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Passing On The Family Business to the Children – Pros and Cons

Happy Families?

Happy Families?

Passing on the family business to the next generation is an ambition for many private company owners – but is it always the right thing to do? An experienced UK business broker explores some of the issues.

I can understand the emotional attraction of passing a company on to the next generation. The feeling that you have built something that will support your family for years to come. The prospect of a better standard of living for your children and grandchildren than they could earn in paid employment. Perhaps the opportunity to maintain a part-time involvement.

Experience tells me that passing the business on is not the right decision for every family. It might well only be the right decision for a small minority of families.
 
A Recent Example Of What Can Go Wrong
 
I was recently offered the opportunity to find a buyer for a family company that five years earlier had been passed from the founder to his four children. For the last couple of years the company had struggled. The difficult economy had taken its toll, and reduced profits were causing friction with two of the siblings who were not working in the business. One of the non-working shareholders had been through an expensive divorce, and now wanted the other shareholders to buy her out. The business was not making enough money to fund a buyout so a decision had been made to explore a sale.

After meeting with the shareholders we decided not to take the project on. There was a huge variation in motive, price expectation and emotional commitment to the business between the shareholders, and I just couldn’t see them agreeing on an offer. The meeting with the shareholders did however set me thinking – just what are the pros and cons of transferring a business to the children?

 
The Pros And Cons Of Passing A Business On
 
There are genuine benefits

For many owners keeping the business in the family is a decision driven by emotional preference not commercial logic. It certainly avoids the cost, disruption and stress of a company sale process. If the children have the ability, drive and personal compatibility to run and grow the company it can provide a better standard of living than paid employment. These are genuine benefits to keeping a company in the family, but I have seen enough failed transfers to know that there are some genuine risks as well.

Buying out the older generation

The first and most basic rule of wealth management is to build a diverse portfolio to spread risk. Passing the company on could well result in an unhealthy concentration of wealth in one asset. Some founders solve this problem by requiring the younger generation to buy them out, but the resulting cash drain on the company can hobble growth for years.

Can your children run the business on their own?

Hard as it may be the founder has to find a way to take a dispassionate view of his children’s ability to grow the company. Could I do this myself? I’m really not sure. You also need to be sure that running the business is what the children really want to do. Successful owners have a passion for the business, not a sense of obligation.

Can you really let go?

Building a business takes independence of mind and belief in your own judgement. These are not character traits that make it easy to let go. Will you really be able to manage this? It is likely that at least one of your children will have inherited these qualities, sewing the seeds for future conflict. Inter-generational strife can quickly sap energy and leave the business without a sense of direction.

Does the business need new ideas or investment?

Is the business in need of fresh ideas or an injection of capital to take it forward? Children that have grown up in the business may not be the best source of new ideas. New owners may be better placed to invest to take the business forward.

 

If you are interested in finding out more about these and other issues relating to the sale of a private company one of our business sale experts would be delighted to talk to you in complete confidentiality. Click CONTACT ME to book an initial phone conversation or call us on 01604 432964.

 
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