When you are the CEO of a family owned business, What’s Next? for you and the business is often a discussion that gets a tad animated over holiday feasts and company meetings. Some owners dream of one day passing on the business to a child, only to find out either the child doesn’t want it or they are incapable of running it.
The hard part is when the CEO has blinders on and thinks their succession plan is a good one – when in fact it’s disastrous. Not everyone is a leader, a visionary, or a manager. Just because someone grew up in the business doesn’t necessarily mean they should run it. A tough conversation to have with Mom and Dad; one we never treasure, but one we know is necessary.
So how do you know if it’s the right thing to pass your business along?
1. Have the conversations early. So many owners don’t talk to their children about owning the business until they are ready to head to Boca! In fact, the conversations and the prepping need to happen over a period of time. I would say 5 years is ideal. It gives time for them to work in a variety of roles, get their feet wet, and give the owner time to step back. This letting go and mentoring is best for the health of the company.
2. Be prepared for the NO. Folks born after the Baby Boomers have a much higher standard when it comes to work/life balance. Many children have watched their parents be slaves to the business, missing family time and well…fun. Perhaps they aren’t as inspired as the owner, it doesn’t bring them joy. Be prepared for your kids to say Thanks, but No Thanks.
3. Be prepared for them to say, “We’ll See”. When a child isn’t ready to be an owner, the current CEO needs to be prepared to spend the time to coach, train, and mentor – setting some important KPI’s in place for the child. If met, they are CEO material – if not, they don’t pass the grade.
4. The Money. There is also the financial side – can the child afford to buy the owner out? Many families have been divided over money, it gets really ugly when a family business is involved and multiple siblings. You need to have realistic conversations about money, debt, and what happens if things go sour. Are they willing to take the risk? Do they understand what that means as far as their personal finances?
5. It doesn’t have to be an all or nothing option though. An alternative option could be bringing in a private equity firm allowing you to get cash out and give your children partial ownership. It’s a win/win – as long as the children are ok with only owning a piece of the pie. The good news is, there is a lot of cash out there now and private equity firms searching for family owned businesses to invest in. Many private equity firms will hold investments up to 7, 10, or even 15 years, allowing children time to work with a long-term business partner until it’s time for them to retire. At that time, they may have netted more than a sale would have way back when.
It’s a difficult conversation to have; we’re here to help. Give our office a call to have a no obligation conversation with one of our advisors to discuss your situation.