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Family Business? Consider Your Succession Options

The statistics are very troubling. By the time the family business gets passed down to the third generation, over 70% will fail or be sold. Yet no matter how perilous the path of choice for so many family owned businesses may be, as if it is the only way, they pass the business to sons, daughters or their spouses to keep it in the family. They do this even if it means the end of the golden goose, and the implosion of the dream. They do this to be able to provide for their family and their descendants.

The first notion that must be exorcised is the entitlement trap: the fathers believing and the children also believing that this is theirs, no matter what. The fact that it belongs to the children whether or not they are capable is irrelevant. This entitlement has been part of the issue from the beginning. When the children are very young they are told, “this will be yours someday”. This myth becomes part of the family culture and is a mistake. Better stated is that, “you will have an opportunity if you are prepared, adequately schooled and trained and have the capability of running the business after serving an apprenticeship”.

In other words, yes there can be favoritism. But only if the children are capable will they succeed in the leadership plan. Far better to hire a manager to support the children in a meaningful way while they build their own careers and have the benefits of lifetime income, than to potentially destroy the business with inept leadership.

There must be proper education, training, possibly a required stint away from the family business as further training followed by an apprenticeship path within the business. If successful, this can end in the children taking leadership positions. This is a much better path, as opposed to entitlement.

Another trap is the need to employ all of the ever growing family members as they come of age or marry in. The opportunities are not endless, and the business may be able to support only one or two children and maybe one or two grandchildren while there may be 6 or more waiting their turn.  It must be understood that the opportunities are limited. And while financial arrangements can be created out of retained earnings and profits, job opportunities are not endless and only those fit to lead in appropriate positions will have that opportunity. The others will enjoy benefits, but not employment. This also works.

The first priority is to provide economic support for your descendants. The second priority is to provide employment for those that can be and want to be employed. Continuing the line of ownership should not be confused with continuing the line of leadership unless it is done appropriately and with a plan that will work.

It is a trap for most family owned businesses. But it need not be if you know in advance what your priorities are and how to achieve them.

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