Consider This Before Passing Your Business to Your Child

Executive Summary

A family business can be a good way to be successful and live a fulfilling life. This takes hard work and dedication. An owner of a family business needs to have a good education and a firm foundation when starting. It is important to know legal policies and laws and how they may affect the business even though the business may be small.

Family businesses face a lot of risk. Owners who are more educated seem to take larger risks than the less educated family business owner. This may be an advantage in the long run.

When looking at expanding the business, new roles need to be defined and new jobs may need to be created. This can be difficult in the family business since no one wants to hurt other family member’s feelings. It is important to treat family members as employees who are not related.

As it comes time to pass the business on to children, it will be a smoother change if the children have been involved in the business little by little as they were brought up. It is important to explain current situations to the child honestly and give them small, easy to accomplish tasks. However, one does not want to make their child feel as if they have to take over the business.

A current case is The Antique Quilt source. This is a small family based business that will be passed onto the owner’s children some day. The owners of The Antique Quilt Source are providing their children with a background of their business and teach their children small tasks to involve their children.

Table Of Contents

I. Executive Summary
II. Issues
A. Starting Up
B. Procedures
C. Risk Taking
D. Expanding and Passing Family Business to Children
III. Current Case
A. Introduction
B. Passing the Business on to Children
IV. Conclusions
V. Recommendations

Issues

Running a business takes a lot of hard work and dedication, but this becomes harder when the business is run from the home. According to Susan S. Lang (2001), more than 18 million U.S. households have a small business. One advantage of a family business is the competitive advantage. Family business owners tend to view their business as a long-term commitment instead of something short-term (Klein, 2002). Klein also suggests that customers prefer to do business with family businesses because of the belief that families care.

Starting Up
A family business can be very rewarding but one needs to keep his or her priorities straight. This is often hard when working out of the home. The owner may find his or her self doing chores around the house rather than keeping on schedule for the business. When business is slow, it is still important to do job related tasks during the workday. One needs to set up a space from where they can run their business from the home without distractions. Also, the owner needs set business hours when it might be tempting to put off work until the evening or whenever else they can fit it in. Set hours are needed to stay productive and to work well with customers.

During the initial creation of the business, employees’ job responsibility is pretty broad since there are usually few people at the beginning. It may work out well like this for the first while, but during the growth and while more employees are hired, the owner needs to make a distinction between job tasks and roles. He or she needs to clearly assign employees to certain tasks and make sure the employees are doing what is assigned (Kaslow, 1993). Especially in family business, this can be hard. If there are several family members working at this time, and they all have equal jobs, the owner may find it hard to give job titles and roles since he or she does not want to slight anyone (Kaslow, 1993). It is important to treat family members like any other employee who is not in the family. Expansion can take many forms. This can be in number of employees, larger product line, or location.

Policies
Some family businesses can struggle with policies and laws because of their size. Since family businesses may be smaller and less complex, it may appear their businesses are more easily managed (Douglas & Scanell, 1999). However, this is not the case. Sara Douglas, professor at University of Illinois and Elizabeth Scanell (1999), professor at University of Vermont also note that legal knowledge may be limited and some business owners may believe they are excluded from some policies due to their small size. Douglas and Scanell (1999) point out that all businesses can be sued under common law, so no matter what the size of the company, it is important to have a clear understanding of the policies, laws and restrictions that apply to your company.

It is always important to share your company’s goals and objectives with someone, such as a lawyer, who is knowledgeable in these areas. If something should happen, it will be easier to get back to normal. Also, since funds are smaller for a family business, and a family might be venturing out into the business field for the first time, an accountant should be informed of objectives as well as all other financial decisions.

Risk Taking
Owners of family businesses are often timid when it comes to taking risks. Since the family’s financial resources are often mixed with the business’ financial resources, decisions need to be made with the utmost importance (Xiao, Alhabeeb, Hong & Haynes, 2001). They also report that male business owners are less likely to intermingle family funds with business funds and female owners are more likely to do this. Xiao, Alhabeeb, Hong and Haynes (2001) suggest that business owners with more education are more willing to take larger risks.

Expanding and passing the Business to Children
When it comes time to expand, the owner may question who will run the business when he or she wants to step down. This can be hard to decide, as the owner wants to see the business continue for many years. Whether the owner should pass his business on to a relative who already has had work experience or to a child, who may not fully understand how to run a company, it is important to make the transition as smoothly as possible.

Attorney Steven Lehr who specializes in family business planning suggests that family business owners set up a succession plan as soon as possible. The benefit of doing this makes the transition smoother and orderly (Townes & McCoy-Pinderhughes, 2001)

Having children around a business can be beneficial to the family business. Most children grow up where the parents go off to work in the day, and the children have a very vague idea what working in the business field is like. Children who grow up around the business can slowly learn what it is like to run a business and what a workday consists of. A lot of business owners would like to see their business run by their children some day but a lack of the knowledge of what it takes to run a business can be harmful for the company and also employees (Baskin & Aronoff, 1998). According to Baskin and Aronoff (1998), a parent should wait until the child shows some kind of interest in the business before teaching the child how to run it, to avoid making the child feel obligated to take over.

Baskin and Aronoff (1998) have set up some guidelines for business owners and how they should introduce their children to the business. If the child expresses interest when they are young, it may be appropriate to give the child small tasks that they can complete successfully. If the child has any questions about the business, the owner should answer them honestly, and briefly. Set aside a time for the child to come to “work” to watch and do the tasks. Cybele Weisser (2003) of Money Magazine gives the example of Dr. James Mosley who runs a chiropractic clinic. He introduced his practice to his children as often as possible to help educate and familiarize them with his work. “I had them filling in insurance forms and answering phones,” says Mosley. “Anything I thought they could do” (Weisser, 2003). Most importantly, treat your child like you would treat any other employee. Let work at work, and home at home (Baskin & Aronoff, 1998).

Current Cases
Introduction

One example we will be looking at is The Antique Quilt Source. The Antique Quilt Source is a family business started in 1970. The previous owners decided to sell the business instead of passing it on to their children. The Antique Quilt Source (TAQS) is a mail order business that sells antique quilts. Recently, the author’s parents purchased it in 2000. Since then, it has gone through many changes. First, the location, ownership, and employees of the business changed. After making sure the transition was smooth by working with the previous owner for a time and informing the customers of the changes, it is now undergoing expansion. The owners of TAQS decided to expand their customer database and also make a website allowing for online purchases. Since doing this, the customer database has increased and there have been more sales.

The since the owners of TAQS have made many changes to the business, it was important for them to have close contact with accountants, lawyers, etc. to have their opinion in legal and financial matters. Since buying TAQS, more employees have been hired, and the owners needed to define responsibilities for them since this was a new aspect to the business.
Passing the Business on to Children

The owners of TAQS want their business to continue to succeed even when they retire. For these reasons, they have slowly introduced their business to their children. The owners had their children come along when they purchased quilts. They explained what to look for in a quilt, what makes a quilt valuable and what should be paid for it. The author has completed small tasks in the owner’s office such as inventory, taking orders online and answering the phone. Other, more complicated tasks such as keeping the website up to date is still being shown to the author. The owners of TAQS have explained major changes and dilemmas that the business has gone through to their children. This way, the children know the entire history of the business and not just the good stuff.
Conclusions

Running a family business can be very rewarding but takes a lot of hard work and dedication. It is important to realize that family businesses are usually smaller in nature and will require a lot of planning and organization if they want to be successful. It is also important to include your children from the get-go if you are planning on passing it to them when retiring.

Recommendations
The author agrees that when planning a family business, it is important to work with outside sources to assure that the entrepreneur has clear guidelines and plans for the future. When running a family business, the author suggests that the owner separates the family’s financial resources from the business’ funds. When deciding to pass the business down to a child, it is wise, as mentioned by Baskin and Aronoff (1998), to get them involved little by little so they become familiar with how the company works. This will make the transition of passing it on much smoother. Some family businesses are handed down to children who do not intend to attend college. The author suggests that this is not done. Even if the child has a clear understanding of how the business is run, the successor still needs to understand the outside business world, policies, laws and practices.

References
Peer Reviewed
Baskin, M. & Aronoff, C. (1998). Preparing your Children to `Drive’ the Business. Nation’s Business. 60-61.
Douglas, S. & Scannell, E. (1999). Challenges for Family Businesses in Marketing and the Legal Environment. Interests Annual. 141.
Kaslow, F. (1993). The Lore and Lure of Family Business. American Journal of Family Therapy. 3-8.
Klein, K. (2002). When It’s All in the Family. Business Week Online. 1p.
Lang, S. (2001). Family Businesses and their Impact on Family, Community, and Economy. Human Ecology. 24.
Xiao, J., Alhabeeb, M.J., Hong G., and Haynes, G. (2001). Attitude toward Risk and Risk-Taking Behavior of Business-Owning Families. Journal of Consumer Affairs. 307-320.

Non- Peer Reviewed

Townes, G., McCoy-Pinderhughes, P. (2001). Keeping it all in the family. Black Enterprise. 40.
Weisser, C. (2003). Small Business. Money. 28.