Creating The right recipe for a successful transfer of a family business to a child, requires several special ingredients. The child needs to be well suited to run this particular company at this time in his life. The transfer should support the financial and personal goals of the owner. At its core, a handover must represent more than just a ready-made career for the child. At the time of the transition, the owner should have met all other financial and family obligations–and set himself up so that his life will be satisfying and give him peace of mind.
Advanced planning teams look at several critical details before they develop a transfer plan between an owner and children or other family members including:
o Identifying the client’s exit goals regarding financial security, equitable distribution of assets to the children, and the timeframe for leaving day-to-day management of the company;
o Value of the family business;
o The motivators that will keep key employees–some of whom may be disappointed by the succession plan–to continue building the company and support the transition;|
o Analysis of which is better for the client–transfer to one family member or to more than one and the respective roles of those family members;
o Contingency plans to protect the business in case of death, disability, or early retirement, if the transfer of management and/or ownership takes place over several years.
Once the advanced planning team has these details, they can develop the transfer strategies using the right combination of gifting and purchases, buy-sell agreements, and so on. Equalization of the estate among all of the children, charitable planning, retirement income planning, and estate tax reduction should also be a focus of the team.
A positive transfer experience occurs when a son or daughter who has worked in the business and has demonstrated the ability to adapt to change and grow the company, and has highly evolved organizational and intercommunication skills takes over. In short, the prospective new owner needs to have an excellent senior management profile. She must be able to lead siblings (if they are also working in the business) or at least effectively split the duties with them. At the same time, the new owner must maintain a solid working relationship with non-family members who may have many years working in the company and are more financially dependent on it.
Selling Outright as an Alternative
Instead of the owner giving up his desk to the next generation of family management, the outright sale of the company may actually prove more advantageous. Such a liquidity event bypasses such issues as continuing dependency on the business for income, an under-prepared child running the business, and difficult management dynamics between family members and non-members, among other issues.
If the client sold the business, would the children be in a better financial and personal position without the additional role of small business owner? The answer may be yes, but the client may not realize or have ever considered that a sale would place him and the children in a better place.