The dream of most family business owners is to pass the business on to their children, with the hope that it will continue for many generations to come. As such, business owners have much consternation over figuring out a succession plan. However, this does not have to be the case. The fact is that many family businesses are not designed to pass on to the next generation.
If you are running a small retail store and it does well enough to pay for your kids to receive a top-notch education, then most likely your kids will not aspire to come back and run the family business. At the same time, many first-generation businesses can be in a field dependent on fast-moving technology or significant creativity. For these businesses, it is difficult to find anyone who can lead the company, making it unlikely the next generation will possess the required rare skills or natural ability. I had a client that fell into this last category.
The founder of the company has an engineering degree from a prestigious university and worked as a senior engineer at Rockwell International for many years. He now runs his own company providing custom engineering solutions. While his children are bright and motivated, none have an engineering background. Given the highly technical and ever-changing nature of the products and services, it is unlikely the next generation will be able to lead the company in the future.
Then there are financial constraints. Consider an owner whose total net worth is almost entirely in the family business. There’s one child in the business and three not in the business. Can a parent reasonably leave the entire estate to just one child? Not likely. And if the other siblings do become shared owners, the pressure on the one running the business can be so unbearable that he or she would jump at the chance to sell it.
Another financial scenario is when the number of owners in a multigenerational family business has simply outgrown the ability of the company to provide the jobs or size of dividends desired by the many family owners, forcing the question of selling the business.
However, the most obvious reason many family businesses do not pass from one generation to the next is simply that the next generation has chosen a different career path. If the company is an engineering company and the daughter has her master’s in psychology, this is probably not a good fit.
All the above “natural events” whittle down the number of family businesses that need to work on figuring out succession. The “unnatural events” are, of course, when your kids are clearly not capable or interested, or are so passionate and skilled they have already taken over and grown the business beyond what you thought possible.
Clear away all of this and you are left with a good chunk of family businesses that truly need to put forth effort figuring out and working through a succession plan. And to this end, it is important for these family business owners to understand the overall objective of succession: Preserve the wealth that has been built up due to the business and retain the harmony among all the family members.
If the wealth of the business erodes, no one will be happy. But if the wealth is retained and family relationships are damaged, that is not success either. Many times we fixate on the wealth aspect, but let us remind ourselves of the importance of upholding family relationships.
Henry Hutcheson is a nationally recognized family business speaker, author and consultant. He can be reached at familybusinesscarolina.com.
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