Passing along a family business may seem like a pretty simple process. The entrepeneur builds a successful business, makes a solid living, then passes it along to his or her children. Easy, right? Unfortunately, those entrepeneurs fortunate enough to have created a successful business have found, when the time actually comes for them to pass the torch, that things aren't so easy. If you own a successful business, here are some issues that may come your way. In future blogs, I'll go through these different issues and describe how they can be overcome. But for now, give them some thought well before the time comes for you to pass down your business.
1. Do your children want the business? The first, and most basic question to ask yourself is, do your children really want the business? Do they have a desire to carry on the family business; do they have the same passion (and ability) to do what you are doing; and are they currently involved in your business? Or, have your children enjoyed the benefits of your business (e.g., annual gifts of cash, a company job at an inflated rate, a higher standard of living than their career would otherwise allow), but don't seem to have an interest in doing what you did to provide those benefits?
If your children are already adults (and you're considering retiring), chances are you probably already know this answer. But knowing the answer, and making future plans for yourself and your family, are two different things. If your family is not interested in joining, working at, or perpetuating your successful family business, then it's time to start thinking about your own future. You may want to consider selling the business while you are still healthy, and while the business has goodwill. Because if you have no one to succeed you, and you hold on to your business until you die, your business' value will wither quickly while your children try to orchestrate a quick liquidation.
If, on the other hand, your children are interested in taking over and continuing your business, you need to consider how best to accomplish such a handover. The way you accomplish this may have profound consequences, affecting your own standard of living during retirement; the net worth of your children; and estate taxes that may be suffered by your estate after you die.
2. Give or sell the business? Assuming one or more of your children do want to own the business, how should you convey it to them? Should it be a gift? Or should you sell it to them? While many people, at first blush, might be aghast at the idea of making their children pay them money, the decision on how to handle this shouldn't be made without the collective advice of tax and legal professionals.
3. Should you keep any control? When you convey the business to your children, should you walk away? Or should you retain the right to make business decisions even after you no longer own it? The decision you make should depend on the particular circumstances of the family members who will be taking over your business.
4. If you sell the business, should you take cash or owner finance? A cash payout will provide you hard, liquid assets that will allow you to live out your retirement goals. Owner financing, however, also has its own benefits--both for you, and the family members buying from you.
If you live in North Carolina, and have questions about a family business, feel free to contact my office to set up an appointment:
wldeaton@bellsouth.net
704-735-0483.
