The 1 Question a Family Business Owner Should Ask His Children

Succession planning is critical for any business to survive beyond the current generation, and especially so when it comes to family businesses. Yet according to a PwC US Family Business Survey, 73 percent of family business owners in the US admit they don’t have a documented succession plan in place.

That’s one reason why only around 12 percent of businesses survive into the third generation. In Canada, business founders have only a 3 percent chance their business will survive and their grandchildren will run it, according to the article “Succession Planning in Family Business – Freud and Finance.”

While family business owners may assume their business will pass along to their heirs and thrive under the new owners’ stewardship, they have not taken the necessary steps to ensure a successful transfer of ownership.

If you own a family business and don’t have a plan in place, the time to start is now. As you consider what steps to take, ask your children this one question first, as suggested in the article above: Do they love the business enough to risk their own capital to buy it, over time?

If they don’t share your passion for the business and love it enough to invest their own money, as you did, they may not be the best people to manage it for growth in the future.

For more steps on passing your business to your children, please read “Should You Give Your Kids Your Business? 2 Factors to Consider.”

Should You Give Your Kids Your Business? 2 Factors to Consider

In 1985, Guy Laliberté was a fire-eating, accordion-playing stilt walker on the streets of Quebec. Thirty years later, he is still walking tall but now with a lot of more money. Estimated to be worth around $2.6 billion, the founder of Cirque du Soleil recently announced he sold a majority interest in the company to private equity firm TPG Capital for an undisclosed but estimated price of around $1.5 billion.

One of the reasons he cited for selling a majority in the business is that he didn’t want to pass it along to his five children. They range in age from 7 to 18.

“They have their dreams and as a father I have made the commitment to support them as they chase them,” he said in an article on CBSnews.com. “I don’t really believe in the idea of the second generation of entrepreneurs. From the outset, I didn’t want to put the pressure of running the circus on their shoulders.”

I can’t say I agree with him, as I do believe in second-generation entrepreneurs. In certain circumstances. In my career as the turnaround authority, I have seen many situations where a company would have fared better if the founder had not passed along his company to the second generation.

While the founders of a company have often been fueled by passion and the thrill of growing a business from just an idea, that passion is often not shared by the second generation. And sometimes they just haven’t developed the drive and work ethic to keep a successful business growing.

There are so many factors to consider when contemplating handing down your business to your children. The same is true with any succession plan, but the situation with family businesses can be complicated by assumptions and expectations of the founders.

Most family business owners assume their company will still be in family control in five years – 88 percent, according to the Family Business Institute. But only about 30 percent of family businesses make it to the second generation. That number drops to 12 percent for the third generation. By the fourth? Only about 3 percent make it this far.

There are two questions I suggest you ask yourself as a starting point when you are considering turning over your business to the second generation, now or in the future.

  1. Do your children have any interest or desire to work in the business?

You’d be surprised how often this simple question is never asked. I’ve seen business owners just assume that their children love their business as much as they do and of course, they want to take it over. But a discussion with those children tells a different story.

It sometimes comes as a complete surprise that our children don’t share our passions. And how can they not be thrilled to have a company that you worked so hard for be handed to them?

Yet that is often the case. While it may mystify you and break your heart, if your children don’t share your passion or show much interest in your business, your company will suffer for it and it’s best to pass it along or sell it to someone who cares.

One note on when you ask this question, however. In Guy’s case, his children are too young to know their life’s passion. And often kids go to college with no concept of wanting to join mom or dad’s company. A few years in the real world can often change their mind. Or they may find a place in your company that they can care deeply about.

  1. Do your children have the necessary qualities to grow your business?

It’s tough to be objective about our own children. But taking a good look at their strengths, weaknesses and potential is essential when making this assessment.

Does you son have the leadership ability to run the company? Or does your daughter have the skill set to be in senior management?

If they don’t have the education or skills yet to take over, do they have the potential to learn what they need to know?

There are many more factors to consider in planning the succession of your business to family. For more on succession planning, please see my blog Don’t Miss the Exit: Make a Succession Plan.