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How to get out of business

In a few years at most, Queen Elizabeth II, age 93, is going to hand down the family business (the British Empire, or what’s left of it) to her eldest son, Prince Charles, age 71.

Many owners of family-held businesses—which are common in the produce industry—face the same question: some 20 percent of family-held firms are now in the hands of someone 65 years or older. Except the choice of succession isn’t as clear as with the British monarchy, and a lot of the older generation are Prince Charles’s age or younger.

Many entrepreneurial elders want to hand down the fruits of their labors to the next generation. When is this a good idea, and when is it not?

The first, and most important, question: does the younger generation really want to take over? The answer is not always clear, because it can be muddied by things such as emotional pressure, stated or unstated. Even if they do, are they up to the job?

Things don’t always turn out as expected: a reluctant successor can take the enterprise to new glories; another, totally gung-ho, wrecks it in two or three years. In any case, the statistics, though murky, aren’t promising: a common figure is that only 30 percent of family-owned businesses survive to the next generation, while only 13 percent make it to the third.

Like any important question, the decision to hand down the business to a family member has to be considered from as many angles as possible. Analyst Dickinson Bransford, writing in Thomas Industry Updates, has some suggestions.

• The size of the business matters. Middle-market businesses, defined as having between $10 million and $1 billion in annual sales, have more options. They are comparatively easy to sell to other companies or to private equity capital. Smaller businesses, especially those with revenues of $5 million or less annually, are harder to sell, so these companies are more likely to rely on the next generation.

• Traditional expectations aside, it doesn’t always have to be the son or sons who take over. Today about 25 percent of family-owned business are run by women—a figure that could go up to 50 percent in the next decade.

• The successor doesn’t have to be a family member. A key employee or employees could be, and often are, better possibilities.

• Financing is another key aspect, notably this issue: does the older generation still need income from the business? That is, can they simply give the business to their children, or will they require a buyout? Fortunately, today’s sophisticated capital market offers many financing alternatives, although you will almost certainly need a professional advisor to sort through them.

Whether you, as a family business owner, have thought about this issue or not, it’s probably time you did. If you’re 65 or older, you’re playing catchup. If you’re around 55, you’re on track to get things started. Ten years is not too long a time for making and carrying out succession plans.

Richard Smoley, editor for Blue Book Services, Inc., has more than 40 years of experience in magazine writing and editing, and is the former managing editor of California Farmer magazine. A graduate of Harvard and Oxford universities, he has published eleven books.