Recently, I heard stories about two business owners I know, and the outcomes were completely different.

One owner passed down a laundry business he had operated for nearly thirty years to his son, and even with the change in generation, it continues to run smoothly. The other owner, despite his child's strong desire, firmly decided not to pass down his restaurant.

As both are in the same self-employed sector, I was curious why their judgments differed so much, and upon looking into it, the reasons were clearer than I expected.

According to commonly cited statistics from the U.S. Small Business Administration, the survival rate of family businesses is 30% for the second generation, 12% for the third, and only 3% for the fourth generation and beyond. Just looking at these numbers gives a sense of how challenging it is to successfully pass down a business.

However, if you examine these statistics closely, there is a distinct pattern between the types of businesses that survive and those that do not.

First, let's look at the types of businesses that are good for passing down. Industries like home service franchises or coin laundries, which have established operating manuals and consistent repeat sales, can continue to function smoothly even with a change in ownership. Franchises also have the advantage of the parent company reviewing successor qualifications and providing training, making it a secure option. Asset-based businesses like rental properties or small real estate, which require less hands-on management, are also relatively stable for the same reasons.

On the other hand, businesses that should never be passed down are those where the entire operation relies on the owner's personal skills and stamina. A prime example is restaurants. With fluctuating costs for rent, labor, and ingredients, and the quality of food and service heavily dependent on the owner's intuition, it is quite difficult for the inheriting child to replicate that same intuition.

Similarly, professional offices like those of lawyers, doctors, or accountants, which require personal licenses, face the same issue. While the office itself can be passed down, the license must be obtained through examination, so if the child does not wish to pursue that path, the concept of succession simply does not apply.

Industries that rely on trends are also risky. No one can guarantee that a dessert shop currently thriving in front of a campus will still be successful in ten years. Trends always give way to the next trend.

Businesses like liquor stores or gas stations, which require permits issued by local governments, also have many aspects that need to be checked in advance. While the business itself can be transferred through sale or gift, the requirements for permit succession vary by state, and it is common for the child to have to reapply in their name. There are often cases where businesses cannot operate due to unanticipated gaps in operations caused by not researching these administrative procedures beforehand.

Interestingly, most family business owners wish to pass their businesses down to their children, yet only a small number have a documented succession plan. While the intention is there, the execution often falls short. Just as important as choosing the right type of business to pass down is documenting when and how to transfer it.

Ultimately, what lasts longer than the business itself is the way of working and the attitude. By involving children in customer service or reviewing accounting books from a young age, the actual process of inheriting can significantly reduce trial and error later on.

In the end, the key question is whether the business operates as a system that can run without a person or if it collapses the moment that person is gone.

Don't be swayed by appearances; I believe that betting on something that lasts is ultimately the winning choice.

If you want to pass something down to your children, shouldn't the first step be to envision a structure that will still be operational in ten years, rather than just focusing on the current success of the business?