When transferring to family members is NOT a good idea

What's more important, the business or the legacy? While handing over the business to your kids might be your dream, what makes the most financial sense?

Some view the continuity of the family business to the next generation as the ultimate indicator of success – usually being achieved by transferring both management and ownership to the kids.

But transitioning the business to non-family ownership perhaps through a sale or management buyout should not be seen as failure. Selling a successful business can mean using the family wealth to start another venture or to distribute the wealth to the next generation so that they can make their own career choices.

Planning for the divestment of assets is as important as planning for a transition within the family. If the family is to exit from ownership, then preparation for a sale or management buyout is crucial.

We need to move away from the idea that success comes only from the traditional ‘handing over to the next generation’ to success being ‘how best we can preserve and build on family assets’ whether that be succession or sale. The main aspiration of families-in-business should be to preserve family assets and wealth for the next generation. Retaining a particular business entity, however long it has been in the family, may not be the best option to achieve the legacy.

A key question then becomes ‘At what stage do we review the business and industry we are in and perhaps decide that change or divestment is required?’ Good business practice includes monitoring the industry environment and make sure you are still competitive and serving its market efficiently and effectively. 

This means that current owners must recognise when a former strategic direction is no longer working – the assets may indeed be declining because of difficult market conditions and owners, young or old, have to respond to their surroundings.

A recent example was a family business in the mining industry, which felt all the ups and downs of the resources boom. In down times, the family business’ capital investments were being underutilised.  When offered a price for the business, the owners and the next generation weighed up the pros and cons, put aside their considerable emotional attachment to the business that they had nurtured from its inception, and decided it was in their best long terms interests to sell right then. 

In retrospect they still consider that to be the right decision although agree that many entrepreneurs find it difficult to indeed part from their ‘baby’, their business.

Another example is a family business in the manufacturing sector which saw the writing on the wall in terms of overseas entities being more competitive. The family had several meetings to discuss their options and, after considerable thought, were open to selling their business. They were, in fact, proactive about selling the third generation family business and they look forward to investing their assets elsewhere.

The bottom line is – don’t be wedded to the industry or business you are in just for the sake of it – it is not a failure to change direction if market forces mean that family wealth will grow better elsewhere. Timing is the key and if you let one offer go, it may not come around again!

Dr Chris Graves and Dr Jill Thomas are the co-founders of the Family Business Education and Research Group and are senior lecturers in The University of Adelaide Business School.

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