When it comes to the succession of a business from one generation to the next, the numbers are somewhat dismal.
88% of current family business owners believe the same family or families will control their businesses in five years, but succession statistics undermine this belief. According to The Family Firm Institute:
- Only about 30% of family and businesses survive into the second generation.
- 12% are still viable into the third generation.
- Only about 3% of all family businesses operate into the fourth generation or beyond.
Even if you don’t plan on transitioning away from your business for years, having a comprehensive, holistic plan in place gives you peace of mind, knowing that your business, your future, and your family’s future are secure. While many owners of family businesses want to keep them in the family, often, family dynamics can present challenges and concerns not present in other business ownership structures.
Keeping family harmony is of the utmost importance during a transition. You want to be able to enjoy the holidays together and function as a family, regardless of what is occurring with the business.
Issues and Problems w/Lack of Planning
Unexpected tension and discord can occur when a family member in the business becomes the new owner through sale or gift and the proper planning has not been done. Here are some issues to keep in mind:
Lack of Communication
One of the problems that arises in family businesses is that potential successor children and other children who may not be involved in the business are often kept in the dark when it comes to the business, including the day-to-day operations and financial situation of the owner. Successors often do not understand that current owners will need to take time to plan this ownership transition and that they will need to “cash in” on some of their wealth in order to fund the rest of their lives.
Often this happens because the owner/parent wants to keep their financial situation private and they want to shield their family from the burden of running the business. However, this lack of education, communication, and planning can cause a real disconnect when it comes time to hand over the reins to the next generation.
Fair vs. Equal
We have witnessed what can happen when owners divide up their company equally among all their children, some involved in the business and some who are not, in an attempt to be fair. Bitter battles and rivalries can occur, and the children involved in the day-to-day operation of the business often feel as though they are working really hard to generate profits for those who are just sitting on the sidelines. We encourage owners to consider using other assets to equalize the assets distributed to their children.
The Solution: Planning Gives Peace of Mind
As you can see, this is a complex topic and needs to be carefully considered. The guidance and assistance of a trained transition planner is invaluable in these situations. S/he can provide the objectivity and skills necessary to assist you in determining if you should keep the family business in the family and, if so, how it should be accomplished.
Children can be involved in the planning and be educated about how and when the transfer will occur well in advance. As part of the planning process, they will understand the current owners’ needs and can be encouraged to consider their own desires and needs as it relates to the family business. It’s important to keep children in the loop, even if they’re not involved in the day-to-day operations of the business.
There is a path that can be followed to put a realistic plan in place to ensure business continuity and your financial future along with family harmony. Don’t make the mistake so many owners have made of stumbling down this path without a plan. It doesn’t usually end well!