The Next Gen In Your Business

If you: 1) have a child or children active in your business and 2) Plan to transfer the business to the next generation when you make your exit, you face certain challenges that can become obstacles.

Family-owned businesses have special circumstances. Relationship, a success factor in any business, is even more critical. Tax and finance matters can become more complex. Personal issues can greatly impact business operations.

If your children are working in your business and you plan to pass it on to them one day, you have likely pondered one or more of these questions:

Can the business continue to grow without you?

Can the children think like employers and not like employees?

Where will the money come from to buy you out?

Can you minimize taxation?

What will you do with yourself after you exit?
Will you have to come in and buy your own business back at half of the value by default?

Do the children taking over the business understand what is really involved, or is there an attitude of entitlement with no sense of stewardship?

Do they perceive the culture of the business the same way that you do?

Do they have the same work ethic that you do?

What do you need to do about children who are not active in the business?

Will your family still be able to sit down for Thanksgiving dinner and spend other special occasions together in harmony after the business is transferred?
Though the answers to many of these questions are specific to your situation, there are a few that can be answered generally.

First, the vast majority of all business transfers are inside transitions, and they are successful only about half of the time. Children rarely have sufficient funds to buy the business outright. The buyout will likely take place over a seven- to ten-year period, and as the seller, you will receive a promissory note for your ownership, and you will only get paid if the business continues to do well. Your children will in essence be buying you out of future cash flow.

As far as taxation questions go, there are a number of issues you can explore with your CPA to reduce the tax consequences to both you and your children. For example:

Any time the children can use pretax dollars (i.e. rent payments to you), it is a good thing.

You can begin now to sell your children stock on a discounted basis. They can pay you for this stock out of their future dividends. This will reduce what they will eventually owe you. Once the stock is paid for, they can approach a financial institution and acquire financing by pledging this stock.

Parents often tell me that they just plan on giving the business to their children. This can trigger some very expensive gift taxes. You only have a limited amount of gifting you can do each year or at one time. If you are planning to turn over the business as a gift, talk to your accountant first.

Many of the questions you are pondering are likely more esoteric, more emotional. If you are wondering about how your children view the business and their eventual takeover, the best way to answer your questions is to talk to them. Not once, but over time. Be sure to share your view of the business, its culture, and its future, and also be sure to listen to them. They may not have the same view as you, and that might actually be a good thing. Include your children more and more over time in executive management and decision making, and you will be able to mentor, guide, and gauge them long before you make your planned exit.

The last question on the list is the most important. Whatever you do, however the turnover gets structure, family harmony is the primary priority. You must never lose sight of the fact that you are a family first and a business second.