Many small business owners believe their children will continue the family business. Unfortunately, that is not always the case. Let’s revisit the scenario of Bob and Beth mentioned in a previous article. Their daughter worked in the business all of her adult life; whereas their son never worked in it. With both parents falling ill and unable to work anymore, their daughter is left in charge of the family business management. The daughter is terrified because she doesn’t yet understand the family business issues and is not prepared to take over.
Regrettably, this is an example of what happens when there is no family business succession planning. Bob and Beth had no plan, not for transitioning control to their daughter or for selling the business to a third party buyer. Small business owners need to think about succession planning in order to have a contingency plan for sickness, accident, and ultimately death. Through a series of articles we’ve been discussing the myths family business owners have about what it takes to successfully hand off the reins.
Below are some more myths about family business succession:
Myth Number 3: Family Businesses Must Divide Equally to be Fair to the Heirs
In the above example, one child worked in the business for years, while the other child was not involved. That is a common situation in a family business. Maybe the children want to keep it this way in the future. Or perhaps, once the parents stop working, they both want it but they just don’t get along.
Questions family business owners should ask themselves include: Will the business function when all the children receive equal ownership and control? Do we believe everything will work out when Dad and Mom are not around to keep the peace? There are few guarantees in life. Implementing a family business succession plan will help maintain the balance of happiness between family members, if it existed in the first place, and reduce family business conflict.
Besides equal ownership of the family run business, fairness can be achieved in many ways. Fair is not always equal. Several solutions come to mind. A business law attorney can help determine the best way to achieve the small business owner’s goals. For example, if one child wants to be CEO and the other child simply wants cash, a life insurance policy or the transfer of other assets can be put into place to balance out the distributions.
Myth Number 4: My children want to take over the family business and will be great at it.
You may love owning your small business. It may be your greatest passion. Perhaps you enjoy waking up and going to work every day. Quite possibly, your children grew up there and helped out during summers or after school. So, it must follow that your children feel the same way you do about it. Do you remember when your children were teenagers? Everything you did was awful in their eyes. Your small business may not be what they want. Transferring business ownership to family members may be the last thing your children want.
Parents want to believe that their child will be an excellent successor. However, maybe you run a law practice but your son is in medical school. Perhaps you run a successful dance studio but your daughter has two left feet. A good test is whether you would hire your child as an employee if not related to you. If the child is a good employee she or he might become a great owner and manager. If she or he is merely collecting a pay check, this might not be the right person to become your successor. There may also be uncomfortable issues that arise such as your child’s divorce, financial troubles, or bankruptcy, that must be considered in a succession plan.
So now that you’ve discovered that your children may not be the best option to take over the family business, what do you do? The next article will discuss finding an appropriate successor and selling your business. This is the second of a series of articles about family business succession planning. Click here to read the first article.
This article is not intended to provide legal advice. The facts of your situation are unique and you should seek the guidance of a business law attorney. Call us at 813-852-6500 to schedule a free 30-minute consultation with a business lawyer.