Family businesses are the backbone of economies worldwide, contributing over half of GDP and employing more than half of the global workforce, all while fostering a sense of community and tradition. But what happens to this legacy when there are no heirs to assume leadership and move the business forward? This scenario is becoming increasingly common with an aging population, changing family structures and differing priorities for succeeding generations,
The Looming Gap: Dream Versus Reality
Statistics show family enterprise leaders want their business to remain in the family, with over 75% expressing that the business is the most important family asset. Surprisingly, over half of family businesses don’t have a documented or communicated succession plan. These statistics align with what we’re seeing—that family-owned businesses want the business to stay in the family.
So why, then, do so many family business owners lack the foresight to plan for transition?
The most common reasons are fear and discomfort. Leaders, especially founders, don’t want to think about, plan for or implement a strategy to let go of the reins and face their mortality. However, we’re starting to see new factors come into play amid generational shifts. A recent trend causing challenges for family businesses around transition planning is that the family lacks an obvious successor.
Generational Differences
Generational differences exist between the experiences of older generations (baby boomers and Gen X) and the values of younger (rising) generations (millennials, Gen Zs).
If asked about the family business, those in the older generations might say, “I felt forced into this job by my parents, and I don’t want that for my kids. I want them to find a meaningful career that aligns with their passions.”
Until recently, most family business leaders raised their children with the expectation that family members, especially firstborn sons, would work for and one day take over the business. Many parents today express different dreams for their children. Many baby boomer parents felt they were forced into careers by their parents and want to raise their children differently—with the agency to find their own purpose.
Those in the rising generations may take a different view. They might say, “My dad seems miserable and is always at work. Stepping into his shoes is the last thing I would ever do.” Millennials and Gen Zs stereotypically have different values than their parents and grandparents, striving for more work-life balance and meaning and purpose in their work. When seeking employment, a key driver for younger generations of talent is identifying a business whose values and mission align with their personal beliefs.
Changing Dynamics of Family Life
A growing challenge for family enterprises is the evolution of the traditional family structure. Around the world, we’re seeing a decrease in marriage and birth rates. Whom do you pass the family business to when you have no heirs?
Given expanded lifespans and innovations in health care, many individuals are waiting to have children until well into their 40s. As the average age for parenthood rises, it becomes more likely that children are still under 18 when their parents retire—business leaders may have heirs who aren’t prepared to take over leadership of the business.
In addition, increased rates of divorce and blended families have added to the complexity of choosing a successor.
So, What Now?
Consider these strategies:
- Communicate, Communicate, Communicate
When thinking about the importance of communication for family cohesiveness, three real-life examples come to mind:
- A child dreamt of taking over the family business and built their life around that plan, only to have it sold without being consulted.
- Three siblings work in the business, and two express reluctance to become the leader, sharing, “We believe our sister would be the best choice.”
- Cousins tied together by an operating business desperate to get out of the handcuffs their grandparents thought would be the greatest blessing.
Unfortunately, numerous examples of resentment and anger could have been resolved if only the family had discussed the issues before it was too late. Encourage your clients to talk to their families about the what-if scenarios and not to make assumptions.
- Family Owned, Professionally Managed
Families who dream of keeping the business in the family but don’t have a family member interested, prepared or available to step in should consider a professional management team to run the business and pass ownership to the next generation of family members.
This is a popular and successful strategy as long as there’s proper governance to define the role of management versus the role of owners and adequate education to prepare heirs for their role as owners. A well-defined and managed oversight board that includes family owners and non-family independent members is key to ensuring business sustainability. Further, generously compensating professional management teams is highly encouraged, in some cases with equity or phantom stock.
- Proactively and Thoughtfully Sell
In some cases, we recommend that the family discuss the option of proactively selling the business. Selling doesn’t take away from a family’s legacy, and often, the liquidity event can create exponential opportunities for additional entrepreneurship, growth and charitable giving.
Should the family choose to sell, many facets of the transaction require careful income and estate tax considerations. We recommend owners engage in planning to minimize taxes on the transaction through strategies such as charitable vehicles, family limited partnerships or grantor-retained annuity trusts to maximize the value to the family.
Some families have developed a close, trusted relationship with employees and want to transfer the business to them, which can be accomplished through an employee stock ownership plan (ESOP). An ESOP offers a long-term corporate strategy that promotes employee dedication and retention and more control for the owner to slowly let go of the shares versus selling the business to a third party.
Honoring the Past, Shaping the Future
Most family businesses want to keep the business in the family, whether or not a family member is the leader. While the absence of an heir presents a challenge, proactive succession planning for family businesses can ensure a smooth transition and continued success. Advisors should encourage their clients to communicate as a family and explore options like non-family professional management or proactively selling the business, making owners better equipped to secure the legacy they’ve built.
Jill Shipley is Head of Governance and Education and Brittany Cook JD is Fiduciary Counsel and Wealth Planner, AlTi Tiedemann Global