One of the most challenging ways to exit your business is via a transfer to family.
While passing on your business to family can be one of the most satisfying things a client can do, it can also be among the most stressful given the emotional and relationship issues involved. However, creating a written road map for the transfer can ease the process for everyone involved.
A written exit plan is the best way to help your clients get from where they are today to the post-business life they envision. The plan describes what actions are necessary, by whom they are to be executed and when. If a client wants to transfer a business to a child or children, they must set out what they need and want from the transfer. They should set goals with their spouse, and then communicate these goals to their advisor and family. While parents may want their childrens’ input, they need to be very clear that they are the ones making the decisions. After all, their financial independence is the predominating factor in the decisions they will make.
Financial security is the fundamental principle, and no transfers of ownership or control should be made until financial security is guaranteed. After all, the business is being gifted, which avoids income tax. However, gifting means that nothing will be received in exchange for the transfer.
The exit plan should define the specific steps in which the child or children will receive control and ownership. Optimally, the plan will be based on the business meeting specified financial benchmarks. As the benchmarks are attained, the transferring owner receives cash from the business. Moreover, in order to insure financial security, the business owner must maintain control of the business until their financial objectives are met and they have complete financial security. Remember, there is no guarantee that a child will be as successful at running the business. Moreover, events beyond the child’s control could also have a negative impact.
Performance benchmarks can also be effective in governing transfers of ownership. However, this will be possible only in the case of the child serving as a key employee. If the child is not capable of independently running the business, the exit plan should lay out procedures to ensure effective management until the child develops the necessary management skills.
For more information, please read:
Transferring Your Business To Family? First, Create A Written Roadmap | Forbes