Many business owners have envisioned, and likely assume, their business will pass on to their children one day. It feels natural to pass the torch to the next generation after decades of hard work, family sacrifice and financial success.
However, sometimes life unfolds differently than expected. Perhaps there is a shift in desire from the founder to transfer their business to their children, or the children develop career passions elsewhere.
In some cases, a child has grown into an adult who is unfit to run the business. Sometimes there are multiple siblings with varying degrees of abilities or interest.
For business owners, it is important to have these conversations and plan accordingly.
The family business isn’t always the dream job
Just because the business is valuable and has been successful doesn’t mean a founder’s children want to run it. Passions and careers may have developed in different industries. Or the next generation may have planted roots in a different geographical location.
A judgment-free dialogue about whether a founder’s children want to participate in the business should happen early on. This not only allows time for leadership development but exploration of alternate successors if family succession is not the right fit.
Fair is not always equal
Imagine a scenario with two siblings. One has devoted years to honing their craft and learning the business, while the other has pursued an entirely different career. Should they both inherit equal shares of the business?
Splitting ownership down the middle may feel fair, but it can saddle the committed sibling with a co-owner who has no role in the day-to-day business and leave the uninvolved sibling with an asset they neither understand nor want.
Life insurance can be a useful tool in this case. If one child is inheriting the business, a policy on the owner’s life can “equalize” the child who isn’t involved. The active child receives the company; the other receives insurance proceeds of comparable value, in cash, with no entanglement in the business.
This avoids forcing the successor to buy out a sibling and gives the non-interested child liquidity instead of an illiquid minority stake. The goal is an arrangement each child considers fair, which requires talking about it openly rather than leaving it to be discovered in an estate plan.
Start planning before it becomes urgent
Succession works best as a process, which may include leadership development years ahead of any transition, so the next generation earns credibility with employees, customers and lenders.
It may involve incremental steps like a gradual handoff of responsibility such as letting a successor run a division, manage a banking relationship or lead a major project before taking the reins.
Governance structures such as an advisory board or a family council can streamline difficult decisions and give non-family executives a voice. And if an honest assessment reveals no willing or able successor, planning early leaves time to prepare the business for a potential sale on your terms.
Legacy is bigger than ownership
Sometimes preserving a legacy does not require preserving family ownership. A sale to employees through an employee stock ownership plan or a management buyout rewards the people who helped build the company and keeps it rooted in the community.
A strategic buyer may bring the capital and scale to grow the business further while retaining its name, jobs and culture. Sale proceeds can fund charitable giving that carries the family’s values forward for generations.
Legacy, in other words, can mean your life’s work thriving after you’re gone, whoever holds the stock.
Ask yourself: Have you explicitly discussed the future of your company with your children? If the answer is no, that conversation is the logical next step.
Alison G. Cosgrove is a senior wealth planner based in the Stonington office of Bradley, Foster & Sargent.
