by Scott Bushkie, CBI, M&AMI
Many of the super-rich aren’t leaving their fortunes to their kids. The reason generally goes something like this: “Money kills motivation.”
Reportedly, Bill and Melinda Gates’ kids can expect just $10 million each, of a $76 billion fortune. Sting says his kids shouldn’t expect much. And Gloria Vanderbilt isn’t leaving her son, journalist Anderson Cooper, any money either.
We’re seeing a similar trend in M&A. About 10 years ago, an estimated 30 percent of family-owned businesses passed to a second generation. Today, one study places that number closer to 15 percent.
For some businesses, this generational transition is stymied by death taxes. But more often the issue is about changing markets and changing generations.
It used to be that when we were packaging a business for sale, we included a short rationale about why the company wasn’t selling to the children. Today, that’s rarely a question.
Businesses in the lower middle market are increasingly attractive to large corporations and international buyers, and competition is going the same way. Many second-generation leaders aren’t ready to compete on that scale. Either that, or they simply aren’t passionate about their parents’ industry.
It seems to me that when a family situation enables the children to get as much education as they want, the kids opt for professional degrees in medicine or law. That, and today’s young leaders often want faster-paced, technology-based businesses, not their parents’ “old” manufacturing firm.
And many kids don’t want to make the same kind of life sacrifices they saw their parents make. I was talking with one seller whose adult son is a manager in the business. About a year ago, this guy bought a cottage and boat, but he’s only used it once. Meanwhile, his son has spent nearly every weekend there.
When the father brought up a transition, his son said, “Dad, why would I want to switch places with you?” The younger man knew he was leaving an opportunity on the table, but to him, it wasn’t worth the time away from family.
Finally, some children just aren’t ready to take over. One seller told me he started a business with his son mainly because the son didn’t want to go to college, and he wanted to give his kid a good start.
But fifteen years later, the son still has little visible leadership in the organization. He’s not passionate about the business, and his dad recognizes that. He knows that “good” just isn’t “good enough” to compete in today’s market.
It takes strong character to realize that transitioning your business to your children might not be the best thing for you, them, or the company. And even if you do want to leave your children an inheritance, selling to a child without the right skills or passion is hardly the best way to do it.
Scott Bushkie is Principal of Cornerstone Business Services, an M&A Advisory firm. To request a book with advice on the exit planning process, or to discuss other confidential options, contact Scott at (920) 436.9890 or [email protected].