By Maurie Cashman
What could be easier than transferring your family business to its natural successor, your children? Well it turns out, just about anything. In â€œUsing Multiple Entities To Save Tax Dollarsâ€ we discussed how to structure your business to save taxes, using a strategy involving transferring part of your business ownership. That is childâ€™s play compared to successfully transitioning complete ownership of your business to your children.
Statistically only one-third of all family-owned business are passed on to the second generation, and only ten percent are transferred to a third generation. My experience suggests that those statistics are optimistic. However, some family businesses do transfer successfully to younger generations. For the transfer of business ownership and control from parent to child to succeed, the parents must achieve all of their exit objectives, including:
- Financial independence, meaning they are completely separated from reliance on cash flow from the business;
- Fairness to all family members in the distribution of family wealth; “Parents are always trying to equalize, and one of the things we know is equal’s not fair”
- Complete transfer of business operation, ownership and control to the younger generation. The parent is out of the business and is not needed in the business for any reason.
Is there a way to improve upon the miserable failure of family business transitions that the statistics show? Letâ€™s start with some basics.
Parents hope a child will take over a business for several reasons:
- Family pride. The owner takes considerable pride in continuing a family business and tradition;
- Greater employment and financial opportunities for family members than that available elsewhere.
- Gradual retirement. The owner can stay semi-active in the business by gradually turning over operations and ownership to the new generation.
- The joy of working together. (Note to my kids: not impossible â€“ but not probable)
- Maintenance of the familyâ€™s focal point â€” the business. Parents see the business as holding the family together.
- Fulfillment of a childhood dream. The child has grown up in and understands the business, and wants to stay in it by acquiring ownership.
Sounds wonderful and can be. But all business transfers are challenging and family businesses face special obstacles. My partner likes to call me the Chief Reality Officer, so I will embrace that by listing a few of the unique challenges to transitioning ownership of a family business:
- The children have different career goals that don’t include running your business
- The parents need to achieve financial goals before feeling comfortable transferring a business to children. However the children desire significant ownership and control sooner, rather than later;
- The children donâ€™t get along with each other, or wonâ€™t continue to (caution, the parents are the last to know);
- The children donâ€™t have the same desire, ambition, or aptitude for running the business as the parents;
- The children get married and their partner has a very different opinion about the â€œdreamâ€ of business ownership;
- Acceptance of the success or failure of the child who acquires the business
- What happens when the child is more successful than the parent after acquiring the business?
â€œThe theory seems to be that as long as a man is a failure he is one of God’s children, but that as soon as he succeeds he is taken over by the Devil.”— H.L. Mencken
Despite all this and more, it is possible to successfully transition business ownership to your children. It takes a steady hand and some basic planning principles must be applied. Weâ€™ll dig into the first of those next week.
Â© 2016 Aspen Grove Investments, Inc.