Business owners often dream of working side by side with their children in their family business. Unfortunately, this idea is often plagued with unexpected challenges: what if the child doesn't want to run the business? What if they're happy to, but lack the skills?
Many times, internal family stresses often spill into the business and vice versa. All these challenges affect the succession planning process, which is often delicate and time-consuming. When clients turn to you for advice about their exit strategy, here are some crucial points to consider.
Key Challenges of Succession Planning In a Family Business
Three common scenarios that can disrupt family businesses during Exit Planning.
Heirs Lack Relevant Leadership or Knowledge
Problems arise if the children don’t have the necessary skills to take over the family business successfully. Most often, children pursue other unrelated careers that don’t transfer easily. For example, if the kids studied medicine or law, it’s tough to leave those careers to run the family restaurant or accounting firm.
Heirs Prefer Not To Work with Their Parents
It seems obvious, but this needs saying: parents and children are separate individuals. Sometimes the next generation has absolutely no desire to follow in their parents’ footsteps.
Others may agree to run the family business but feel trapped in their duties. It ultimately harms the company and adds unnecessary stress to the family.
Parents Prefer Not To Work with Their Children
Parents may feel resentful of their child’s success in one branch of the business. They may dislike the direction in which the child is driving the company. Parents might believe that family wealth leads to laziness, and therefore stifle their children’s efforts in the family business. They may simply underestimate their children’s abilities.
All these are reasons why parents may opt not to involve their kids in the company, even if they are willing and able.
How to Overcome Exit Planning Challenges
If there’s no clear way for the children to participate in the family business, there are several options you can take to ensure the long-term success of your client’s business.
Speak Honestly About the Family Business
Be open with your client about the realities of family business succession. In many cases, the client failed to gauge their kids’ interest in the family business. It’s always best to have this conversation early in the Exit Planning Process before you take your client down a path that isn’t right for them and their family.
If the children express interest in another line of work apart from the family business, guide your client to alternative avenues for succession.
Discuss the Alternatives Available for the Business
The kids could own but not run the business or serve as board members. Your client can also sell the company to someone outside the family, usually a key employee or third party. All these options need a clear transition strategy with the help of an Exit Planning Advisor.
Give yourself plenty of time to work on a transition plan since succession doesn’t happen overnight. Remind your client that they are also responsible for their employees, not just for their children in the business. The impact on all parties should be considered in the Exit Planning Process.
Accept that the Child May Not Be the Best Fit for the Business
Sometimes, parents may have to fire their children to protect the business. This is a tough decision, and it can have lasting consequences for both the family and the company. However, if their leadership style isn’t working out, and there’s proof of this in the declining bottom line or high turnover rates, the child can be justifiably relieved of their role in the family business. By letting the child run the business before giving up complete control, business owners can see if their wishes for family succession can come to fruition.
Get a Concrete Valuation of the Business
Exit Planning should always begin with a solid idea of how much a family business is worth. This, in turn, affects how your client plans their estate, regardless of the children’s participation or lack thereof in the family business.
Conclusion: Put the Family First
Choosing a family member to take over a business is always a big decision, but ultimately, there are two things to keep in mind. First, there are viable alternatives if there is no suitable heir to a family business. Secondly, your client will want to continue having a productive life with their family outside of and after the company. So even if there are challenges in choosing a successor, the owner's Exit Plans should always consider maintaining family harmony. With these tips in mind, you can make the best possible recommendations for the long-term success of your client’s family business.