Passing on the Business to the Next Generation: Not for Everyone
A recent article in The Economist (“The Reluctant Heir”) addressed the challenges in getting the next generation ready to take over the family business. These challenges are nothing new in the family business community. In fact, the Pacific Family Business Institute’s most recent survey of Northwest family-owned businesses cites this particular challenge as the number one concern among current family business leaders. The Economist article’s author, Christophe Bernard, observed that an effective handoff requires preparation, planning and a lot more time and effort than anyone might expect.
All of this presumes, however, that the goal of a family-owned business is to continue the ownership and leadership of the business to the next generation. Indeed, some do not define a business as a family-owned business until it has made at least one generational transition and has the clear intent of making as many more as possible. Our common expectation in this community is that a transition to the next generation is always the first choice, and only if that proves unviable, would a family business consider other routes.
Yet, there are certainly businesses in our community that we would observe to be family-owned businesses that do not share this philosophy. The owners and leaders of these businesses affirmatively do not want to pass the business to the next generation, even given the option and potentially notwithstanding the expression of interest by the rising generation.
To these individuals, the pride and legacy of keeping the business in the family (and the family in the business) are just not worth the inherent challenges and struggles.
First and foremost, they find it hard to believe that their children, just by virtue of being in the same family line, would have the same interests and drive. In other words, they have no ambition in coaxing their children into working in their industry when those children might have chosen a completely different career path on their own, had they not faced the family pressure. Similarly, being in the same family line is no guaranty of an aptitude or ability in a particular business. For these business owners, it is important that what they have built continues on, and they are actually limiting their ability to achieve this goal if they limit their pool of potential successors to their own children. There is certainly no shortage of statistical and anecdotal evidence of subsequent generations not being able to carry the torch effectively.
To be certain, these business owners are not looking to penalize their own children or cut them out of the benefit of the business.
For these business owners, they would much rather consider all their options to ensure the continued success of the business they have built and, at the same time, use the financial successes they have achieved to support their children in the endeavors they (their children) select.
This sentiment – and the concern about the temptation of trying to effect a generational transaction even when it is not the right fit – has caused some business owners to adopt policies expressly excluding their children from the taking over the businesses. They can work their summers in the business and will no doubt benefit from the financial success of the business, but they can (and must) choose their own path.
Not the story we typically hear in the family business community – nor an approach that would or should appeal to all family businesses. It is, however, an honest approach for certain situations.
Joe Weinstein represents companies in corporate structuring, mergers and acquisitions, divestitures, and other business transactions. He focuses particularly on transactions involving family or closely held businesses, private equity funds, and international businesses. Joe has substantial experience in the food-related industries and assists clients with the purchase, sale and finance of such companies. Contact Joe at joeweinstein@dwt.com or directly at 206.757.8165.