There is something enchanting about the idea of passing on a business to your kids. This idealized vision appears of Jr. stepping into your shoes and executing your business just as you had. Perhaps there are even a few cigars or clinking glasses after a big deal in your vision as well.
If only it were that easy.
Just like handing over the keys to your car, it’s never a smooth ride. While technically from the same gene pool, your children will approach your business differently than you do. This, in addition to several other factors, makes keeping the business in the family the most complex business transition.
For a quick reality check, here are several challenges to be aware of:
1) Letting Go of the Reins
It will be much easier for your child to take your corporate seat than it will be for you to walk away from it.
Remember teaching them to drive? Same emotional roller coaster but rather than your car, they are taking the keys to your business. Your child will be itching to step up to the plate and take control. You on the other hand will be in the passenger seat wishing you had the instructor’s dual control and emergency brake.
In most cases, you have been nurturing this business for the better part of your life. Your identity is intertwined with its success. Your personal value and self-worth are wrapped tightly around your company’s success. That’s natural.
As you transition out, it’s essential to understand that just like with the car, you need to let your child run the business on their own. No backseat driving. No emergency instructor’s break. This will be the most challenging element to the transition. It will be excruciating sitting back and letting them make changes to the business. Recognize it and prepare for it.
2) Bloodline doesn’t Ensure Success
Just because you were successful in building the business does not mean that your offspring will be too. Success is not guaranteed by someone’s last name, and I don’t think that it ever will.
Everyone is different. Especially when it comes to families. You know this is true as you look around the table at family gatherings. Your family members have some very interesting traits. Those traits aren’t always appreciated either. It applies to your kids too. It amazes me how drastically different even brothers and sisters can be.
Passing a business to the next generation should never be your default solution. It’s rarely the right answer. If it is right for your family, it takes a smart, fully executed succession plan in order for it to have a chance. And, clear open communication throughout the entire process.
3) Seller Financing
You will have to finance the sale. That puts your investment at risk.
Full disclosure, seller financing means that you might not ever get paid all of your money. If you do, it’s not always the timing you expected. My advice is whenever there is seller financing, especially with family, assume you will not receive payment. This makes every payment a happy day.
To put it in perspective, view yourself as the bank. You are lending to a person that has:
- No assets;
- No security;
- No experience running a business on their own.
And on top of that, they will be paying you out of company after tax profits. That’s if there are any profits. Any investment manager will tell you that this is very high risk. You need to go into it with eyes wide open.
4) Fair Market Value
You are not “giving” your child anything if they have to pay fair market value for it.
I want to be clear that a “gift” is something that has no conditions to it. Taking over an existing company with all of its past customer and employee liabilities while writing you a check every month, is not a gift.
Let’s break this down. Before they can pay themselves, they have to pay company bills, employees, the parent loan (aka you) and then Uncle Sam. I think that present is missing a bow.
The “gift” is the opportunity, but there is significant risk and responsibilities tied in. You are exchanging the past risk and stress for the opportunity to run your business. Bottom line, it’s a transaction.
Sometimes none of the kids want to take that risk.
5) Prodigy Child Syndrome
Unless your business has no employees, odds are against a warm reception when your chosen child waltzes in to take over the company.
Rarely, and I mean rarely, have I seen employees view an owner’s child as the best candidate for leadership. Respect is earned, not given. You lived that principle when you built the company. It applies as much today as it did then. Putting a title on your child does not make them a leader.
Leadership requires a certain type of personality. It can often be a lonely position. While it comes in many forms, fundamentally it is something acquired over years of experience. We are not born with it.
Just like leadership, winning is earned by sweat, experience, talent and intelligence. As social beings, humans want to be on a winning team. If you start altering the dynamics of what makes your team win, your team’s loyalty will also wavier. Don’t assume your child has the respect or following from the staff just because you anointed them.
This doesn’t mean that passing a business to your child can’t be done successfully. There are several family businesses that have thrived throughout multiple generations.
You just need to understand that it’s not a walk in the park. These success stories came after in-depth preparation, extensive due diligence, constant communication and comprehensive succession plans. Not to mention having kids that wanted to take over the business.
If you want to have your business remain in your family, start planning early. It’s going to be a bumpy ride.