Recently, we explored the five succession planning questions that every family business owner should consider. But what issues should the next generation — the children of these business owners — consider when deciding whether to take on the family business?
Before we dive deeper into these questions, here’s a quick recap of what you need to know about succession planning, as discussed in my previous article:
Succession planning for family business owners is one of the most talked-about areas of financial planning, but it is often poorly executed. The reason for the disconnect: many people fail to recognize that families and businesses are run very differently.
Families generally take care of each other based on individual family members’ needs — not by how “successful” each family member is — whereas owners or employees of a business are largely judged on successful results.
These often opposing forces can give rise to many potential missteps in the transfer of ownership and control of a business to family members — and the process can get even more complicated when you factor in the nuances of family relationships. It’s one reason why so many family businesses ultimately fail in succeeding generations.
In cooperation with a competent financial planner, here are five questions the next generation should consider when thinking about their future and the future of the family business:
1. “Is this really what I want to do with the rest of my life?”
Many next generation children feel an obligation to continue the family business, whether or not they really have a passion for it. It’s normal to feel this obligation — but if the passion isn’t there, that feeling can lead to unhappiness, resentment and possibly a failed business.
Most people need to have some passion in their chosen career to be successful, and owning and running a business is no different. Thus, family business owners must have ongoing, honest conversations with their children, and address whether they really want to be involved in the family business or simply feel obligated to be involved (or worse, just don’t know what else to do). Of course, business owners can play a large part in not making their children feel obligated to take on the business, especially if they can sense that the children have no passion to do so.
2. “Do I want to co-own the business with my siblings?”
When next generation children take over a family business, broaching the topic of “ownership” can be tricky. For instance, the owners may pass down the business to all of their children for various reasons, regardless of whether all of them are active in the business. This mixed ownership structure with “ins” and “outs” can create conflict between next generation owners. The siblings who are active in managing the business may have very different interests and goals than those who are not active in the business. That’s why it’s important for owners to consult with children who show interest in being successors and openly discuss the best ownership structure for the business in the next generation.
3. “Do I have the skills to run the company?”
As discussed in my previous article, the family business is often the owner’s life work; therefore, it may be difficult for them to imagine not running the business and trusting that someone else can operate it as well as they did.
Next generation children must earn their place as potential successors; if an owner just hands over management duties to a child who is not capable of running the business, the chances of success are unlikely. If the children have already identified a passion for the business, they must be “groomed” to learn the skills that it takes to run the company early on. Part of this grooming may occur in other businesses in the industry or in new areas outside the scope of the owner’s expertise.
4. “Do I want to wait around for my parents to let go?”
Over time, it can be difficult for a business owner to let go of the management and control of the company, which may be problematic for some next generation children — even those who want to remain involved in the family business.
In some cases, children may take a reduced salary in the business or pass up on other career opportunities to “wait in the wings” until their parent(s) retires. Children who remain in the business amid these circumstances often raise the wait as a sacrifice they have made to eventually assume ownership in the future. Every situation is different, so it’s important for next generation children to weigh this question carefully when deciding whether the family business is the right career path for them.
5. “Can I afford to buy the company?”
If the next generation is not receiving ownership in the business as an inheritance and must purchase it from the owner, they need to consider whether the company can provide sufficient cash flow for day-to-day operations, while covering their living expenses and debt obligations. With appropriate financial planning, both parties can determine whether there is viable cash flow in the business to support the successor child’s family, with enough additional cash flow to make payments to their parent(s) for the purchase of the business.
A corollary of this question is: Should the next generation buy the business? When it comes to the sale of the business, some of the questions that apply to family business owners also apply to next generation owners: How viable is the business over the next five, 10, 15 and 20 years? How much capital will be needed to expand and grow the business? Is this a business with limited growth opportunities for the future? If the answer to the latter is ‘yes’, does the next generation really want to buy a declining business? In this case, it might make more sense for the owner to sell the business to a third party now to maximize the family’s wealth over the long term.
For both parties, the key to a successful transition is the same: clear, honest communication.
As discussed in my previous article, all family members and key management have to tackle the tough issues and honestly discuss their respective needs, expectations and fears. They need to try to agree on shared values and goals to be achieved. Communication is the foundation for a happy, healthy family, which will ultimately support a smooth transition between generations and a successful, viable business.