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Family-business succession planning

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Only around a third of family firms are passed onto the second generation and just a 10th reach the third generation, research has revealed.

The rest are sold or closed down.

With some notable exceptions (some of the largest private and quoted UK companies are family firms, including JCB, Clarks Shoes and Associated British Foods) we often find this happens:

(1) The Grandfather - starts the business to generate income for him and his family, and builds it on conventional lines and with strong traditional values.

(2) His Son (or daughter) - as a result has a good education, and has seen the world. He takes over the business, but has ideas of his own and makes changes to grow the business.

(3) The Grandson - lives in a rapidly-changing world full of possibility. He's not interested in business (or not this one, anyway!) and wants to do something completely different. He loses the business.

One of the biggest challenges you face will be how best to pass on to the next generation the value you have built up in your business

What's going wrong?

There's a fundamental problem: the older generation thinks the next generation will carry on the business exactly as they did. Each (younger) generation, if interested at all, wants to grow and develop the business in their own way.

If they set their own objectives, there is very often conflict with older family members, or there's a mismatch with the business's traditional values, the business loses credibility and custom, and ultimately fails.

Often, the older generation cannot see what is happening - they are too close to the problem, and don't want to recognise that the family may not want to run a carbon-copy business if they take over.

So what's the answer?

One of the biggest challenges you face will be how best to pass on to the next generation the value you have built up in your business. You need to make the right decisions, balancing your needs with those of your family and your business.

It's easier if you plan the succession process early, ideally when you set up the business. Long before you intend to retire, you need to ask yourself:

  • Does your intended successor really want to take over - or simply feel obliged to?
  • Does he or she have the right skills and attributes?
  • Is someone else in the business - maybe a non-family member - better placed to take your business forward?
  • Will family succession provide sufficiently for your future?

Is family succession the best option?

It may even be that passing your business to your family is not the best option - you may get more value from selling a business to a third party and giving the money to your children. This way you can also realise money for your own retirement.

If a family member is the right person to run the business, has the right skills and attributes and, crucially, wants to take over, the best solution may still be to sell the business to them. There are several advantages to this:

  • You transfer psychological as well as physical ownership.
  • The business can be relaunched with a fully consistent and thought-through strategy, and values relevant to its new owner's needs and objectives.
  • The business does not have to support two people.
  • It's easier for you to let go and resist the temptation to meddle - you are no longer financially dependent on the business's success.

You can make things easier if you:

  • clearly agree what future role, if any, you will have in the business.
  • accept that you're no longer in charge - though your advice and support may be invaluable.
  • remember that change is often necessary for a business to develop successfully.
  • plan other activities to continue to lead a fulfilling life after you leave.

OurĀ advice?

  • By all means find a way of passing the value of your business to your family - though this doesn't mean simply 'handing over' the business, which the Inland Revenue would frown on!
  • Recognise that in today's world, what's appropriate for your business and your heirs may be very different from what worked for you.
  • If you do decide to pass on the business, do it with your eyes open, and with no strings attached - make a clean break.

If you've ran the business for many years there's a good chance you're from the baby boomer generation. If you do sell outside the family, you may well sell to someone from the same generation, as BusinessesForSale.com research suggests over 55s are increasingly common business buyers

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