When handing over a family business to the next generation, there are a few common and costly mistakes people make.
Our founding partners Adam Gaslowitz and Craig Frankel recently hosted an episode of our “Wealth Matters” radio show with two special guests from Wilmington Trust — Southeast Regional President Garrett Alton, ChFC, CLU, CEPA and Managing Director and Senior Wealth Advisor of the Atlanta Region Chip Kelleher — to discuss what these mistakes are and how family business owners can avoid them.
Here are the 3 family business mistakes you should avoid making.
1. Children Lacking A Unique Vision For The Business’ Future
Adam and Craig both shared that they have seen many family business owners place certain requirements on their children before they are allowed to step into ownership. Sometimes this involves going to college, getting an MBA, working at a different company to get first-hand experience in the industry, etc.
Chip added that this is usually a very effective model in preparing the next generation to start bringing new ideas to the table. When successors are unprepared for ownership, they often try to coast by and stay afloat by replicating the processes and strategies of their predecessors rather than innovating and growing. By getting outside the family business and learning from the successes and failures of others in the industry, they are more prepared and confident in trying new things.
2. Assuming The Children Are Ready To Take Over When They Are Not
Craig explained that one mistake many parents make when transferring ownership of the family business to their children is handing it over to children who simply are not prepared for the hard work involved in being the owner.
“It’s important for the parents to reach their successors that they aren’t just going to stumble into success,” Chip said. “They need to start by sweeping up the shop floor and working their way up to truly appreciate and understand the business.”
3. Neglecting To Set Clear Expectations Early On
Another common issue that arises when transitioning ownership of a family business is when the parents/current owners neglect to set clear expectations about who will be taking over the family business one day, and who will be compensated in different ways, especially when there are multiple children and heirs involved.
Garrett went on to explain that in these cases, there will be owners with interests who are working the business, and owners with interests who aren’t working the business. In these situations, the working owners feel like the non-working owners are profiting from all of their hard work, which quickly builds resentment and can lead to business disputes down the road.
“It’s all about communication – that’s where we see the biggest failures in all of the examples we’re talking about,” Garrett stated. “Having open and frank communication from the patriarch and matriarch of the business to their children, often and early, goes a long way in avoiding these situations and alleviating tension and anxiety.”
For more tips on how to avoid common mistakes when transferring ownership of a family business, check out the full “Wealth Matters” episode on our YouTube channel here.
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Gaslowitz Frankel LLC is the Southeast’s premier fiduciary litigation law firm. Our legal team specializes in all aspects of fiduciary disputes representing individuals, executors, trustees, investors, shareholders, and corporate fiduciaries in complex fiduciary disputes involving wills, estates, trusts, guardianships, and businesses.
