Keeping it in the Family

Do I Have To?

Every child has an innate desire to please his or her parents, but that desire can turn back on itself when a son or daughter joins a family business solely out of a sense of obligation. “It’s a big commitment,” Kruger says. “It’s up to the child to ask himself, ‘Do I want this to be my career?’ Many businesses have foundered because the child or children who took it over simply didn’t have the same passion.”

Maintaining that passion through more than one generation is difficult, and probably one of the reasons that few businesses stay family-owned once the children of the founder are out of the picture. According to Family Business Review, while more than 30 percent of all family-owned businesses survive into the second generation, only 12 percent will still be viable into the third generation, with only 3 percent operating into the fourth and beyond.

Part of successfully carrying on a family business is determining who in the family—if anyone—is truly qualified for the job. “It can be a tough question, but you have to ask if there’s actually someone in the family who can run the business,” Kruger says. “Just because Mom or Dad could do it doesn’t mean the children can. Sometimes family members are allowed to work even when they’re not contributing in an economic way.”

Tom Morgan, who works in the corporate finance group at Faegre & Benson, recalls a business he represented in which the brothers who owned it were lucky enough to recognize that a family succession simply wasn’t in the best interest of the company. “Their children had succeeded to an ownership interest through a preferred stock recapitalization and were actively engaged in management,” Morgan says. “But ultimately, the fathers and the sons recognized that there wasn’t a sufficient commonality of interest among the new generation of owners. The fathers recognized the practical problems of continued family ownership and blessed a sale.”

One way to keep all the children involved in the business—and in the money it makes—is to assign clear, appropriate roles. If one child is obviously the full-time, hands-on manager of the family, give him or her controlling ownership while splitting the balance of the ownership among the less-involved siblings.

And just as the children of a business owner need to honestly assess their place in that business’s future, the parent must also be willing to cede control over an enterprise that, in many cases, he or she has built from the ground up. Part of an owner’s succession plan has to include the often emotional process of removing himself or herself from the day-to-day operations.

“Over time, you need to make yourself dispensable,” Kruger says. “A lot of entrepreneurs feel indispensable because they made the business what it is. Some understand [the need to be dispensable] and accept it, but some can’t accept it.”