SCORE defines a family-owned business as “Is one in which any two or more family members operate the company, and the majority of ownership or control lies within the family.”
If you are an owner of a business in which other family members—a spouse, sibling, child, or other relative—also have an ownership interest or work in your company, you’re not alone.
Using this definition, SCORE estimates that about 19% of businesses in the U.S. are family-owned, employing about 60% of the U.S. workforce and generating 64% of the country’s gross domestic product (GDP). They range in size and can be businesses owned and run by spouses on a small scale to a number of Fortune 500 companies—public, such as Walmart of which 48.9% is owned by the Walton family and Nike, of which 84.2% is owned by the Knight family, and privately held, such as Mars, Inc., the candy manufacturer is a family-owned business with revenue estimated to be $45 billion in 2022.
Yet only 30% of family-owned businesses survive to the next generation, 12% to the third generation, and only 13% remain in the family for over 60 years. Why? One of the key reasons is that problems are not adequately addressed by owners when they’re in a position to find solutions. An estimated 47% of business owners expecting to retire in the next five years haven’t made plans.
Here are some succession problems and possible solutions for them:
Passing on the business when not all children are equally passionate or talented.
Parents want to be fair when it comes to passing on their wealth. However, children have different talents and interests, and their participation in the business may not be equal. One child may work long hours while the other barely shows up. Nonetheless, the slacker may feel entitled to an equal share. Sibling rivalry after a parent’s death may play out in financial terms that can be detrimental to the business and the family’s wealth. That’s what happened to famed-jeweler Harry Winston’s estate. His sons Bruce and Charles fought for decades after his death for control, and eventually the company was sold off (including the name Harry Winston to Swatch).
The best solution is to address these concerns prior to death and empower the children to resolve issues after your death. Consider working with family-business consultants (e.g., Family Business Consulting Group who are experts in helping families communicate).
Passing on wealth when one child is in the business and the other is not.
A parent is not legally required to give children equal inheritances, or any inheritance for that matter, but many want to do so. If the business interest will pass to the child who is active in the business, find ways to equalize the inheritance to the other child. If one child is given full ownership of the business, the other can receive life insurance proceeds of equal value. Alternatively, the non-active child can be given a limited interest in the business so he/she can share in profits without interfering in day-to-day operations.
Again, a family discussion about the problem can help you find a resolution to maintain harmony among siblings and ensure that your business has the best chance for continued success.
No child or other close relative wants to run the business.
Children can still be given ownership of the business where they function essentially as investors, but there must be sound management in place to ensure the company’s viability. Put this management in place early enough for it to take hold. Also consider using advisory boards, which can be formal (paid) advisors who counsel your children and the managers on how to run the business, handle problems, and plan for the future.
Another possible solution to this problem is to use an Employee Stock Ownership Plan (ESOP) to transfer ownership to employees. An ESOP can only be used if the business is incorporated. Work with a knowledgeable tax professional to see if this makes sense in a particular situation.
Work with a knowledgeable estate planner to craft the best succession plan for your situation. Even if you are young, don’t postpone the matter because, unfortunately, anything can happen.
For more written about estate planning for your business, see these blogs.