Entrepreneurial business developers who succeed with perhaps a 15-year plus business, which has provided wealth for their family, often think that the greatest thing they might pass to an heir is the ownership of that family business. There are, literally, thousands of such baby boomer owners out there right now, in the 60+ age range. However, the owner who looks to have the company stock serve as the next generation’s legacy, often may have a very unrealistic perception of the burden of such legacy, which they leave for the next generation.
First of all, owners often don’t appreciate the family turbulence potentially caused by some kids in and some kids out of the business, when the time comes to cash in on ownership. The kids working in the business feel, “I helped build it. I am the one who deserves to own the benefit.” The kids outside of the business find themselves thinking, “You had a job given to you. You have the company car and the benefits. I have to make my way on my own in this world.” The parent usually truly wants fairness and tries to be even-handed in long-term benefits to all the kids. They may divide stock in the company evenly among siblings. (Good luck with kids agreeing how to handle those minority pieces). They may retain all stock, and all control, until death. (Immensely frustrating to the 50-year-old who never has and probably never will get to run their own show.) It is not an obvious or easy inequality to solve.
Secondly, even if we simplify, and assume we somehow have no problems of multiple siblings, the realistic issues with transition to the child are still complex. Even if we have just one primary successor child in the business, how likely is it that this child will have the temperament or the gusto to drive the company to next stages? In 75% of second-generation businesses, size diminishes during the tenure of generation two. This is obviously sad for family wealth but, perhaps even more importantly: it is terrible for the healthy psyche of those second-generation operators.
When the business does survive that second generation, and goes one step deeper, transitioning to a third generation, matters become even more complex. We have all read about the very public family catastrophes, where uncles, cousins, and in-laws begin to brutalize one another about who will remain in charge.
A parent’s desire to help the kids get a head start in life, by allowing them to take over at the height of the business’s success, is a natural and nurturing objective. However, owners and builders of companies – people smart enough and industrious enough to have demonstrated the amazing ability to nourish and grow a healthy business – need to make themselves think more like a business executive, and less like a parent, for protection for their enterprise and protection of their family’s fortune.
Do your kids and your business a favor and take a truly dispassionate look at your future. The kids might be happier with cash. Employees might better survive and grow their jobs long-term with a new and bigger owner.
Eighty percent of today’s baby boomer business owners will have to sell within the next decade, or transition to heirs. The buy/sell market today is about 20:1 buyers to sellers. This will not likely continue forever. Talk to family and think about the possibility of sale while the market is hot. Owners selling in the next few years will get higher multiples and face lower risk than owners who hold and force transition succession. It’s worth a family discussion.