Reality of Passing the Family Torch

Chris Mitchell, CA Outlines the topic "Should you sell your business to your Children".

Many owners of family businesses expect to sell or transition their business to their children on retirement.

If this sounds like you, then you may be surprised to hear that while many owner’s succession plans, vision and hopes are to sell to their children, in reality only about 20% will be passed on to the next generation and it rarely goes to plan.

Most business owners can’t afford to give their business away to their children as the sale funds are required to fund their retirement.? So many are sold using outside finance, either upfront, or progressively in instalments.? This is commonly known as family succession.

Many owners are so focused on a family succession and expect this is what will occur as their main exit plan, that they forget to consult the children.? It may come as a major shock to the parents when they find out their children have no interest in working in the business and taking over once their parents retire.

The reasons are many and varied including:

·???????? The children’s perception their parents’ shoes are too big to fill;

·???????? The children may have worked for decades in the business, under the watchful eye of their parents.? Many maybe “old style” businesses, all the children have known, and they may wish to explore something more modern or different, as there are many more options available these days beckoning the younger generation, particularly with technology.

·???????? Many children having grown up with their parents in business have seen the huge responsibility they take on and the financial stress.? The appetite may not be there for the next generation.

·???????? The owner’s business may have become too big or complex and the skills needed to operate the business are not possessed by the children.

For many reasons only a small proportion of family businesses (around 20% - 30%) are transferred to the next generation and only about 10% are transferred to the third generation in the next cycle. Most are either sold to outsiders, or closed.?

The best advice is not to encourage or force your children into buying the family business and instead have a family conversation around the children’s future plans, or what type of business they potentially see themselves in.?

Family capital from the sale of the owner’s business could potentially be employed in more productive family outcomes, or in different business ventures which the children are passionate about. More importantly, it may provide the children with the opportunity to enter business into an industry they know and at an enterprise size or level they are comfortable with.?

When the parents do eventually sell their business they will be well placed to assist their children and this may be potentially more satisfying, rather than trying to force an outcome into the existing family business.