You might think that a transfer of your business to a child or family member would be the easiest exit route to facilitate. Whereas statistics reveal that only one-third of all family businesses pass successfully to the next generation, and only 10% to the third generation.
Owners considering a transfer to children often run into these obstacles, among others:
The children not getting along with one another
The children not interested in the business and with different career goals
The children don’t have the same skill, ability, or temperament to be a business owner as the parents do
Fairness in transferring wealth to both children active in the business and non-active
The children want ownership and control of the business before their parents have achieved their financial goals
The business is strong and large enough to support a transfer while also providing for the financial goals of the parents
All business transfers are challenging, but family businesses face especially significant challenges. However, with the right pre-planning, the obstacles can often be overcome and a successful transfer can be realized.
Following is a basic set of questions for evaluating whether or not a family business transfer is the best exit route for you and your family:
How much wealth do want to keep? How much cash will you need post-transfer of the business?
Do you children desire to be owners? How capable and prepared are your children for ownership?
Is your business prepared for a successful transfer? Are growth and cash flow steady and increasing? Is the business large enough to support all children (if applicable) financially while providing each with areas of responsibility?
Are you ready? Financially? Most business owners are unhappy within two years of leaving their business — do you have a plan for life after the business? Do you have a plan to minimize taxes in transferring the business? Do you have a plan to treat all children (business active and non-active) equitably?
If applicable, can your children share ownership? Do you have any concerns pertaining to their relational harmony?
What contribution do you want your business active child or children to make? Pay for all or part of the business? “Sweat equity”? Is their future ownership actually contributing to your retirement plan?
Define fairness: What does “fair” mean to you and your spouse? To your business active child? To your non-business-active child? Do you need help with defining fairness?
What is your contingency plan if transfer to family doesn’t work out? Sale to other insiders or ESOP? Sale to third-party?.
There is much at stake when and how you leave your business, and never is that more true than when transferring your business to children or family. You would be wise to be as thorough and detailed in your planning as needed well in advance of your eventual transition. For every question listed above, there can be ten or more “drill-down” questions. As always, please let us know if we can be of assistance.
