Is It Always A Good Idea To Pass The Family Business To The Children?

By Robert John Kemp

For many owners keeping the business in the family is an emotional as much as a commercial decision. There are genuine benefits to keeping a company in the family. On the other hand I have seen enough failed transfers to know that there are some downside risks as well. A recent experience with a local family company that had run into difficulties set me thinking. Just how does a business owner decide if it is a good idea to pass on the family business rather than try to sell it? What are the pros and cons of transferring a business to the children?

The benefits are easy to list. The owner is spared the cost, disruption and stress of a company sale process. If the children have the drive and ability to run a company, and get on well together, they should earn more than they would as paid employees. There is also the emotional satisfaction of seeing the company you have built live on. These are not benefits to be lightly set aside.

So what are the risks that might outweigh these clear benefits?

Portfolio management to spread risk is the most basic rule of wealth management. Passing the company on can result in an unhealthy concentration of family wealth in one asset. This can be solved in part by requiring the younger generation to pay for the company, but the resulting debts can drain cash and limit future growth.

What if the kids just don't have the ability to run and grow the company, or just don't get along? Hard as it may be you have to find a way to take a dispassionate view of your children's ability. You also need to be sure that running the business is what they really want to do. It takes a lot of energy and passion to run a successful business; if your children are motivated only by a sense of obligation they are less likely to be successful.

Building a business takes independence of mind and belief in your own judgement. If you have these qualities it might not be easy to let go. Some of your children will most likely have inherited the same traits sowing the seeds of future conflict. Are you sure you can walk away?

If the business in need of fresh energy and your children have worked in the company for several years, they may not be the best source of new ideas. New owners may be better placed to take the business forward.

Despite the emotional attraction of passing a company on to the next generation experience tells me that it is not the right decision for every family. It may only be the right decision for a minority of family companies.

Robert John Kemp is Managing Director of UK business broker Select Business Sales. Select specialise in retirement sales of private companies.

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