Transferring Ownership to Children
By Maurie Cashman
As discussed last week, the purpose of Ownership Transition Planning is to select the best path to achieve your lifestyle and financial and objectives after you leave your business. One of the key objectives that must be decided early in the Ownership Transition Planning Process is selecting your successor.
â€œIt takes less time to do a thing right than to explain why you did it wrong.”
–Henry Wadsworth Longfellow, American poet
Only a small percent of business owners want to sell to an outside third party. However, in many cases the people they first identify as their successors do not end up as the ultimate owners. In at least 50% of the transition planning that I have done, the ultimate path changed as we examined our options. Much effort is wasted focusing on the wrong successor or wrongly assuming a child or employee wants to own the company and then discovering that they do not or cannot. In these cases the owner typically has not considered or prepared alternative plans.
For the next few weeks we will strive to save you some pain by setting forth the advantages and disadvantages of transferring the business to each category or potential purchaser: family member(s), co-owners, employees and outside third parties. There are advantages and disadvantages to each choice. Knowing what they are will help you determine which method is most suitable for you. Take time to compare the virtues and disadvantages of each transfer option before making your decision.
Option One: Transfer of Ownership to your Children
If you are a typical business owner, there is a 50 percent chance that you want to transfer the business to your children. If you are a typical owner; however, there is a significant possibility that you will end up transferring the business to someone else because of the difficulties associated with this type of transition. Therefore, it is wise to realize the difficulty of this transaction, as well as prepare the business for the possibility that it will be conveyed to another type of buyer.
- Allows you to control your departure date;
- Allows you to remain active in business with your children;
- Fulfills personal goals of keeping the business and family together;
- Provides financial well-being for younger family members unable to earn comparable income elsewhere;
- Enables you to fix value by starting with the question, “How much do I need or want?” rather than being told, “This is how much I am willing to give you.”
This last point is especially useful in situations in which the business is worth less to a third party than the amount needed to live on. When you keep the business in the family, you can sell for what you need to live on even if the business value does not justify that sum of money.
- Great potential exists to increase family friction, discord and the feeling of unequal treatment among siblings. The normal objective of treating all children equally is difficult to achieve because one child will probably run or own the business at the perceived expense of the others;
- While reaching financial goals is usually diminished, not enhanced; with careful planning and implementation, financial goals can often be achieved while transferring the business to the children;
- Your control may be weakened because family is involved. You can lose effective control even though you still have voting control;
- There is significant risk that a transfer to family members who canâ€™t or wonâ€™t operate it effectively can threaten you financial and personal goals and may threaten the continued existence of the business. In many cases the owner is providing financing to family members and must foreclose and assume active management in order to save the business. This can create tremendous resentment within the family.
Many of these disadvantages can be minimized or avoided through proper planning, but it is important to be knowledgeable of both the advantages and disadvantages associated with the transfer of ownership to children when choosing a successor.
Next week, we will look at the second Ownership Transition option â€“ sale to other owners or employees.