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Exiting & Selling

Your Family Business Transition Will Fail

By April 15, 2016July 8th, 2022No Comments
An article I’m writing for a trade magazine starts with, “Your family business transition will fail! That’s not just my opinion, the numbers say so.”
And it’s true, according to The Kiplinger Letter, Business Know-How, Family Business Institute (FBI), BusinessWeek, and more. The statistics are:
  • Only 12-15% of businesses transfer to the third generation
  • 30% of businesses survive to the second generation
  • 65% of transitions to the second-generation fail
  • 90% of transitions to the third-generation fail
According to the FBI, 88% of business owners think a family member will take over their business. And the FBI is the source of the statistic above saying 30% make it to the second generation.

Recently the Wall Street Journal had a column on this topic and from that column and other sources I’d like to discuss the following points.

If you’re going to transition to family you have to:
  • Make sure they are ready. Do they have the skills? Don’t be like one 80 plus-year-old owner I met who told me his almost 50-year-old son, “wasn’t mature enough yet” to run the business.  The same son who drove all of their sales.
  • Are you ready? There are too many instances of mom or dad not willing to give up control (it’s still “their business”).
Really want some fun? Have multiple (future) owners involved! This is often a sure sign of disaster, or at least a disagreement.
  • Have an agreement. Let’s say it’s your business pre-nuptial. Get all the issues on the table and memorialized in writing.
  • The most important issue is “who’s in charge.” A tough one but it has to be dealt with.
  • Consider buying out family members who aren’t interested in being involved with the business. Don’t have them hanging around pestering about a distribution when the operators want to reinvest for growth.
  • The above is important and can be summarized with the word, “Conflict,” because there will be some.
One client situation has multiple family members with shares. The story has it the non-active owners don’t trust, aren’t happy with, and make life difficult for the active owners because dad couldn’t let go (see above). Dad wanted things done the way he always did them and when that didn’t happen he told the other family members not to trust or respect the operators. This went on for decades and never ended.

Realize a family transition may not be best. The kids have different interests and goals. Ask yourself if transitioning the business will create more family issues than it’s worth (again, see above). Perhaps it’s best to take the money now by selling to a good operator who will grow the business and preserve the legacy.

This whole issue reminds me of a long article I read a few years ago about the conflicts that arise when there’s a family cabin passing to the next generation. Those who love the outdoors want it, those who don’t say sell it. Some want it fancy while others want it rustic. Repairs and maintenance are affordable to some but not others. As with a cabin, maybe the best answer is to sell it, distribute the money, and move on.

Conclusion

There are three things a business with the possibility of a family transition must do.

1.    Plan it by getting all involved well in advance.

2.    Make the tough decisions now.

3.    Get the proper advice from a transition and/or buy-sell advisor, attorney, and accountant.

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