Is it better to leave your kids the business or the cash?

Only one-third of family owned businesses survive the transition from the first to the second generation of ownership. Why is that?

According to the U.S. Small Business Administration, more than 90 percent of American businesses are family owned or controlled, and they generate about half of the nation’s Gross National Product. Yet two-thirds of them fail after transitioning to a family member.

There are a number of likely reasons behind this phenomenon, but the most significant relate to the children not being ready or able to take control of the business. This could be due to a lack of interest, business knowledge or management experience. Overall, transitions fail when children don’t have the same vested interest in the business that their parents did. Owners succeed because they can risk it all and refuse to fail. Does the next generation bring this same commitment and passion?

Business owners typically are all consumed by their companies. They have grown their companies through a tremendous investment of time, money and passion, and this is extremely difficult to replicate. The same is true of their vast knowledge base. Without this comparable investment and knowledge, it should be no surprise that many second generation business owners fail.

Given all this, is it wise for business owners to leave the business to their children? If the goal is to maintain a family reputation or legacy and provide employment for the children, then the answer is probably yes. If, however, the goal is to maintain the economic value the owner has created over the years and use this value to provide for current and future generations of family members, then the answer is more likely no. While emotionally this decision may be difficult, financially it is rarely wrong for the owner and his/her family.

Finally, if an owner does decide to keep the business in the family, it is far wiser to sell it to the children than to give it to them. It probably won’t create the largest proceeds for the owner, but at least this way the children will be forced to bring the same emotional commitment as their parents because they will be financially invested.

Joe Froehlich is managing director at Corporate Financial Advisors LLC in Milwaukee.

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