Family businesses are the backbone of economies around the world, 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 take over and carry the business forward? This scenario is becoming more and more common with an aging population, changing family structures and different priorities for succeeding generations.
The Bridging Gap: Dream vs. Reality
Statistics Managers of family enterprises indicate that their business remains in the family, where over 75% say that the business is the most important asset of the family. Surprisingly, more than half of family businesses do not have a documented or communicated succession plan. These statistics match 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 the transition?
The most common reasons are fear and worry. Leaders, especially founders, don't want to think, plan, or execute a strategy to let go of the reins and face their own mortality. However, we are beginning to see new factors come into play between generational changes. A recent trend that causes challenges for family businesses around transition planning is that the family lacks an obvious successor.
Generational differences
There are generational differences 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 may say: “I felt forced into this work by my parents and I don't want that for my children. I want them to find a meaningful career that matches their passions.”
Until recently, most family business owners raised their children with the expectation that family members, especially first-born sons, would work and one day take over the business. Many parents today express different dreams for their children. Many parents who raised children felt they were forced into careers by their parents and want to raise their children differently—with the agency to find their purpose.
Those in the rising generations may have a different view. They might say, “My dad looks 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 looking for work, 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 businesses is the evolution of the traditional family structure. Around the world, we are seeing a decrease in marriage and birth rates. Who passes on the family business when you have no heirs?
Given the extended life expectancy and innovations in health care, many individuals are waiting to have children until their 40s. As the average age of parenthood rises, it is more likely that children will still be under 18 when their parents retire—business leaders may have heirs who are not prepared to take over the business.
In addition, increasing divorce rates and blended families have added to the complexity of choosing a successor.
So what now?
Consider these strategies:
- Communicate, Communicate, Communicate
When we think about the importance of communication to family cohesion, three real-life examples come to mind:
- A child dreamed of taking over the family business and built his life around that plan, only to sell it without consulting.
- Three siblings work in the business, and two express reluctance to become leaders, saying, “We believe our sister would be the best choice.”
- Cousins bound together by a business acting desperate to get out of the shackles their grandparents thought would be the greatest blessing.
Unfortunately, many examples of resentment and anger could have been resolved if the family had discussed the issues before it was too late. Encourage your clients to talk with their families about what-if scenarios and not make assumptions.
- Family owned, professionally managed
Families who dream of keeping the business in the family, but don't have a family member interested, willing or available to step in, should consider a professional management team to run the business and pass ownership down to the next generation. future family members.
This is a popular and successful strategy as long as there is proper governance to define the role of management versus the role of owners and adequate education to prepare successors for their role as owners. A well-defined and managed supervisory board that includes family owners and independent non-family members is key to ensuring the sustainability of the business. Further, generous compensation of professional management teams is highly encouraged, in some cases with equity or phantom stock.
- Sell proactively and thoughtfully
In some cases, we recommend that the family proactively discuss the possibility of selling the business. Selling does not take away from a family's legacy, and often, the liquidation event can create exponential opportunities for additional ventures, growth and charitable giving.
If the family chooses to sell, many aspects of the transaction require careful income and estate tax considerations. We recommend that owners engage in planning to minimize transaction taxes through strategies such as charitable vehicles, family limited partnerships or grantor-held pension funds to maximize value for the family.
Some families have developed a close, trusting relationship with employees and want to transfer the business to them, which can be accomplished through an employee stock ownership plan (ESOP). An ESOP provides a long-term corporate strategy that promotes employee commitment and retention and more control for the owner to slowly release 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, regardless of whether or not a family member is in charge. While the absence of an heir presents a challenge, proactive succession planning for family businesses can ensure a smooth transition and continued success. Advisers should encourage their clients to communicate as a family and explore options such as professional non-family management or a proactive sale of the business, making the owners better equipped to secure the legacy they have built.
Jill Shipley is Head of Governance and Education and Brittany Cook JD is a fiduciary advisor and estate planner, AlTi Tiedemann Global