Who's Taking Over the Family Business?

Next generation not an option? Here’s what to do.

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Running a family business is tough work. And one of the hardest parts of the job is deciding who will take over the business. What if there isn't a second generation to take over? Or perhaps there is a second generation, but they're not ready to take the reins?

If this is a decision you'll have to make, "a couple years is not sufficient enough time," says Wayne Rivers, president of The Family Business Institute, a consulting group. "If you want to give yourself a realistic chance of success, then start thinking about what you're going to do 10 years ahead."

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U.S. News spoke with family business consultants, who outlined several scenarios and options for owners.

If there's no one to take over:

Sell to employees. Rivers says your best bet is to try to sell the business to the people who work for you. "If you've got people who are really sharp, ambitious, and are willing to take on the massive load—the psychological and the financial load—of running a small business, get them to take over," he says. A sale to insiders is the most common route for people in this situation, according to Rivers.

Rivers adds that you should make sure you're brokering a fair deal for the employees. "If the debt burden causes the business to fold soon after, what good have you done?" he says.

Ideally, you want to sell to management-level employees for a management buyout, or an MBO. "The nice thing about an MBO is that the management team knows your company better than the third party does, so the process of selling it to them is more efficient," says Bradley Franc, an attorney who counsels family businesses. "They don't have to kick the tires and lift the car up as much as a third party would."

Sell to a third party. If no one within the company wants to purchase the business, sell it to a third party. In this scenario, you would sign an agreement of sale, or an asset purchase agreement. Consult a lawyer to look over the terms of the agreement, and talk to several third parties before deciding who to sell to.

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Create an ESOP. An Employee Stock Ownership Plan provides every employee with stock ownership in the company. Franc says this is essentially a type of pension plan. Shares are given to employees and are held in the ESOP trust until they retire or leave the company. As the former owner, you can choose to hold onto your stock or sell it. Although this will take care of the monetary side, an ESOP won't solve the problem of who's going to run the company after you leave.

If you don't think the next generation is ready:

Assemble advisers. You might not think the next generation is ready to take the reins, but you're not the most objective person to make that decision. "Somebody's got to make the assessment of readiness. And it's hard for family members to do that," Rivers says. He suggests hiring a team of advisers to assess the situation and evaluate the younger generation's readiness. "Some senior generation members are way too critical," Rivers explains. "They see only the faults and flaws of the next generation. They don't see the good."

Rivers emphasizes the benefits of hiring advisers: "They don't advocate for either generation, they advocate for what's best for the business. It's a perfect balance point between the needs of the generations and the needs of the business."

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Often, business owners put an interim leader in place to give the younger generation more time to prepare. "This is a popular option if the older generation is hesitant to pass along the business to the next generation," says Joe Schmieder of The Family Business Consulting Group.