How to know if your children are ready to take over your business

By Morey Stettner from MarketWatch

Financial advisers encourage entrepreneurs to put together a succession plan years before retirement

Successful entrepreneurs are often control freaks. But there’s one thing they can’t control: whether their children can take over the business and keep it growing.

Financial advisers who work with founders of thriving businesses frequently hear them say, “I’m concerned that my children will run the company aground,” or “I fear they’ll never be ready or able to fill my shoes.”

Ideally, advisers anticipate this fear and address it years before it arises. While there’s no guarantee that they can pave the way for a smooth passing of the torch from one generation to the next, the odds soar when advisers collaborate with clients to plot a seamless transition.

“You have to plan well in advance, 10 years or more, before the client’s retirement,” said Stephan Shipe, an adviser in Winston-Salem, N.C. “As retirement gets closer, the children’s responsibilities need to increase so that they gradually get to make more decisions. Then you hand over the reins” after they’ve developed wide-ranging operational know-how and exhibited traits of effective leaders.

In reality, however, many founders don’t start serious succession planning until they hit their 60s or 70s. By then, their fear intensifies and they question their kid’s ability to perform as CEO.

“It’s not an irrational fear,” Shipe said. “There’s plenty of research that shows the second generation doesn’t do that well. They may lack the skill sets” to lead a company to next-level growth.

The fear can take on added dimensions. Founders may worry that most of their assets are tied up in the business, so sons or daughters who cannot keep the enterprise afloat may squander their inheritance.

“Some parents fear that if their children cannot make this work, there will be nothing left for them and the [client’s] grandchildren,” Shipe said. “And what happens if there are other siblings who have financial interest in the business? They may rely on its cash flow and have voting or non-voting shares.”

Shipe encourages clients to meet regularly with their adult children to plan succession in stages. Through discussion, the parties can agree on next steps and voice their aspirations and concerns in a supportive environment. “It’s such a sensitive topic,” Shipe said. “So many emotions can be involved.”

Entrepreneurs may be visionaries, but sometimes it takes an adviser to identify choices that they might otherwise overlook. Shipe often tells anxious clients, “Giving full control of the business to your children isn’t your only option.”

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Other options include recruiting an outside CEO, or a founder can remain on the board of directors in retirement while letting their kid take incrementally more responsibility for the business.

In some cases, advisers refocus their clients on what matters most. Swirling fears can distract aging entrepreneurs from core issues that can make or break the business. Mike Alves, a certified financial planner in Pasadena, Calif., worked with a woman who inherited a business from her husband after his sudden death. Two of her four sons didn’t get along, and she fretted about familial discord.

“She didn’t believe that they lacked the skills to run the business,” Alves said. “But I had my suspicions. The sons were smart. However, were they experienced enough to step into the CEO role?”

Alves and his client agreed to bring in an independent consultant to assess the situation. After analyzing the business and interviewing family members, the consultant concluded that the sons needed more management training before taking over.

Laura Wartner, an attorney at Smith, Gambrell & Russell, an Atlanta-based law firm, urges advisers to work with clients and their families to hire a business consultant to address fears or conflicts over succession. She suggests that parents and their children should participate in selecting a consultant. She also recommends that advisers propose the formation of an outside board of directors — a team of seasoned entrepreneurs and other experts who can help less-experienced family members gain insights and skills to lead.

“[The board] may provide reassurance to the senior generation that the junior generation is in good hands,” Wartner said.