I wrote last week about how to improve the odds of passing down a family business to the next generation. Understandably, when founders love their business, most want it to stay in the family. I can relate. As I was pouring my heart and soul into building my law practice, I always assumed my son Adam would one day join The Blum Firm and help keep the Blum legacy alive.
Then one day during Adam’s undergrad years at UT, we had the conversation that awakened me to the fact that Adam’s head wasn’t in the same place as mine. Laurie and I were walking with Adam along downtown Austin’s Sixth Street when he announced: “I don’t want to go to law school. I want to be a banker.” What? I didn’t even know what a “banker” was, at least not the kind Adam meant. I only knew of Laurie’s “banker” career as a bank officer at Fort Worth National Bank. Adam meant a Wall Street “banker,” and before long he headed to New York for an investment banking career at Goldman Sachs. At least Adam did accommodate me by becoming a CPA (though he never practiced accounting), but he tried to get out of that too. When he hit me with the line, “I don’t plan to take the CPA exam,” I wasn’t as accepting. I replied: “You had the misfortune of being born into the wrong family; becoming a CPA is not optional.”
Lizzy had the same potential to join The Blum Firm, given her superb academics and math skills, as well as her heart for helping others, but I learned from Adam not to even hold out the hope. Indeed, when she turned down UT Business Honors to study music business at NYU, reality hit that neither of my kids would join me at The Blum Firm. Neither wanted to follow my footsteps, get up every morning, put on a suit, and “go talk to people about dying.” (Of course, my life’s work is so much more than that, as my fervent passion is to help families create and pass down a meaningful legacy.)
So, here’s the message to family business owners: Don’t assume the next gen is the solution to your business succession plan. I advise all business owners to conduct an honest assessment of their heirs. Do they have the necessary skills to run the business? Do they have the passion and desire? Would they prefer to chart their own career path? Could passing the business down to the next generation lead to family friction that’s just not worth it?
Estate planning advisors can help you determine if an in-family transition is the right solution for your business. It’s better if these conversations are conducted by an advisor who knows you and your family. Parents often have a blind spot about their children’s true abilities. Kids are often reluctant to share their true feelings with their parents for fear of offending them. An advisor with good communication skills (one who has both “head” and “heart”) can interview the stakeholders and provide an objective assessment. Furthermore, whatever is decided, that decision needs to be monitored and subject to modification based on future developments. Business succession planning is never a “one and done” decision, but a dynamic and continuing process like all other aspects of estate planning.
In one case, an 80-year-old father was keeping the business going to pass down later but believed his 60-year-old son was “not yet ready” to take it over. In interviewing the son, the consultant learned that the son really had no interest in running the business and was ready to retire. Imagine the dad’s surprise.
Family business consultant Jeff Savlov tells of a St. Lucia rainforest tour guide business “Oliver & Son” where Oliver Sr. gave top-quality tours, yet a tour experience with Oliver Jr. was the opposite. Oliver Jr. lacked both his father’s skills as well as his father’s interest. “In family businesses, success or failure often hinges on intentionally and proactively developing the next generation. That requires effort to find out if they have interest, desire and ability – supporting/developing them if they do and finding alternatives if they don’t.”
Shark Tank TV personality Kevin O’Leary (aka “Mr. Wonderful”) speaks to this issue in “Kevin O’Leary on the Wealth-Destroying Mistake He Sees Too Many Family Businesses Make” (Eric Rosenbaum, CNBC Leadership Insights, Nov. 14, 2021). “One of the biggest mistakes of all made by successful first-generation founders is when a family patriarch or matriarch assumes the right decision is to turn the business over to their children…. When businesses are wildly successful, it’s often because the founders, a mother or father, have tremendous operational skills but those execution skills may not be present in the subsequent generation. That’s why we see American wealth evaporate within four generations.”
If your business succession solution isn’t to pass down the business to your kids, there are abundant other solutions. In upcoming posts, I’ll address those choices. Some involve ways to structure a sale to insiders (such as certain family members or key employees) using various leveraged buy-out approaches and Buy/Sell Agreements. Others involve deferred compensation arrangements. Still others involve the use of charitable techniques. We will also explore how to keep key employees engaged, either through equity or non-equity incentives. We will also examine the practical and emotional issues involved in selling a business to a third party, whether to a private equity buyer or otherwise. The key is to work with advisors who can help you identify the solution that’s the best fit for your family.
For those clinging to the hope of keeping the business in the family, click on this link to review last week’s post “No One Owns the Tree” to improve the odds of success. But this a decision that requires a heavy dose of reality. If passing down a business to your children isn’t the right business transition plan, don’t force it.
Marvin E. Blum
Marvin Blum’s son Adam Blum and daughter Lizzy Savetsky hiking in Colorado. As both are charting their own paths and neither became a lawyer, Marvin’s succession plan for The Blum Firm requires a solution other than his kids.