One of the key things that we work with business owners in building an ownership transition plan is to identify their values, objective and goals and how to fund them. This is sometimes a difficult discussion and involves making hard choices.
Look at the graph below. We are starting to see debt rise again, which can be a sign of an improving economy, particularly given the current lending evironnment. However, take a closer look. Mortgage spending moved up the last two quarters, which is likely due to refinancing give recent low mortgage rates, adding little to the economy. The major driver of increasing debt is an explosion in student loans.
â€œEducation’s purpose is to replace an empty mind with an open one.”
–Malcolm Stevenson Forbes,
American magazine publisher
This will no doubt have major impacts in the form of household formation and consumption that must be forgone to offset the drain of repaying huge student debts.
What Does This Have to Do With Ownership Transition Planning?
Many business owners we work with would like to transfer ownership of their businesses to their children. This involves several key factors. First, the children must want to take over ownership of the business. Second, they must be educated to prepare them to take over the business. Third, they must be in financial condition to buy the business from you. And finally, they must have the financial discipline and understanding to pay you for the business.
I would argue that we are failing in nearly all of these areas and that it is largely the failure of our generation rather than that of our children that is creating what is likely to become a severe constraint of business owners trying to transition over the next several years.
First, how involved are we getting our children in our businesses? I have taught Junior Achievement and recently judged a Future Business Leaders of America regional competition. Many of these kids are capable, intelligent and motivated. However, it is simply unreasonable to expect our educational system the things you can share with them about your business experience. Did you learn more at school or by getting your nose bloody in the business world? How open are you to helping educate your children to their potential opportunities in your business and what they have to do to take over some day?
Second, are we really preparing our children for the opportunities that will exist? Does your son or daughter really need to attend an out-of-state school to get a four year degree? Will they be any better prepared to own your business twenty years down the road because of this? Or, can they take AP high school courses, some basic community college classed and get the bulk of their education from an in-state college? How hard are you making them work in high school so that they can earn college scholarships?
Third, are you working with them (or without them) to prepare a financial plan for college? There are some excellent vehicles for you to put the money you will need away for college. For example, Iowa has an outstanding 529 College Savings Plan that will allow you to deduct all of your contributions from Iowa taxable income and earnings are not taxed at all if used for education expenses. Grandparents can also contribute to the fund. If you will not finance their education, or at least part of it, your kids may never be in a financial position to buy your business from you.
Finally, are you teaching your kids financial discipline and how to manage money? These are critical skills in operating a business and in paying off debt (likely to you). Kids have enormous capacity to understand fiscal discipline and the necessity to make choices and sacrifices â€“ if we force them to do it. Are you living within your means? What example are your kids getting from you?
It is apparent that we are not following any of these. No one is taking responsibility or being held accountable for our childrenâ€™s preparation to take ownership of our economy. That is not their fault, it is ours.
How willing are you to open your mind toward funding your childrenâ€™s education in a way that prepares them in all of these areas to someday buy your business? If you fail to do so you will be cutting off what may be your most desirable option for transitioning ownership of your business.
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