Making difficult decisions is a way of life for anyone who has started and runs a business, and the toughest decision that you as a business owner will make is planning your succession.
As you approach a point in life where you are ready to leave your business, either because of retirement or a desire to seek a new challenge, it is imperative for the long-term health and stability of your company after you are gone that a strategically organized succession plan be put into place.
You might think that the answer is an easy one, especially if family members are already part of your business’ day-to-day. I’ll just hand the business over to my son or daughter, you may be thinking to yourself, thus eschewing any further planning.
But in our 20+ years of working with family-owned businesses, we have learned that simply handing down the business as if it were an heirloom is rarely the best course of action.
The most important reason why a family handoff should not be assumed as the automatic course of action is this stark reality: the ability run your business, or any business for that matter, often skips a generation. Obviously this is not true in every case, but we have seen it enough to know that it occurs more often than not.
There are myriad reasons why this “generation skipping” occurs. Perhaps you came from nothing and built your business on the back of your own fear and hunger to provide a better life for your kids. You very well may have succeeded, so much so that your kids do not have the same fear and hunger that drove your success. Additionally, kids can sometimes take their positions in the company for granted and thus do not need to work as hard to achieve the same level of success and attention as an outsider.
It can be a difficult reality to come to grips with, especially if you always assumed that you were building your business to hand it off, but the empirical and anecdotal evidence clearly shows that the children of successful business owners usually are not ready to take over and grow – or even maintain – their parents’ business.
Rather than thinking about the business itself as a gift or heirloom to be passed down to future generations, consider it in terms of value.
If you pass down your business to a son or daughter who is not ready for the responsibility, it could set them up to fail. Not only could their business career be forever stunted, but the value of the business will be depleted.
On the other hand, if you sell your business then you are “cashing out” at a high point and creating family wealth that can be shared with the family independent of the business’ future success or failure. This way, if your kids have other interests or need more time to learn how to lead and operate a company, they are not risking the future of the business (and its value to the value) in the process.
As one successful serial entrepreneur put it: “My kids are better off with me giving them money than being given a business into which they have not been integrated.”
The key component in making this decision is removing ego.
We know that many business owners want to hand the baton over to a family member and keep family leadership of the company going into perpetuity. The ongoing family-led success of the business becomes a part of your legacy, and there is intrinsic value in that. But you must ask yourself:
- Is it the right decision?
- Is the family member really the best person to take over the business?
- Are they even ready?
- Am I irresponsibly gambling family wealth and the future of the business on someone who has not proven they are ready to run the show?
These questions must be answered candidly and without bias. Most often, the answers point in a direction outside of the family-handoff succession plan. And in terms of legacy, passing on the business to a unfit family member can have the exact opposite effect than intended. If they run the business into the ground, that part of your legacy goes with it.
In many aspects of business, separating family from the office is important. Few if any family-owned business have fulfilled their potential and achieved great long-term success without lines delineating business/office life from family life. The creation of a sound succession plan is an area where this is absolutely necessary to do.
A good succession plan should always be geared towards getting the business into the hands of the most qualified person possible. If the most qualified person happens to be a family member – when ego and pride and love are stripped from the equation – then so be it. More than likely though, this won’t be the case, and you are often better off selling to maximize the long-term value of the business to your family.
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