Keeping It in the Family: Transferring the Business to Children

Keeping It in the Family: Transferring the Business to Children

Business owners often dismiss the option of selling their businesses to employees because employees rarely have enough money to buy and run a company. In those respects, transfers to family members are similar. In fact, transfers to family members can be the most difficult and challenging of all Exit Paths. But the flip side is that family transfers can be the smoothest, most emotionally rewarding Path for owners and their families. The same is true for us as professional advisors: Working with owners to transfer their companies to children is both challenging and potentially the most emotionally rewarding work we can do. Let’s look more closely at the benefits to all involved.

Sticking With What You Know: Benefits for Business Owners

As we’ve discussed throughout this series, The BEI Seven Step Exit Planning Process™ is a proven process for several types of ownership transfers, including sales to outside third parties and transfers to management. Some of the benefits for owners who use the Process to transfer ownership to the next generation are similar.

For example, BEI’s process of transferring a business to children:Is owner-centric. It ensures financial security for the owner and his or her spouse.

• Creates a road map for sellers (parents), buyers (children), and others to follow to achieve the owner’s goals. This road map provides accountability, a timeline, and performance benchmarks as bases for transferring ownership.
• Is designed to significantly reduce taxation.
• Includes a back-up Exit Plan that can be used if the family transfer proves too difficult.

In addition, the Exit Planning Process achieves values-based and personal goals unique to family business owners, such as:

• Legacy or the continuation of the business as a family-run enterprise.
• Family harmony.
• Providing the opportunity for children to enjoy the financial, career, and personal satisfactions that come with business ownership.
• Maintaining the family’s identity or focal point. Often, running a business together is the “glue” that helps a family stick together.

Navigating the Family-Transfer Minefield: Necessary Aspects of a Plan

If you’ve ever worked with an owner to transfer the business to his or her children, you already know that these transfers can be the most challenging of all Exit Paths for both you and the families involved. The same is true of the rewards: Helping owners travel this Path successfully can also be the smoothest, most emotionally rewarding work you can do if you have a process that:

• Creates a written road map for everyone to follow. A written road map can overcome a principal reason for family-transfer derailment: the failure to clearly and fully communicate your business-owner clients’ goals and aspirations for the entire family. Communication requires a written plan whose primary foundation is ensuring your clients’ financial independence and security before control is transferred.
• Constructs a business that is transferable. This means, among other requirements, that the business-active children must be able to run and grow the business without the presence of the parents in the business. Step Three of The BEI Seven Step Exit Planning Process provides designs and tools to accomplish this.
• Sets merit-based performance standards for transferring ownership to business-active children. Prior Steps in The BEI Seven Step Exit Planning Process involve strategies to incentivize key employees to grow value and cash flow. Step Five uses these techniques as the foundation for awarding or selling ownership to business-active children, based on their contributions. Linking ownership to performance helps overcome the notion that transfers of value to children always have to be equal.
• Tackles the delicate issue of fairness. Who gets to decide what is “fair” in the allocation of family wealth? BEI’s owner-centric Exit Planning Process suggests that the owner and spouse define fairness. Their definition provides clarity and direction to your planning efforts.
• Includes a back-up plan. If the designed transfer to children proves unworkable, the road map gives the owner other exit options.
• Minimizes income taxation. This Exit Path design uses the tax concepts and techniques from Step Three to minimize taxes for both the parents and children.
  In sum, The BEI Seven Step Exit Planning Process provides you with the tools you need to convert one of the most difficult Exit Paths, the transfer of family ownership, into the most gratifying for everyone involved.