10 Reasons Why Your Kids Probably Won't Take Over the Family Business

Shared from Thomasnet.com

Only somewhere between an estimated 10-30% of U.S. businesses transfer to family members when the founder exits. Why so few? In no particular order, the most influential reasons are likely:

1. The retiring generation has decided not to gift the business to the next one, but rather wants or needs the proceeds of selling the company. Typically, the next generation is undercapitalized to even acquire it at the fair market value price, a legalistic “standard of value” often less than what the business is worth in the merger & acquisition (M&A) market, with possibly less than great credit, and the retiring generation is reticent to be the Bank of Mom and Dad.
   

2. There may be concerns about the next generation’s readiness to run the business autonomously. Insufficient planning and preparation did not ensure that the next generation is managerially seasoned and respected by the board, non-family employees, suppliers, and customers, which results in asynchronous timing between the generations’ readiness.
   

3. The retiring generation needs or wants maximum financial proceeds from the business — itself a contrary objective to family succession — and realizes that the full market value of the business could be obtained by a professionally managed, competitive M&A process in which the purchase opportunity is confidentially shopped to multiple prospects.
   

4. Multiple shareholders complicate the succession of any individual shareholder’s progeny.
   

5. Parental concern about fairness to multiple siblings may encourage selling the company so that all may gain proportionally and fairly. It’s not uncommon to have one or more siblings working in the business and others, not at all. There may be only one genuine candidate who wants and is ready to assume the leadership role, or perhaps multiple; either way, things can get messy fast. There are ways to mitigate the tension, but they may take a creative arrangement delivered with state-level diplomacy.
   

6. As a greater proportion of the population completed higher education over the past decades, more options outside the family business became available to them. The number of employed workers aged 25+ with a bachelor’s degree or higher almost doubled since the early 1990s, according to U.S. Labor Department data.
   

7. An expanding economy simply offers each successive generation more options. Over the 30 years from 1991-2021, a rough proxy for a lengthy ownership lifecycle from founding to divesting, the U.S. has grown inflation-adjusted GDP by over 75%.
   

8. There is a greater perceived opportunity elsewhere. “Opportunity” is, of course, in the eye of the beholder, but for many founders’ offspring it may not only be economic but a way to escape challenging interpersonal family dynamics. Also, as society has become increasingly technology-enabled, attractive alternatives have been created that didn’t exist on today’s scale just two decades ago.
   

9. Many family businesses are simply not run very effectively, and unless the next generation has the vision, resources, and complete freedom to restructure everything, the business may present limited room for career growth.
   

10. The parties often do not know the array of options available to support the various objectives and needs, thus sometimes missing an opportunity to effect a transfer that meets all parties’ needs. Attorneys and accountants versed in exit planning may help sort this out and are critical partners in estate and financial planning, but professional merger and acquisition advisors such as investment bankers who advise private companies are in a position to explore options from the perspective of someone who specializes in transferring private company ownership.