By , Axial | September 15, 2015
Many CEOs dream of bequeathing their business to their son or daughter. They’ve built a fledgling company from the ground up, or taken their parent or grandparent’s business to the next level. Their company has been their life’s work, and they want it to stay in the family.
The instinct is understandable. But is making your kid CEO always the best choice?
Business broker and certified exit planning advisor Camm Morton of VR Baton Rouge recounts a story of his uncle N. Gillis Cammack III, a successful World War II fighter pilot who went on to be president of the student body at Auburn University. “He graduated in engineering at the top of his class, and then was hired by Ford and moved to Detroit from a small Alabama town. He was doing exceptionally well when his dad asked him to come home and help run the family auto parts business.
“He did, and he had a great life — but he always wondered if he should have stayed with Ford. The small town auto business wasn’t his dream.
“Were there other choices? Absolutely. Had my grandfather sold the business at that time, it would have been worth a lot of money. He could have helped his two sons — the other a Georgia Tech engineer — follow their dreams.”
The Ideal Heir
For a child to be a successful CEO, Morton says, they needs three things above all: “talent, passion, and prior experience.”
If the succession stars align, the child will be just as excited as their parent about taking over the family business. They’ll be smart and capable, with management expertise and business savvy. “Working for around five years in a similar or complementary business and succeeding gives the child a different perspective than a child that goes straight into the family business,” notes Morton.
When Complications Creep In
This perfect successor may come around once in a blue moon — but more often than not there are a few wrinkles. A would-be heir may not yet have the experience to run a company at the time their parent is ready to exit. There may be gaps in communication or expectations. Sibling rivalries may get in the way. Emotions can run high.
According to the Family Business Institute, only 30% of family businesses make it to the second generation, 12% into the third generation, and 3% into the fourth generation.
Here are a few things to consider before deciding to pass your business on to your son or daughter.
1) Don’t assume you know what your kids want.
“The first step in exit planning for a family is to understand what everyone’s perspective is, and help them think through the process,” says Morton. “Often family members have preconceived notions of what everyone else wants. Maybe the founder just naturally assumes that the firstborn son wants to take his place and that the daughter has no interest without even asking or speaking to his children. Maybe the son would rather start a different company and the daughter really wants to run the business.”
2) Make sure they know they have a choice.
Some would-be heirs may feel immense pressure to take over for their parents. It’s important to talk to kids from a young age about what they want out of a career and introduce them to a wide range of potential paths. Outside internships or jobs can help clarify interests and goals. Some children may discover a passion for a new industry, while others keep coming back to home base. Look for a sense of curiosity about the business. Does your child want to know about the ins and outs of daily operations and the nuances of the industry? Ultimately, you want a successor who wants to run the company.
3) Beware the silver spoon.
Jobs outside the family business can also help children learn tough lessons that will serve them well later on — whether they take over for you or not. As clinical professor, founder, and co-director of Northwestern University’s Center for Family Enterprises Lloyd E. Shefsky notes in Inc., “If [kids] know they have a family business to go into, they might not pursue any [other fields] because of that excuse.” Outside work experience will help increase their confidence, expand their skillset, and better understand their career interests. If children decide to come back to the family business after a few years, they’ll do so with an increased empathy for their employees and a sharpened business acumen.
4) Evaluate your child objectively.
“When evaluating a family member, consider his or her attributes as both a manager and an entrepreneur,” notes Kiplinger Retirement Report. “Someone may be a good manager but lack the ability to focus on the big picture or think strategically — the kind of skills needed to run a successful company.” If necessary, broker Morton suggests an “outside stint in a similar business or more education or training” to see if the successor can hone their leadership and management skills.
This may not always do the trick, in which case parents may have to have difficult conversations about the future of the business — or risk eroding everything they worked so hard to build.
5) Don’t try to make everything fair.
“If you have two children in the business, don’t make the gutless mistake some owners make and decide to make both of your sons or daughter and son co-presidents,” cautions executive coach Dr. Rick Johnson. Avoiding choosing one child over the other may make life easier for you right now, but it’ll make things more difficult for your kids later on.
First, talk to each child about their expectations. If more than one of them aspires to be CEO, you’ll face a difficult task. Try to look at the situation objectively, evaluating each child’s leadership skills, commitment, track record, and reputation within the company. Talk with trusted advisors where possible to compensate for any parental blind spots.
You may choose one child to be CEO and another to be a board member or shareholder. You may end up deciding to sell the business instead. Regardless, be upfront about why you made the decision you did. The conversations will inevitably be painful, but better they happen now. Resentment and hurt feelings can cause even more pain and family strife if left to simmer.
6) Your business is not your legacy.
When you’ve worked to build a company for decades, it’s impossible not to be emotionally attached. After all: your legacy is on the line. Right?
Dr. Tom Deans, author of Every Family’s Business, disagrees: “The legacy is not your business. The legacy is the family… Your business is an instrument of wealth creation, full stop.”
Businesses come and go, he argues. Throughout history, successful families have found “a way to find the end of their business before the end finds them.” Selling a business doesn’t mean you’ve failed. “The point is if now is a good time for you to take some chips off the table to monetize your business at a fair price, then do your deal and feel good about it.”
It’s important to keep both business goals and family relationships in mind when doing a deal. “The best deal will be the one that a family business can work on collaboratively,” Dean says. If your kids are truly passionate about running the business, then perhaps that’s the way to go. If not, give them “space to succeed and become the people they were meant to be.”
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