BMO Family Office
If your family owns a business, it’s easy to assume that the younger generation will naturally want to take over the company. Unfortunately, that’s not always the case.
Adult children sometimes have career plans outside the family restaurant or retail shop. They may avoid telling their parents for as long as possible, since they worry they’ll seem ungrateful or that they’ll hurt their parents’ feelings.
However, if you’re a family business owner who’s setting up your business succession plan—and none of your adult kids want to take over—you need a clear transition strategy.
First: Understand your odds
Passing on a family business to kids or other family members today is more the exception than the rule. Among family firms who plan to pass the company baton to a new owner/leader in the next five years, only 41% say they plan to keep the company in the family, according to PricewaterhouseCoopers’ (PwC) U.S. Family Business Survey.1 This figure is significantly down from several years ago, when almost three out of four family firms expected to maintain family ownership.
Instead, 30% of family firms now say they’ll either pass on the business to the next generation to own but not run, says PwC. Another 11% say they’ll look for buyers outside the family within the next few years.
The bottom line: If your family’s next generation isn’t jumping at the chance to take over your family’s business, you’re not alone.
Talk early and often
Ideally, family business owners should talk frankly with their kids about their interest in the family business as early as possible. It’s a smart idea to start these talks even before the kids enter college, says Richard Kollauf, vice president & director of business advisory and estate planning at BMO Wealth Management.
And if the kids pursue courses of study that have nothing to do with the family firm—such as going to medical or law school—parents should see that as a clear sign that their kids are going in a different direction. It’s not likely, says Kollauf, that these kids will later give up their professional licenses and return to the family auto repair shop or accounting firm.
However, that’s precisely what many family business owners assume, notes Kollauf. “Parents just can’t shake the thought that ‘if they built it – the family business – the kids will come.’”
Kollauf encourages business owners to ask their kids early and often: “Do you have any interest in joining the family business?” If the kids aren’t sure or outright say no, start working on your Plan B.
Succession is a plan, not an event
If your kids aren’t interested in running the business, would they be willing to own it but let others run it? That’s a first question to ask, suggests Kollauf, and it could provide a family compromise. For instance, several siblings might be willing to sit on the company’s advisory board and retain ownership shares, but hire professional managers and employees to run day-to-day operations.
If that’s not an option, it’s probably time to consider an outside buyer. A longtime employee or friendly competitor may be thrilled to take over your business. This choice can also make sense if your adult children change their mind about joining the family firm or—as can happen, too—just aren’t cut out to run a company.
“All of these transitions take time, so ideally allow yourself up to five years to fully research, document and implement a family business transition plan,” suggests Kollauf. “You may need time to hire and train your successor, as well as to manage the financial and tax implications of a business sale.”
And don’t beat yourself up if you don’t already have a formal succession plan. Only about a fourth (23%) of family business owners actually have a formal succession plan in place, according to the PwC survey, although almost half (44%) of family firms say succession planning will be a major challenge for them in the next five years.
How to get started
Whether your family hires a professional CEO and retains company ownership, or you seek an outside buyer, your first step is to get a professional valuation of the business, says Kollauf.
“Your business has likely been the largest asset on your balance sheet and has driven most of the cash flow for your family,” he says. “When you see that it’s almost time to exit, you need to know the fair market value of your business. You want to make sure that any sale plans will help give you financial security for the rest of your lives.”
Company value also matters if more than one member of the next generation is retaining ownership. The company’s worth may impact the way you, the parents, structure your estate plan and your children’s inheritances.
“Our wealth planners and specialized business planners at BMO Wealth Management can help with the valuation and success planning process,” says Kollauf. BMO professionals can also collaborate with your other key advisors, including your accountant, attorney, and insurance professional.
Separate business from personal
Tensions can run high when a business owner learns that none of their children will be the next company CEO. However, Kollauf says that letting disappointment get in the way of your family relationships can be something you’ll all regret later.
“You’ll have a whole post-business life after you exit your firm, and you’ll likely want to include your family in your plans,” he says. “Let your kids and other family members know what your ‘encore’ is going to be, and also how you’d like to remain involved in their lives.”
1Source: The Missing Middle: Bridging the Strategy Gap in U.S. Family Firms - U.S. Family Business Survey, PricewaterhouseCoopers. (2017). Retrieved September 28, 2018, from https://www.pwc.com/us/en/private-company-services/publications/assets/pwc-family-business-survey-us-2017.pdf
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