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.

5 Tips for Successful Family Businesses

You’ve heard the definition of a dysfunctional family? One that has more than one member in it. How about if you take that dysfunctional family and try to run a successful business with it? Getting a new business off the ground is difficult enough, and adding the complications of family relationships can only make it that much tougher.

According to the Family Business Institute, only about 30 percent of family businesses survive into the second generation. About 12 percent are still around for the third, but only 3 percent make it to the fourth generation.

Here are a few tips to help your family business survive to the next generation.

1. Put the right people in the right jobs

This is a key component for the success of any business, but becomes particularly true for running a family business when you may feel pressured to hire Uncle Marvin for your open sales position because he just got laid off.

What if Uncle Marvin’s background is in accounting and he’s known as the family introvert? Just because a family member needs a job doesn’t mean they should have one in your company. Make sure you find the best people with the right skills for any position.

2. Hire outside help

In addition to needing an outside perspective on occasion, outside consultants can help with conflict resolution between family members and offer an unbiased perspective on needs the company may have. You’ve heard the expression, “Don’t air the family’s dirty laundry.” Well, that’s exactly what you need to do with consultants.

Don’t be afraid to tell them about your brother Joe’s absenteeism due to his alcoholism if he or she needs that information to make decisions about the future of your business.

3. Communicate regularly

Again, communication is critical for any business to success. Perhaps in family businesses you run a greater risk of miscommunication of key information if employees aren’t properly informed, as they are seeing each other outside of the office. Make sure that all employees understand the long-term goals and vision of the company and are well informed of any developments.

You may want to set up weekly or monthly company-wide meetings as a means to communicate and allow for questions.

4. Have the same standards for everyone

Nothing demoralizes co-workers faster than having different standards for employees. If your company has non-family members working for it, you especially need to pay attention to this one.

Don’t allow your son to take off every Friday afternoon for his ski lesson while others are left to cover for him, or promote family members at a quicker rate than others in similar positions. Have the same vacation policies and compensation guidelines for everyone.

5. Have a succession plan

I’ve written about this before in a previous column:  the greatest threat to a family business is the failure to plan and manage succession well. I can tell you from personal experience how important this one is. I encouraged my dad to take an offer of $5 million to sell his company. He refused. Fast forward ten years and dad, who now had dementia, had been swindled out of money and the company ends up being worth nothing.

For more tips on how to pick a successor, see my previous blog post on Filling Your Own Shoes.

Family businesses do thrive. In fact about 35 percent of Fortune 500 companies are family-controlled. You just need to pay attention to how your family members contribute to the success of yours.