Handing Down the Family Business

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By Randy Boss

In a recent survey by the Family Business Institute, when family business owners were asked if the family business was meant to be handed down within the family, 80 percent responded, “Yes.”

So why is it that only 30 percent of family owned businesses survive into the second generation, 12 percent are still viable into the third generation, and only 3 percent of all family owned businesses operate into the fourth generation or beyond?

The reason could very well be that of the 80 percent of business owners who said they had the desire to pass off the company to their children when they decide to retire from the company, only 20 percent stated they had a succession plan in place if their ownership or ability to run the company comes to an abrupt end due to death or a severe disability.

According to the Family Business Institute, when business owners were asked why they don’t have succession plans, their response was:

  • No time to deal with the issue
  • Too early to plan for succession
  • Can’t find adequate advice/tools to start
  • Too complex
  • Don’t want to think about leaving
  • Conflict with family or employees

We work with a client in the Midwest who oversees 100 employees in the tool industry.  As the company’s owner and its top salesperson, the client is approaching 70 years old.  What he needs to do is answer the question aimed at all business owners – “What do I want to do with the business when I step down?”

The answer is one of three options:

  1. Pass it off to my children.
  2. Sell it to the employees.
  3. Sell it outright (to a competitor).

But it’s not a choice one can levy from beyond the grave and if statistics bear out, this is not a decision that can be put on a backburner for a long period of time.

According to a survey by Mass Mutual, about 40 percent of family businesses expect the leadership of their companies to change hands within the next five years.  Well over half expect a leadership change within 10 years.  About a third of the companies surveyed have a chief executive officer who’s older than 60 and the average age is 54.  Only about 11 percent are younger than 41 and only about 11 percent are older than 71.  About 88 percent of the survey respondents believe the same family or families will control the business in five years.

Let’s look again at the last statistic.  88 percent of business owners believe someone in their family will take over the business.  Now stack it up against what we previously said about succeeding generations, that only 30 percent of those handed the business will pass on the legacy. Why is that?

The answer could be as simple as the second generation has no family to pass it on to which is unlikely in most cases unless the owner is a monk. The more likely scenario is that the succeeding generation doesn’t have the same fire and passion as the family member that possibly built their business from scratch or maybe even came over as an immigrant with the fear of losing everything.  In the case of the second generation, it is easy to brand that person with a sense of entitlement at being handed something already secure but that would be painting with a broad brush. It is more likely the son or daughter has cultivated other interests while growing up and that the dream of the parents is not the dream of the children.

Here are the steps needed to make sure family owned businesses can put a plan in place to continue to prosper and carry-on:

  1. Establish Goals & Objectives
  2. Establish a Decision Making Process
  3. Establish the Succession Plan
  4. Create a Business and Owner Estate Plan
  5. Create a Transition Plan

Not all family businesses will survive from one generation to another but taking these five steps now will ensure the continued success of a family business for many years to come.

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Randy Boss is a Certified Risk Architect at Ottawa Kent in Jenison, Michigan.  Randy can be reached at [email protected].

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