Should Your Business Transfer to the Next Generation?

Should Your Business Transfer to the Next Generation?

NorthBridge Business Advisors

I was speaking to an accountant earlier this week about a possible business transfer of his client’s business to the next generation. He said that he was working with a couple who owned and operated a nice company. Both the husband and wife had operating roles in the company, and they were looking to retire in five years.

The accountant has known the couple for years, as well as their children. It has been the parents’ vision that someday the son, let’s call him Charlie, would take over the business. As the conversation progressed with the couple, the accountant told me that the parents admitted that they never had the actual conversation with Charlie about him running the business. After several additional minutes they indicated that they were not sure that the Charlie could run the business.

The conversation started to touch upon other aspects of the contemplated succession plan. Some of the things that were discussed were:

  • The son does not really have a role in the company. He has not been placed in charge of a division or department. He is somewhat overseeing things.
  • There is a concern that employees may leave the company if they are not comfortable with the son’s leadership.
  • The parents had saved well, but they were going to need the sale or some ongoing payment from the business to fund retirement.
  • The parents were aware of the general statistics that family businesses may not successfully transfer to the next generation[1]. That is a concern and a reason that the business may have to be sold to a third party.
  • If the business is sold to a third party, the son may want to stay with the business. The question is whether he would be a good fit for the new owner especially since he does not have any direct responsibility for matters or functions.
  • The accountant asked the owner “if you wanted to replace yourself as the president of the company, how would you identify a candidate?” The owner described a process where he would engage a retained search and that the person would need to have a combination of sales, operations, and finance expertise, as well as the ability to interact with clients. The accountant then asked, “if the future of the business is reliant on finding that person, are you comfortable that Charlie can fill that role?”

What started as a conversation about the succession plan turned into a concern about whether they have done the right thing with their son by assuming that he would want to and could run this business. The parents admitted that they needed to have a true heart to heart talk with their son on the matter.

This reminded me of a situation I had many years ago as a resident assistant in college. I was largely responsible for freshman, and it was part personal pride and concern that made me want them all to do well. I did not want to “lose” any one of them.

I remember one student was not doing well in class. His name is Steve and I decided that I needed to see the counselor on his behalf. The counselor was Dr Cannon, and he took out Steve’s file and thanked me for my concern but much to my surprise added that Steve likely would not be returning for the second semester – and Dr Cannon seemed comfortable with that. He explained that Steve had great math SATs and not so great scores in other areas. He added that college as we traditionally understood it, is not for everyone. However, he said that someday you may be driving your car in Peoria, Illinois and if it breaks down, then Dr Cannon leaned forward and said, “you will be very lucky if Steve runs the local car repair shop”. Why he chose Peoria always confused me and I have probably refrained from traveling there just for that reason. Dr Cannon added that “we have to let people find their own path and Steve is on his way to finding his, it is just not going to be through here”. I was 20 years old and one of the most valuable lessons taught to me was not in a classroom, but in Dr Cannon’s office that day. It was my first lesson in “parenthood”.

Parents want to take care of their children in the best possible manner. Entrepreneurs have the added opportunity to do that by grooming their children to take over a business. However, the heirs may need to find their own way and succession can be successful if it is the chosen path by the heirs, they are capable of running the entity, desire to run the business and are appropriately groomed in key aspects of the business.

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