What seems like a lifetime ago, The Who did a song called “The Kids Are Alright”. (You can see the original cheesy music video here. And check out the spectators on the lake in the background!)

Many business owners seem to believe that phrase when it comes to their business. And, needless to say, we have had countless discussions over the years with business owners that would, in the face of all the evidence that it shouldn’t happen, say, “I want to keep it in the family”.

Though I’ve gone on about this phenomenon before, the UBS report that was the inspiration for last week’s post contains some interesting statistics about this very topic; none of which are very promising. If you’re a business broker – or aspiring to be one – or own a business, this predicament is important to keep in mind when working on the sale of a business, especially if the heirs work in the business.

As a rule, heirs are reluctant to take over the family business. A recent post on this blog is the true story of parents coming to grips with this fact. The kids, even though they’ve worked for years in the business, are simply not qualified to run it – and don’t want to get qualified.

What UBS Found

The UBS report contains some eye-opening statistics that business brokers – and sellers – should keep in mind:

1. Although most business owners’ adult children work for the business, few are interested in assuming ownership.
2. Among business owners who plan to sell but would like to keep the business in the family, 89% cite a lack of interest from their potential heirs.
3. 82% of business owners say their children would rather inherit the assets – that is, the cash! – from the sale of the business than the business itself. Only 18% express any interest in keeping the business.

The report also raises some interesting points about how the owners view their kids:

1. 21% of owners feel that their offspring are not qualified, even though they’ve worked in the business. (And given the fact that most parents think their kids are geniuses, the true number is probably significantly higher than this!)
2. 9% want their offspring to follow a different career path

We recently had an electrician do some work at our house. We’ve known this guy and his business for some time and his company has done work for us on rental properties over the years. His oldest son and namesake works in his business.

Though the company generates a handsome level of revenue, the father confided to me that he has urged his son to pursue his studies to prepare for a different career. Regardless of the handsome revenue stream, the father feels that the work is difficult, especially as one ages. He’s one of the 9%.

What Else Did They Find?

But there’s another surprising revelation in the report. When heirs do take over the business, parents worry about their own legacy.

That’s right. According to the report, most of the anxiety felt by business owners after a lifetime building their business relates to how successors will carry on their legacy.

What Does All This Mean to Business Owners?

Well, at the very least it means that owners must accurately assess the capabilities of their heirs.

If the owners are worried about their legacy, they should consider that there are three directions that legacy can take after the business is sold:

First, the business – and the owner’s legacy – in the hands of capable management, can continue to grow. Are the heirs capable and committed?

For example, can the owner, with the assistance of a professional business broker, find talent outside the business to take it over and, if so, is that talent more skilled and committed to the business than the heirs? If so, would such outside talent be better for the business? Would it be better for the heirs? If some heirs wanted the money, it might be; particularly if the proceeds from the sale of the business are, to some extent, dependent upon the future performance of the business. (See “Earn-outs“.)

Second, the new owners – heirs or otherwise – want to take the business in a different direction. This will, at the least, alter the owner’s legacy and, after some period of time and if the new direction proves fortuitous, that legacy will be overshadowed – if not consumed – by the legacy created by the new owners

For example, over the years, have the heirs been clamoring to add pet supplies to your auto parts distribution business because their college roommate’s aunt is making a killing selling dog biscuits online? If they squander profits on a failed attempt to emulate their friend’s aunt, the owner’s legacy will be forever damaged. (On the other hand, of course, if they score a early round of venture funding from some Sand Hill Road fund and go public two years later, good for them! But at the point, the original owner’s legacy is gone anyhow.)

Third, in the hands of unqualified heirs, the business can falter – and even fail.

For example, the story told above is the danger facing the parents that started the lawn and garden center (and linked to near the top of this post). Whatever the original owner’s legacy was, it’s now toast.

What Does it Mean to The Business Broker?

Business brokers are uniquely positioned to guide owners through the multitude of issues that must be considered when the time comes to exit the business. When meeting with business owners – especially those whose children or other family members work in the business – brokers must be able to explain the challenges businesses face when the next generation takes over and help the owner do an honest assessment of the capabilities of their heirs.

Remember – and use – the old axiom, “from rags to rags in three generations” because too often it’s true.

You may find that some owners are adamant about leaving the business to the kids, capable or not. In that case, your job is to value the business for the owner (let him or her get the kids on board with that value), help outline some terms of the deal and then work with the owner’s legal counsel to guide the transaction to closing.

In such cases, my experience suggests that it would be wise to stay in touch with the heirs who are now driving the train, especially if you harbored some concern about their capabilities and commitment. If you’re concerns are proven correct, this business might be for sale again in the not-so-distant future.

The Bottom Line

Selling a family business is emotionally wrenching enough without the potential drama that relatives bring. It’s extremely important to critically assess the capabilities and level of commitment of family members that say they’d like to acquire the business. When a business is sold to a non-family third party, the seller is less likely to suffer dire financial consequences if the business falters under the new management. But if the new owners are the kids, guess who they’ll come to in tough times – whether such tough times are their fault or not. This, too, is part of the conversation a professional business broker must have with his or her selling clients.