Family Business Planning - A Bittersweet Process

One day it may all be . . . . . . yours? . . . . . . mine? . . . . . . theirs? . . . . . . ours? . . . . . . WHOSE?

Of course, given the proper circumstances, an Employee Stock Ownership Plan, or ESOP, is an excellent tool for transferring business ownership.  What the above cartoon is meant to highlight is an issue with far greater implications, that of inter-generational wealth transfer.

Depending upon whom you listen to or which numbers you believe, various studies have forecast that unprecedented wealth – somewhere between $7 to $10 TRILLION dollars – is supposed to pass from one generation to the next between now and 2022.  Much of this wealth will be in the form of closely held businesses.  The dilemma faced by countless business owners is that of finding the appropriate methodology.

How Do I Transfer My Business?

That’s a simple question with a myriad of complex answers.  The best place to start is at the beginning.  One of our favorite quotes is by Rudyard Kipling

I kept six honest serving men (they taught me all I knew).  Their names are WHAT and WHY and WHEN and HOW and WHERE and WHO.”

We suggest that this simple rhyme is an excellent way to begin constructing a mental framework for examining the emotional and practical issues and questions.  After all, you are thinking about divesting yourself of something that you have nurtured, worried about, lost sleep over and felt pride in during a major portion of your adult life.

What?

The continuation of my business.  Fundamentally, an owner has five options:

1. Close the doors.  The business ceases when the owner retires or dies.
2. Transfer to a child(ren)
3. Sell to an employee(s) or partner(s)
4. Sell to an outsider
5. Sell to an ESOP

Ideally, which option would you prefer?  Is that option realistic?  Why?

Why?           

A closely held business is frequently the physical representation of the majority of an owner’s working life.  It oftentimes represents the bulk of his or her net worth.  Characteristically, it is illiquid.  Ultimately, the real value of the business is what a willing buyer will pay and what a willing seller will accept.  A carefully planned transfer usually favors the seller.  A hasty or forced sale gives most of the negotiating power to the buyer.

In which position would you rather be?

Who?           

The above suggests that the sale of a business is evolutionary.  In a perfect world, the owner would surround himself or herself with individuals increasingly more intelligent than he or she until finally, when it is time to hand over the key to the executive washroom, the owner is the least talented person in the place.  Absent perfection, what do you do?

• Identify a realistic, logical successor(s).  (Hoping that a child who has been on the snowboarding circuit for the past three years will miraculously come in and lead the company in the 21^st century may be too optimistic.)
• If it is a child, what has his or her experience been?  Will that child need help and guidance from an interim manager/mentor while becoming more adept at running the company?  And, if an interim manager is needed, what compensation “sweeteners” will you need to offer to ensure that person will stick around long enough to accomplish the mentoring?
• If you think your successor is a current employee, does that person know how you feel?  If not, why not?
• If it is an outsider or an ESOP, what have you done to position the company to command the sale price most favorable to you?

When?        

Have you picked a target date to pass the baton or is it some nebulous time far into the future that no one can identify . . . . . . even you?  Suppose the date is unclear and your successor is within the company.  Now, put yourself in that person’s shoes.  Would the position you are taking encourage loyalty or angst and/or frustration?  Would it make you want to “hang in there” or consider other opportunities?

Where?

If you have a target date, where will you go during the day after the transition occurs?  What are you going to do to constructively occupy your time and carry you through the next phase of your life?

• You can only play so much golf, go boating, fishing, hunting, etc.
• There is limited opportunity and demand for school crossing guards.

How?           

There are numerous methods for structuring “the deal”.  Subsequent articles will highlight thoughts and techniques for consideration.

Applied Financial Concepts, Inc. is a member of the CEA, Assisting companies and individuals in designing, implementing, updating and improving corporate and personal financial strategies since 1971.  Securities offered through:  VALMARK SECURITIES, INC., Member FINRA, SIPC, 130 Springside Drive, Suite 300, Akron, OH 44333-2431, (800) 765-5201. Advisory Services offered through Wayne D. Minich & Company, Inc., a state Registered Investment Advisor. The TOPS™ Program is offered through ValMark Advisers, Inc an SEC Registered Investment Advisor. The above entities all operate independently