Every day almost 10,000 Baby Boomers reach retirement age and will continue to do so until the last of them turn 65 in 2031. Not every Boomer wants to retire at 65, but the pace of retirement is accelerating. Unfortunately, many Baby Boomer business owners have not been preparing to transition their businesses. Some of them just plan on handing over their companies to their kids when the time comes. Is this a good idea? With business transitions being so tricky and complex, should you give your business to your kids?
The Right Time to Leave
As with any endeavor, there is always a right time to leave, and that’s usually while you are still fully capable of running your business. Too many owners hold on well past that point because they need to keep busy, they haven’t made solid enough financial plans, or they can’t bear to let go and retire. Sadly, in too many of these situations, not retiring can create tension with the next generation or outright war for control of the company.
Sell – Don’t Give Your Business to Your Kids
Should you give your business to your kids? The simplest answer to this common question is that giving away your business isn’t wise. It’s often done because of a lack of planning, and that kind of unpreparedness frequently dooms business transitions.
People do not value anything that comes cheaply or easily. If you’ve spent years building or growing your family’s business, you want it to succeed beyond you. That means that you should choose someone who is invested in your business’s success as much as you are. Part of that investment should be financial.
If you have multiple children, not all of whom will be running the business, giving it away can result in resentment between them. Giving the business or giving shares of the business unequally will complicate your estate planning and can set your family up for years of future drama. Selling the business to one or more children makes it easier to split your remaining assets among your other children or heirs.
If you do decide to transfer your business to the next generation, make absolutely certain that they are the best people suited for it. You should create a list of rules for joining the business and communicate and enforce those rules. Do not give in to the temptation of placing your kids in management positions if they do not have the temperament or the skills to manage. It’s smart to require them to earn their promotions by acquiring skills and demonstrating their abilities over time. This ensures that they prove themselves, and it communicates to your other employees that competence – rather than nepotism – matters most. Your kids should have to earn the right to lead.
For the same reason, children should be paid market value for their work. If you think your employees won’t notice that family members get special status and pay, you’re wrong. Giving your kids more money for poorer performance is a great way to destroy company morale.
Who Can Best Grow Your Business?
Unfortunately, entrepreneurial ability is not genetic. If your kids can’t grow your business and increase its value, they are not the best candidates for ownership or leadership. If you have been transitioning your children into leadership roles and you can see that they are not right for it, think again about selling or transferring the business to them.
You do not want to see both your company and your children’s confidence destroyed. In cases like this, you would be better off selling to a new owner. Many new owners will be willing or happy to keep on current staff, including family members and loyal employees. If you need to retire now, this is a better financial option for you and your children.
For Baby Boomers who do not have the time to successfully transition their children into the business, selling it to a capable outside party is the best possible outcome. If transitioning to a family member is important to you for your legacy, take the time to develop your exit strategy and your children’s skills and abilities now – before it’s too late. 2031 is only 8 years away.
If you need assistance planning your exit or strengthening your business before a transition, Prometis Partners is here to help. Contact us with all of your tough questions. We have answers, and we will work with you to implement the best strategies for business success.
