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There are some amazing statistics surrounding family business succession. First, the average lifespan of a family business is only 24 years, or roughly one generation. Additionally, nearly 60% of family businesses fail to make it into the second generation, while nearly 90% fail to make it into the third generation. Almost half of family business bankruptcies were caused by the death of the founder, while only 16.4% of family businesses failed after an orderly transition.
As an entrepreneur, you can spend your life building your business. It is a unique asset that forms a large part of your legacy. Yet, almost instinctively, you probably treat your business the same as your other assets and ultimately expect your children to inherit it with the rest of your wealth. As the statistics show, this practically guarantees that your business will fail. While you might struggle to solve the conundrum of how to hand your business to your kids in a way that defies all odds, perhaps the better answer is not to hand your business to your kids at all. Stats aside, there are a number of very good reasons why your children should not inherit your business.
See also: billionaires and millionaires who don’t leave all their money to their children
1. They must be free to discover their own purpose in life
Everyone has a purpose in life – a value that only they can bring to this world. Instead of trying to raise your kids to fit into your business, you need to give them the freedom to discover who they really are and what their purpose in life is. If that gets them back to your business, great, but don’t hold your breath. The likelihood that your children’s purpose in life will align exactly with the business you are starting is slim.
2. The family business can lead to an unfulfilling life
Ask a room full of parents what they want for their children and you will overwhelmingly hear that they want their children to be happy and have full lives. Science now points to five factors for a happy, fulfilling life: Positive Emotions, Commitment, Relationships, Purpose, and Achievements (often referred to as “PERMA”). Pressuring your children to take over the family business or creating such expectations can lead to resentment and other negative emotions, cause your children to become disengaged and disinterested in the family business, prevent your children from having meaningful relationships outside of the family building a family business and your expectations don’t serve the children’s purpose or purpose and make them feel like they don’t deserve their position. In other words, your children could land low on the PERMA scale and end up less fulfilled than if they had chosen a different path.
3. Blending family and business is complicated
Family dynamics are complicated. All too often in a family business, personal relationships can interfere with professional ones. Problems that have invaded at home can easily find their way to the office, which can lead to unnecessary quarrels. In addition, your family members may have very different ideas about how to run a business, leading to conflict and disagreement. All of this puts a strain on the business and can ultimately lead to failure.
Related: Do you want your succession planning to be successful? Avoid These 8 Stumbling Blocks
4. Nobody likes nepotism
Giving your children positions of power in your company may be viewed as nepotism by other employees. This can create resentment and create a toxic work environment. It is better to promote within the company on the basis of merit rather than family connections.
5. Avoidance of an Inherent Conflict of Interest
Your children are your heirs and the beneficiaries of your estate. However, a large portion of your wealth may be tied to the value of your business. As beneficiaries, your heirs will likely want access to your wealth and cash, in which case they might have an incentive to sell the business against your will or maximize dividends rather than invest in the growth of the business. This could ultimately lead to the company’s demise.
See Also: Succession Planning: How to Make Sure Your Business Thrives Without You
When it comes to succession and estate planning in family businesses, a distinction must be made between economic benefit and corporate control. While you may want your family to ultimately benefit economically from your business and legacy, the truth is that they are often the wrong managers of your business and legacy. Rather than viewing your family as managers, consider sticking with experts, professional advisors, and key employees who are best qualified to lead the business and ensure its continued success and growth for generations to come.
