It makes me
wonder, what is going to happen to all of those businesses? Although it
is a noble gesture, passing a business down to the next generation is
more often than not, unsuccessful. In fact, statistics show that only
one-third of all family businesses are successfully transferred to the
next generation and only 13% are transferred onto the third generation.
Many family business consultants say the primary reason for this low
survival rate is the failure to develop and effectively plan for the
transfer of ownership and management of the closely held family
business. I agree that this is a factor, but in my dealing with family
businesses I find that there are some more fundamental reasons. The
first is that the next generation has a lot different life style than
the business founder and entrepreneur. They do not share the same drive
and commitment that dad needed to build the business from scratch. They
go to the good schools, get a taste of the good life and generally do
not share the passion of the business founder. I recently was involved
in selling a produce distributor. I found that most of the firms were in
their second or third generation. I asked a third generation owner why
this particular industry had such success with keeping the business in
the family. He said, “When you are up and on the docks at 3 am and work
12 hour days, you don’t have the time to spend the money.”
The next generation may have a grand scheme to turn the traditional
printing business into a media empire or a liquor business into an
entertainment enterprise. A few years back the second generation of a
well known Chicago area computer leasing and IT Services Firm tried to
turn it into an Internet Venture Firm with disastrous results.
Before you just assume that your torch will be carried by the next
generation, make sure that the next generation even wants to run the
business. Imagine the loss in value that would have occurred if the real
estate billionaire from the western suburbs had turned his empire over
to his son who simply wanted to produce plays.
Are your heirs even capable of running your business? Have you held on
to the reins so tightly that the kids involved in the business have not
been able to develop their decision-making or leadership skills? Do they
command company respect because of their personal strength and skills or
are they grudgingly granted respect because they are the child of the
owner? If that is the case, the odds are not good for them taking over
when you retire.
Another big challenge is trying to balance fairness in employing many
children or even grandchildren in a family business with various skill
levels, compensation levels and ownership levels. The jealousy and in
fighting can absolutely grind the company’s progress to a halt.
The business owner must make some difficult decisions when he or she
decides it is time for them to retire. Why did I create this business?
Was it to keep this business in the family for generations or was it to
provide for my family for generations? If the desire and the capability
of the children are not evident and the company is large enough, it may
be the right decision to first get outside board members actively
involved as step one. Step two would be to hire professional management
to run the business. A second alternative is to sell the company while
you are still running it and it can command its highest value. If you
have children that want to remain in the business for the immediate
future, incorporate that into the sale agreement with employment
contracts.
Another way to think of it is, while I am running the business, the best
ROI is to keep the bulk of my net worth invested in this company. If I
am no longer running the company what is the best risk reward profile
for my net worth? Would my heirs be better off if the business was sold
and the value converted to financial assets?
David Kauppi is a Merger and Acquisition Advisor
with Mid Market Capital, Inc. MMC is a private investment banking and
business broker firm specializing in providing corporate finance and
business intermediary services to entrepreneurs and middle market
corporate clients in a variety of industries. For more information
or a free consultation please contact Dave Kauppi at (630) 325-0123,
email davekauppi@midmarkcap.com or visit our Web page
www.midmarkcap.com.
