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Before Transferring Your Family Business to the Kids, Consider These Things

By: Len Rus

I was on my way home the other day, talking with a client who was stressed about a major decision she was facing. After years of pouring her heart and soul, not to mention money, into building a successful family-owned business, she was ready to move on and pass it along to two of her children.

She called to talk about the tax implications of selling the business, but instead of talking about capital gain, avoiding double taxes and minimizing tax liability, I steered the conversation in quite a different direction.

We spent the next hour or so talking about the kids instead of taxes.

Spoiler alert: the successful transfer of a family-owned business is not just about the numbers — how much your business is worth, tax and estate planning considerations, and so on. It’s as much about family dynamics and the legacy that you want for your family and your business.

Let’s take a deep dive into some of the non-financial factors that you should consider leading up to the transfer of the family business to the next generation.

Start With Family Considerations, Not Tax Considerations

Tax issues are huge but first take a step back and ask yourself some difficult questions.

  1. What do you want your legacy and the legacy of the business to be?

  2. Are your children (or nephews, nieces or grandchildren) genuinely interested in running the family business?

  3. How certain are you that your children who are interested in continuing the business have the skills, aptitude and experience to carry it into the future — and fund your retirement?

  4. If you have any doubt about #2 or #3, is selling the business on the open market or to a key employee a better option than trying to pass it on to the next generation?

  5. What’s the future of the business relative to the economy, market share and its opportunities and threats?

  6. What’s on your mind about your responsibility — financially, personally and legally — to your children who have decided not to participate in the business’s future?

Before you get to the point of wanting to pass the business onto your children, hopefully you already have an exit plan in place that addresses all of these issues and much more.

If you don’t have an exit plan, or if your exit plan needs a refresh, our Quick Guide: Exit Planning for Family-Owned Businesses, is a good place to start.

Map Out the Action Items for Transferring Your Business

Let’s say you’ve answered the questions above and it’s clear to you and your children that the best next step is to proceed with the transfer of your business to the next generation. Hooray!

Now it’s time to consider the action items that’ll make the transfer go smoothly. This is only the 40,000-foot view. There are many tasks that fall under each step.

  1. Assemble an advisory team that has as its basic core your CPA, attorney, banker and wealth advisor.

  2. Define the goals and objectives for your exit plan.

  3. Explore and investigate alternatives for reaching your goals. Consider the financial and tax consequences of each option.

  4. Create a roadmap for getting to where you want to go. The roadmap should include projections of how the transfer of the business will impact your personal financial future, the income you’ll need to meet your personal cash flow needs, and the estate and tax impact of transferring the business to the kids.

  5. Sit down with your entire family and present your plan, and then if necessary, go back and make revisions to your roadmap.

  6. Take another look at the tax implications of your exit plan and do a fine tuning to minimize the tax consequences to your family.

  7. Implement the plan and begin monitoring how it is progressing according to the roadmap originally put into place. 

Without a doubt, having a solid exit plan is one of the eight characteristics we see in successful family-owned businesses.

Capture the Intellectual Property of Your Long-Term Employees

Although you might be transferring ownership of the family business to your children, there are other players in the mix. Don’t forget about your long-time employees. While they aren’t members of the family, these employees have a tremendous amount of knowledge about your business, products and customers that even you might not have. This is often an overlooked aspect of exit planning.

In short, your long-time employees can be a huge asset to the successors of your family business.

With you as the patriarch or matriarch of the family business moving on, your successors will naturally have daily questions about the ins and outs of the business. You might be in the background as a mentor, but don’t underestimate how much your long-time employees can help your successor.

But there’s a problem. Many of those long-time employees might be in their 60s and are set to retire soon. That’s why it is critical to take steps now to capture their knowledge. With a proactive plan, important information and processes can be conveyed effectively from retiring employees to the next generation of owners. Ensure that processes, knowledge about key customers and vendors, and best practices are documented for future reference.

If you have multiple long-time employees who are approaching retirement soon after you transfer the business to the kids, consider whether you can stagger those retirements so your successor(s) can benefit from their knowledge and years of experience.

Don’t Ignore the Statistics

There’s a lot of hard work and critical thinking involved in transferring a business to the next generation, and the opportunity for a disastrous result is unfortunately quite high.

Statistics show that family businesses struggle to make it to the next generation. According to the Family Business Institute, 30% of family businesses fail to make it to the second generation. A little more than 10% of family businesses are still around in the third generation, and only about 3% are still operating in the fourth generation.

Need Help?

There are lots of nuances in family-owned businesses, and likewise, in succession planning for those businesses. We’re happy to help you structure a plan that helps you successfully transfer your business to the next generation.

Contact us online or call 800.899.4623.

Published May 17, 2021

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