According to the 2022 MassMutual Business Owner Perspectives Study, 40 percent of family business owners plan to split their companies equally among all their children (an additional 10 percent say their children can figure it out themselves). But what they’re planning could be a recipe for family conflict —and a poor outcome for the business.
Business owners should ask themselves this important question: Are you a business first family or a family first business? “Family first” and “business first” companies differ in the ways where the desires of the family and the needs of the business are prioritized.
Not sure which one you are? We’ll take a closer look.
‘Family first’ defined
Here are some characteristics of “family first” businesses:
- Only family members are the successors.
- Open-door employment for family members.
- Loose compensation structure.
- The business is the checkbook.
- Family issues are often brought into the workplace.
- The business is viewed as the family legacy.
In family first businesses, the concerns involving family are often mixed in with the business and vice versa. Family first businesses generally emphasize the needs of the family over what is best and most productive for the business. There usually are no set boundaries between family and business issues.
This affects how successors are chosen, money is dispursed, jobs are handed out, and communication is handled. Family first businesses also view the business as the family legacy, which can lead to unrealistic expectations of the next generation to carry on that legacy, whether they want to or not.
‘Business first’ defined
Here are some characteristics of “business first” families:
- Successors can be, and often are, non-relatives.
- Specific requirements must be met for employment.
- Market-based compensation structure.
- Personal finances are separate from the business.
- Family matters stay at home.
- The wealth created by the business is the family legacy.
Companies with clear lines between the family and business affairs tend to be more “business first.” Business first families have a clear set of boundaries between family and business issues and do not let the two intertwine. The best interest of the business is the priority — meaning communication issues, succession planning, and financial matters are based solely on what’s best for the business regardless of how they may affect family dynamics.
In addition, the business is viewed as an asset and the wealth it creates is the family legacy. This gives the next generation the freedom to choose what they wish to do with the business when the parents exit.
Strategies to be “business first”
Based on our research, it would appear that many business owners are conflicted. We asked our survey respondents to list their top goals when they exit their businesses and half said, “to keep the business in the family.” However, only 26 percent said their top goal was “to maintain family harmony and avoid familial conflicts.” Additionally, less than half have even communicated their succession plans to their family members.
Family business transitions don’t have to be contentious. Owners should recognize that passing along a business takes time, often months if not years, and requires communication and accountability on all sides.
Here are some hard decisions you may have to make when transitioning the family business:
- Only children working in the business get the business. This is in the best interest of the business and the family. Why? Because it allows the children who are working day in and day out in the business to avoid having to share in the business decision-making — and the profits — with siblings who may be off doing something else. (Related: Estate equalization for business owners)
- Identify potential successors early or come to the realization that they don’t exist. If family succession is the desired path, be sure the children not only have the aptitude to take over but also the desire to take over. If not, exploring the sale of the business to a key employee or third party might be more in the best interest of the business. According to our research, only 33 percent of business owners have identified potential successors and only 20 percent have identified potential buyers. (Related: Succession planning for your business)
- View the business as an intergenerational wealth transfer vehicle. Don’t assume family succession is automatic. When you are running your business, view it as an asset that will one day be monetized so that you and your heirs can reap the financial rewards of a lifetime of hard work. When you take this approach, you will simultaneously maximize the value of your business so that it sells at its highest possible multiple AND build a business that is transferrable so that if your children do decide to take it over, they are well positioned for success.
Issues arise when business owners don’t face the fact that one day they won’t be around to run their business. While many owners have their children’s best interests in mind, their intentions and visions don’t always necessarily align with the reality as seen through the next generation’s eyes. A lot of it has to do with transparency, reasonableness, communication, and a willingness to compromise for the future success of the business and the continued harmony in the family.
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