Whether you should transfer ownership of
the family business to your offspring may depend on your needs and the ability
of your company, after the transfer, to support two families
By
John & Georgann Crosby
March 2009 —
Statistically, family businesses comprise 80-90% of all U.S. companies.
Unfortunately, according to the Family Firm Institute, over the next five years
nearly 40% of those businesses will be passing to the next generation without
effective exit planning in place.
Many owners of closely held family businesses mistakenly believe their companies
are not marketable; thus, they assume that their only option is to continue the
business in the family. Also, in the minds of some business owners, selling
their company to a third party – rather than passing it to one or more family
members – is somehow a sign of business failure.
Keep It in the Family? For better or for worse, advisors to family
businesses have generally been guided by a single objective: to help resolve
challenging family and/or business issues by keeping the business in the family.
Sadly, we know of many cases in which trying to achieve that objective has
caused both the family and the business to suffer. Sometimes, as the result of
planning, a preferred outcome is to sell the business to a qualified third party
and then use the sale proceeds to fund the next chapter in the family’s life.
Recent surveys of family businesses reveal that most owners recognize the need
for more planning but are too busy with day-to-day operations, are unsure as to
how to begin, and/or are afraid to confront their mortality or their
long-avoided family issues. Whatever the reasons, we understand that family
businesses face unique challenges, given the family and business interface.
As former principals in The Family Business Roundtable, Inc., in Phoenix, we are
experienced in advising business owners on family issues and business issues.
Our primary goal at that time was typically to help the family continue in the
business. However, it was not unusual to encounter situations in which ownership
succession to the next generation was not the right solution.
Armed with that knowledge, we now work with families in a different capacity. As
M&A advisors, we know the importance of understanding the various reasons for
wanting to sell. When the situation calls for viable alternatives to keeping the
business in the family, we can provide them.
For example, unless the acquiring family member has an independent source of
capital to purchase the company from the parents, keeping the business in the
family often requires the business to support two families: the family of the
founder and the family of the acquiring child or other relative.
There are also issues of price. In many instances, the parents want to help
their children by transferring the business at a below-market price, but they
are conflicted by the need to maximize the proceeds from the sale in order to
secure their financial future.
Planning Steps. Here are some fundamental components of planning for
succession or sale:
-
First, the parents should calculate the
amount of assets or income they need to secure their financial independence
after they sell or transfer their company.
-
Second, they should pick an exit date. It is essential to pick a target date
– even a tentative one – for planning purposes.
-
From there, we can determine the business’s current revenue and earnings,
and how much it must generate by the planned exit date, in order to satisfy
everyone’s needs and objectives.
Serious adherence to those steps in the planning process can reveal whether (a)
keeping the business in the family, through orderly succession, is a viable
option, or (b) selling it to a third party is the more realistic course.
Without this sort of advance planning, many businesses have to be sold at the
founder’s death in order to pay the estate taxes. That is not something we want
any family business owner – or their surviving spouse or children – to face. |
