Some Day This Business Will Be Yours

Joan M. Ridley, CEPA, CBI, CFP®

That’s a loaded statement.  Give serious thought to what it means to your client’s son, daughter, employee(s), or whoever he or she is talking to.  To them, it could mean something entirely different than what he intends.  Or maybe over the years, exactly what he intended has changed.      
Such a statement to family or key employees could mean that he intends to gift a business interest to them.  Or, that maybe he will sell it to them for less than its true value. It could also mean that he will finance a sale for below market price and terms, or with no expectation of a down payment.  Either way, he needs to be clear about his intent and his capability to follow through, especially his financial capability.
Sharing his good fortune can be a wise and generous strategy. Choosing the best strategy, and executing it correctly, can add significant value to his business should he decide to sell to an outside third party.  Choosing the wrong strategy could deter buyers or result in unfavorable terms down the road.  Gather all the facts about his situation and the pros and cons of all feasibly strategies before moving forward with any recommendations, or before encouraging him to make promises that he might not be able to keep.

Questions to Ask and Facts to Consider

• What are Your Client’s Motives
• Reward employees for past performance and past loyalty
•  Secure their loyalty until after a third party sale is closed
•  Keep peace in the family
•  Maximize the value of his business
•  Reduce his estate tax
• Experience pure joy of his altruistic intentions
•  Commitment to follow-through because of promises made
• Fear that employees will leave if he doesn’t share a piece of the business
• Shift long work hours and risks of ownership, while drawing a handsome salary, perks, and prestige
• Have the final say about important strategic decisions  
• Keep the business in the family

What are Your Client’s Needs and Considerations
Is he at all dependent on income from the business or income from the reinvested equity, or, is he independently wealthy without any further economic benefit from the business?  He should seek advice from his financial planner and tax advisor about how much is financially feasible for him to give away, or sell for less than the value he might receive from an outside third party
Impact on other family members if he transfers ownership to only one of them
The tax ramifications of any strategy he is contemplating
The impact on company value in the eyes of the ideal buyer. Could this strategy actually reduce the saleability for the business.  Get expert advice before answering that question.
The impact on key people if he is not in a position to follow through on promises made.  Will they leave.
Impact on company value and sustainability, and, future personal wealth

What About the Proposed Successors  

• Are they credit worthy, especially if your client will finance the transaction
• Is the proposed new owner’s spouse totally on board with the risks and responsibilities of business ownership
• While they might be stellar managers, are they cut out for business ownership which requires a very different skill set
• Will the other employees accept your client’s proposed successor in an ownership position

Your Next Step
Before giving any serious consideration to a strategy, bring together your client’s advisors who have experience with such matters.  Give them an opportunity to gather the facts help.   Help him carefully consider all of the benefits and drawbacks before moving forward, or before he makes representations that he might not be able to fulfill.
 

That group of advisors should include these and possibly others:

• Certified Exit Planner with expertise in all 34 exit strategies
• Business consultant to analyze all 50 value drivers
• Estate planning and corporate attorneys
• Transaction tax advisor
• Client’s CPA
• Credentialed financial planner
• Credentialed business life insurance agent

Joan M. Ridley (CEPA, CBI, CFP™) is an author, speaker and President of Business Wealth Solutions, LLC. She leads design and implementation of strategies to help business owners exceed their goals before and after retirement. She has more than 30 years of experience advising business owners and managing their business and non-business wealth.   

Copyright 2015 Joan M. Ridley         

I Always Thought the Business Would Go To My Children, But Now I’m Not So Sure

Joan M. Ridley, CEPA, CBI, CFP®

See if This Sounds Familiar…  
You have labored long and hard in your business for decades, and, to your credit the business is thriving.  Your son or daughter has worked in the business and you have paid him a fair wage. (I will use the male gender only for the sake of simplicity.)  Somewhere along the line you might have mentioned or insinuated that someday “he could or would take over the business”, or, that “the business would be his”.    If you are like most business owners, you probably did not give much thought at the time about what this meant to your son, to you, or how you would make this happen.  

You might also have overlooked the impact such a transfer could have on the rest of your family, your employees, and the business – not to mention the impact it would have on your personal financial situation.  As the years slipped by, maybe you did not prepare for such an important transfer of power or wealth.  Now you are thinking about leaving the business and spending your days doing the things you always dreamed about doing.  But, the reality of the situation is keeping you up at night.  Maybe you try to think through the situation, but you keep going around in circles.  

Maybe you are wondering:

• Should you transfer your business to your children
• How to transfer the business to those children who are active in the business and what to do for those who are not
• How to provide for your family’s financial security
• How to keep the business in the family and still be able to pay estate tax
• How to avoid having to resume control if your kids prove unable meet the demands of ownership
• Should you gift the business to them or should they pay for it, and if so, how much

How to Get Off the Merry-Go-Round
Before you can begin to deal with the situation, you will need more facts.  You need to know: what your business is worth; how much cash you need to walk away with after tax; the facts about estate, gift, income, capital gains, and state tax; community property law; how long the transfer process will take; if it is feasible to gift part or all of the business to your offspring; and, if you will sell it to him, how much you should finance. Other areas need to be explored such as what is the future for your business, your industry; and the economy.  You also need to assess those aspects of your business that add or detract from the value, and, if your son or daughter is capable of developing strategies to deal with those issues, especially if you plan to finance the sale.  This is a lot to think about all at once.  No wonder you are having difficulty sleeping at night, much less making decisions. The key to getting off the merry-go-round of indecision is to know how and where to gather the facts, how they all fit together for your benefit, and what advisors to retain to help you make sense of it all.  

You Need to Know

• Your needs, capabilities, and desires
• Your offspring’s needs, capabilities, and desires
• The current and future position of your business
• Federal and state tax issues and other laws

Does Your Kids Have What It Takes?
Once you have determined that transferring the business (either selling or gifting) to your offspring makes sense for you, the next step is to assess his natural ability and preparedness for ownership.  An independent viewpoint would be helpful here since a parent’s viewpoint is understandably biased.  In order to assess the situation, answer the following questions:

Family Succession Check-List

• Does your child really want to own the business, or is he just trying to please you?  
• Has he been groomed to successfully run all aspects of the business?
• If he is lacking in specific skills, is there enough cash flow in the organization to hire someone to perform those tasks?
• Does he have the passion and entrepreneurial gene to drive the business forward and deal with inevitable changing conditions?  
• Does he voluntarily work the necessary hours now to get the job done?
• Does he identify issues in the organization that need to be addressed, even if you don‘t agree with his views?
• Does he take the initiative to seek solutions?
• Do the employees and key people look to him as a leader?
• Does he maintain a lifestyle free of addictions and one that commands respect?
• Does he have a home life that accommodates the demands of a business owner?
• Is he insurable?
• Will you sleep at night if he takes over?    

Can Your Child Lead the Company as Well as Run It?
Just because your adult child is good at “running” the business in your absence, this does not necessarily indicate that he could step into an ownership role and be successful.   Running the company and leading it require two entirely different skill sets.  Effective leadership requires vision and courage. It also requires the ability to: develop systems; to delegate; and to select and command respect from the right talent. When your children were young you left them with a capable baby sitter, but would you have wanted that same person to be totally responsible for raising them?       

Beware the Position of Entitlement and Other Issues
Have a serious discussion with your child about his position.  Once you determine that he is qualified to lead and run the business, determine if he really wants to step into that role.  Does he have other career aspirations? Would he be willing to forsake a personal relationship now or in the future that would require that he relocate?  Is he assuming that he will receive the business as a gift?  Does he think he already has an equity or legal interest in the business?  This discussion might be more productive if you have some outside help from a professional such as a family business counselor.  If you are not absolutely positive that your offspring would be successful at running and leading the business, or if he is too young for you to even consider such a move at this time, consider hiring a CEO and others to groom him for ownership.   This will buy you time to delay this important decision until you can properly assess the situation while allowing you to spend more time on your own outside interests.

Current and Future Position of the Company
The next step is to position the company for success.  A written strategic business plan is important.  Without it, you might be setting your successor son or daughter up for failure. Test the waters by involving him or her with the professionals who are developing and drafting the plan.  It is an excellent way to further assess his or her abilities. 

Assess Your Options
Invest the necessary dollars to work with quality trusted advisors to help you examine the options and issues, and then develop and implement strategies.  You might find that there are solutions that you had not considered.  At this point you need to address the various tax-saving strategies involved with both gifting and selling to your offspring.

Time is An Important Issue
Transferring the business to your family member will take longer than you think.  Start several years before you wish for the transfer to take place.   There are several reasons to give yourself plenty of time.  One important reason is that it could take a few years to come to the conclusion that a third party sale is a more attractive option for you than a family transfer.  This does not necessarily mean that your son or daughter would leave the business, or that he or she could not remain in a key position.  Although a third party sale can usually be accomplished in a shorter period of time than transferring to a family member, you want to be sure that you are selling in a strong market.  That means you need to give yourself plenty of time to assess the feasibility of a family transfer so that if you abandon the idea, you are able to offer the business for sale to a third party before the market weakens, insuring you an opportunity to receive maximum value in a reasonable amount of time.   

Joan M. Ridley (CEPA, CBI, CFP™) is an author, speaker and President of Business Wealth Solutions, LLC. She leads design and implementation of strategies to help business owners exceed their goals before and after retirement. She has more than 30 years of experience advising business owners and managing their business and non-business wealth.   

Copyright 2015Joan M. Ridley

Family Business - Functional or Dysfunctional?

Doug Sippel, Leadership Transitions, LLC.
 
Depending on your experience, you may have a very positive or a very negative view of a family business. If you grew up in or around a healthy family business, which provided a great place to work for employees, a good living for the owners, and a source of jobs and support to the community, then you have a very positive view of family business. On the other hand, you may be from an unhealthy or failed family business or a professional who gets called in to try to fix the dysfunction and unhealthy behavior. If so then your perspective may be that family and business should never mix.  
 
The Two-By-Four Enterprises business scenario is a great example of a business at the fork in the road. Down one fork is a strong business with healthy governance structures and great leadership. The other fork leads to family conflict and possibly a failed business. Unfortunately, 70% or more of closely held businesses take the second road. Two-By-Four owner, Bob and his wife Margaret Sprout have a wonderful opportunity. They can engage their children and the other leaders in the business to execute a strategy based on a strong shared vision of success, and core values that drive their behavior and decisions.  
 
Do the children have the willingness to learn how to work together to manage their shared wealth? Will Bob and Margaret be willing and able to balance their own needs with those of the next generation? Will they be able to select a new CEO based on the best person for the job, or will they allow family dysfunction or office politics to guide the decision? Time will tell. If Bob and Margaret spend the time to build a strong foundation based on a sound philosophy and strong guiding principles, they will likely be successful. If they approach this work with a beginner’s mind, willing to listen and learn from wise counsel and trusted advisors, as well as their own best instincts, they will travel the narrow road to success.  
 
As Robert Frost reminds us in his poem "The Road not Taken":

I shall be telling this with a sigh
Somewhere ages and ages hence:  
Two roads diverged in a wood, and I—  
I took the one less traveled by,  
And that has made all the difference.

Traveling down this "less traveled" road with the passion and the commitment of the family and the key employees will be challenging and may require learning to communicate in new ways. Choosing this road is the right choice. And that will make all the difference.
 
Choose wisely Bob and Margaret!

Doug Sippel is founder of Leadership Transitions, LLC. He is a Leadership Coach, Values Consultant, Mediator and Financial Planner. Doug grew up in a multi-generational family business which has prospered through several leadership transitions and maintained strong family unity.