For many business owners, transferring their businesses to their children is important both financially and emotionally. But transferring to children isn’t always easy, especially when family harmony is at stake. Let’s look at a fictional but representative story about some of the challenges of transferring a family business to children.
Leave Me a Business Worth Staying At
Eugene Chen was approaching his 40th year as owner of a regional manufacturer that produced specific parts for electronics. It was a lifelong dream of his to eventually retire from the business, transfer it to both of his children, and serve in a consulting role to help them guide the business to new heights. The day his son and daughter were legally allowed to work, he began training both of them for specific roles in his company.
His daughter, Ashleigh, had always taken on the bulk of behind-the-scenes operations. She played a key role in hiring, identifying key employees, maintaining client and vendor relationships, and building her father’s Advisor Team.
Though successful, Eugene had a deep stubborn streak and did not like advice. At least once a week, Ashleigh had to remind her father, “If you want me as part of this business after you leave it, you have to leave me a business worth staying at, and the only way that happens is if you take their advice once in a while.”
Father’s Special Boy
Eugene’s son, Horace, was responsible for, as he described it, “posting online for reach.” He spent most of his days on his phone posting on social media and then showing his father all the likes his posts received. “This will be great for business, I’m sure,” Eugene often told him, despite no tangible evidence that anything Horace was doing was affecting the business positively at all. But Eugene was so proud to see his son being active in the business that he chose to consider any activity good activity.
For years, Ashleigh had joined her father’s quarterly retirement planning meetings with his Advisor Team. She often discussed her concerns about her brother’s work ethic with the Advisor Team privately, expressing fear that her father would eventually make her brother a co-owner of the business. Even in the face of mounting evidence that his son was just along for the ride, Eugene still considered Horace his special boy who could do no wrong.
Then, Ashleigh’s fears became reality. Her father told his Advisor Team that he intended to make Ashleigh and Horace co-owners of the business and exit in three years.
When he handed his advisors and daughter a rough org chart for after he left, Ashleigh saw that every employee eventually reported up to her. To her horror, she saw that her father intended to have her report to her brother, and her brother reported straight to their father, even though he would no longer be officially running the business.
After reviewing his initial plan, Ashleigh was blunt. “If this is your plan, count me out.”
When Emotions and Reality Collide
Business owners are used to setting the rules themselves. How they run the business, the people they hire, the strategies they implement all tend to come from the business owner. But as the business grows and the owner approaches their eventual exit, this top-down approach can sabotage their Exit Plans.
In the Chen family example, the owner clearly had a favored child, even though that child was doing nothing to drive the business forward. It’s not uncommon for business owners to have a blind spot for their children’s weaknesses in running a business, especially if that child has been part of an otherwise successful business. But allowing a plan to be guided by blind spots can lead to a dead end.
In situations like these, an Advisor Team can provide objectivity and evidence-based opinions to help guide business owners toward their real goals. It would have been easy for Eugene to view his daughter’s angst as misplaced jealousy stemming from a sibling rivalry. However, his Advisor Team would be able to show precisely how his children were contributing to the business and what their contributions would mean for his post-exit life.
The Financial Side of Family Transfers
In most cases, business-active children do not have the funds to pay for the value of the business up front. This often means that in order for a business owner to receive the maximum value for their business in a transfer to children, the business must continue to thrive after the owner transfers it.
For the Chen family, this would hardly be an issue if Eugene correctly recognized that Ashleigh was the catalyst for success. Instead, in proposing that both children get an equal stake in the company, he was actively sabotaging his plans in favor of doing what felt good in the moment. Ashleigh was the driver of company success, and losing her would be devastating to the company’s performance.
After Ashleigh drew her red line in the sand about her brother becoming a co-owner, Eugene’s Advisor Team was able to defuse the situation with years of performance statistics. They showed Eugene exactly what Ashleigh’s roles and contributions were compared to Horace. And the ace up their sleeve was when Ashleigh took six months off for maternity leave: For those 6 months, Horace was put “in charge,” which aligned precisely with the company’s worst two quarters in its history.
“If you want to be able to exit your business on your terms,” his advisors told him, “you may need to reconsider how you’re transferring ownership. You simply cannot afford to lose Ashleigh.”
Be Aware of Unseen Errors
Additionally, Eugene made a common but initially unseen error in his planning: He assumed that his son would want a share of ownership. Many business owners assume that the successors that they choose want to become owners themselves. But sometimes, the owner’s chosen successor has no interest in ownership, which can crack the entire foundation of a business owner’s plan.
After the tense meeting with his Advisor Team and daughter, Eugene spoke with Horace privately about what had happened. He told Horace his intentions of giving him a 50% ownership stake in the company when Horace blurted out, “Dad, are you insane? You have to let Ashleigh run this thing.”
Eugene was stunned by what his son said and tried to convince him otherwise. But Horace held firm.
“I like what I’m doing, and I’ll take, like, a 25% salary increase instead, but I really don’t want to run this business. It seems way too hard.”
Realigning Goals in Family Transfers
Though he knew how to run a business successfully, Eugene committed three major errors in his planning.
- He misidentified key employees.
- He misunderstood how the transfer to his family would work financially.
- He incorrectly gauged his children’s interest in running the business.
Thankfully, with help from his daughter, Eugene’s Advisor Team was able to help him realign his goals with the realities of his business.
In the end, he transferred 100% ownership to his daughter on the condition that she find a fitting role for his son in the business. Fortunately, Ashleigh had already begun the process of hiring a social media director to actually do the things that her brother said he was doing. When she told her brother that he would now be reporting to this new social media director and have performance goals, he was relieved and accepted the role.
Under Ashleigh’s leadership, the business continued to thrive and grow, allowing her father to formally leave the company on his terms with financial security. Her father took up the role of consultant to the company, which often meant checking in to make sure that his son was still employed at the company.
Think Before You Act
Transferring your business to business-active children can be a prudent decision. However, it’s important to determine whether your business-active children are capable of running and growing the business after you transfer it to them. Because unless your business is simply a vanity project, it’s likely that its performance after you leave it is crucial to the success of your post-ownership life.
We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional.