Intra-Family Business Transfers Take Finesse
So, you want to transfer your business to your children. That?s an admirable goal. In fact, surveys show that 80% percent of business owners share your desire. Unfortunately, only about 20 percent of intra-family business transfers are successful.
There are a number of great reasons to think about transfering your business to your children:
1. You all enjoy working together.
2. The company offers your children greater financial security than other employment opportunities could.
3. The business is your family's identity - its the nucleus that holds your family together.
4. The business has always been a part of your children's lives and they have always assumed that one day they would own it.
These are all great reasons to consider transferring the business to your children. But before that idea is cast in concrete, you should also consider some of the less positive aspects of family business.
In many families:
The children don't get along well enough to share a toy, much less the ownership and management of a multi-million dollar company.
Parents do not want to transfer the company to their children until the parents? financial security is assured, while the children may want control sooner rather than later. Children may not have the same level of desire, ambition or competence at running a successful business as the parents did.
As a result, what makes some generational transfers succeed while so many others fail? Successful intra-family transfers need to meet the exit objectives of all the parties involved including:
Financial independence and security ? no longer be reliant on the company's future cash flows.
There must be fairness regarding the intra-family distribution of wealth.
The needs and desires of the younger generation must be respected and incorporated in the final plan.
Let's look at each in greater detail.
First, before you transfer a company to your children, you must make sure that you have secured your financial future, i.e., you no longer need the company to support your retirement lifestyle. If your financial independence depends on the proceeds you receive from the sale of the business, you should think carefully about financing a child?s purchase of that business. If you would not be willing to finance a sale to a third party buyer, you probably should be equally cautious about financing a sale to your child ? the risks are often identical or greater. A good investment banker can help you understand and quantify these risks.
Second, in most families, there is an unspoken goal that all children should be treated equally. When transferring your business to your children, you need to discard this sentimental notion. The reality is that all of your children are not equally active in the family business. Some children are not involved at all. Transferring equal shares to active and non-active children may sound good, but in practice it is the best way to destroy your company and your family. A good investment banker can show you how to treat your children fairly, not equally. In the end, you and all your children will win.
Finally, when you transfer your business to your kids, make sure the transfer has no loose ends. Too often intra-family deals are done on a hand shake and there are often important unspoken assumptions about who will do what, when, and for how long. It is important that intra-family transactions be handled the same way that you would handle a sale to a third party. Everything should be spelled out in a comprehensive agreement called a purchase and sale agreement. In addition to the standard price and terms that would appear in a third-party sale, an intra-family sale agreement needs to also address issues like the specific nature of your on-going involvement, your compensation, your hours, your responsibilities, and the date that your responsibilities will end. After a predefined transition period, your child must be ready to fully take over and you must let go completely. This is often harder than it sounds, but it is vitally important.
Managing a successful intra-family sale is actually harder than selling the business to an outsider. As a result, if an intra-family transfer is your goal, working with an experienced investment banker who can guide you through the process can often make the difference between failure and success.
About the Author: Richard Jackim, former Wall Street attorney and experienced investment banker is the author of the book, "The $10 Trillion Opportunity: Designing Successful Exit Strategies for Middle Market Business Owners. Richard is also the president of The Christman Group LLC, a boutique investment bank. To learn more visit http://www.christmangroup.com.