I had the pleasure of recently running into Judy Greene from the Family Firm Institute at a meeting. During our conversation I asked her if it’s still true that 30% of first generation businesses end up being transferred to the second generation.
Her reply surprised me. Instead of answering the question she gave me a completely different perspective to think about. She said the way to think about my question is about family business formation, not just about the original family business. This different perspective fits in with what I’ve been observing for the past several years. It appears that children might not go into the family business, but that doesn’t mean they don’t go into any business.
In fact many children of business owners do go into business, just in a different industry. Parents don’t necessarily provide a business for their children; they provide the ability for their children to be in business. This is providing me with a completely different thought process about family businesses.
Enter the family bank.
This is a concept I’ve talked about for years. A family bank is where the family takes their wealth and provides a private venture capital fund. The fund is used for two things.
- To provide funding for education for their children.
- To provide a venture fund for starting new businesses by family members.
We might not want our children to join our business or our children might not want to join the business you run. That doesn’t mean your children don’t want to be in any business. If you have the ability and can put money aside as an economic development fund you are helping your children join the family business just not in your industry.
What having a family bank does for your family -
When you develop a family bank you are developing a method for teaching your children business and money skills. You should have your children develop a business plan and present their idea to the board of the family bank. This board is usually you, your spouse, any advisors you truly trust, and children that have financial savvy.
One of the things I hear from people like you on a regular basis is, “We want to have our children develop responsible money skills.” If your children have the ability to be in their own business developing plans for a successful business will certainly help with that goal.
How does the funding work?
Funding from a family bank can be as simple as a straight loan or as complicated as your bank owning shares in the new company. Your family bank is not likely to be a statutory bank. This means that you can set the rules of how loans will be made and how they’ll be repaid to the bank.
The world of family business is changing. It’s no longer just around the traditional family business. Your children will likely be in business and there is a better and better chance it won’t be in your business. How you help them become business owners is a developing field.
What do you think? Does a family bank make sense to you?
Since there is a reasonable chance your children may not want to join you in your business it would be useful for you to understand the exit process. We’ve written a special report on the 7 Steps to Leaving Your Business in Style. To get this report, click on the button below.