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, you’re not alone. According to the Conway Center for Family Business, as many as 90% of all U.S. businesses are family owned.
Yet the Center notes that only 30% of such businesses survive to the next generation , 12% to the third generation, and a mere 3% to the fourth generation.
Why? Problems are not adequately addressed by owners when they’re in a position to find solutions.
Here are some succession problems and possible solutions for them.
The problem: Passing on the business when not all children are equally passionate or talented.
The solution: 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. Use family business consultants, who are experts in helping families communicate. Find them through the Family Firm Institute.
The problem: Passing on wealth when one child is in the business and the other is not.
The solution: A parent is not legally bound 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.
The problem: No child or other close relative wants to run the business.
The solution: 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.
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.