What makes people leave the safety of a cushy corporate job, with a nice 401(k) and no overtime, to try to fan the spark of an idea into the fire of a successful business? Perhaps they enjoy spending every waking minute trying to figure out how to keep the company afloat in an ultra-competitive market. Or maybe they’ve always wanted to know what a stomach ulcer feels like.
Either way, the answer to that question is complicated, but one of the key motivating factors for a lot of folks who strike out on their own is the desire to provide for their families—not just during their working life, but throughout their retirement and beyond. Having represented many small business owners over the years, I can tell you that there is a great deal of satisfaction to be attained from building a business that will benefit your children and the generations to follow. However, succession planning is a very important responsibility that must be carefully thought out, lest you see all your hard work come to naught.
The first thing the owner of any family business must decide when considering his or her retirement is to whom the business will be transferred. Many parents harbor the dream of their kids returning home to settle down and run the ol’ family business, and for some, that dream is a reality. If your children are willing and able, they may just be the perfect folks to shepherd your company when you move to Florida and start eating dinner at 3pm. But not everyone’s children have the desire—or the ability—to run the family business. Maybe they have moved away and made a life for themselves elsewhere. Perhaps their interests lie in totally different fields. Or, maybe they simply don’t have the right skills or temperament to take over the reins.
Whether your kids step into your shoes or not, there are generally three possibilities for the fate of your small business when you step away from it: transfer it to your kids, transfer it to someone else, or just let it fizzle. No one ever wants the third option, which is why it’s so very important to make plans to ensure that one of the first two options goes off without a hitch.
While your first choice might be to hand over the company to your kids, if, for whatever reason, that becomes unrealistic, the next best option is probably to sell it to a third party. This is frequently a long-term employee or someone who has done business with your company and knows how you operate, but it could also be a complete stranger who’s in the market for an investment or a change of pace. If you want to sell but don’t know of any buyers, start asking your lawyer, accountant or other business connections if they might know of anyone who’d be interested. You’ll be surprised how eager they are to help. You might also consider listing your business with a business broker.
Once you determine the lucky bloke who will take over your company, there are myriad ways of structuring the transaction, depending on how your business is configured and how the new owners want to set things up. One consideration that should be at the forefront is protecting the new owners from liability as much as possible, especially if the new owners are your own offspring. The worst thing to happen would be for your children to step into your shoes, only to immediately face a lawsuit for actions you took.
Thankfully, careful planning can insulate them from most of these concerns. For instance, if your business is currently a corporation, selling the assets (as opposed to the stock) of the corporation to a newly created corporation (or LLC) formed by your kids can help ensure that any liability for which the old corporation might be on the hook stays put and doesn’t affect the new business.
Of course, the best-case scenario is that you have operated your business so as not to expose it to any such liability, in which case a stock purchase might be the most beneficial method of transferring ownership. Assuming the liability factor is the same either way, other important factors to consider are the tax consequences, legal and accounting fees, and any regulatory issues that may be involved. For instance, if your business requires a license from the state, do you know if that license is transferrable to someone who buys your business’ assets? It might not be, in which case a stock purchase could be your only solution.
Of course, every circumstance is unique, and your lawyer can help you determine the most appropriate structure to fit your needs. But don’t leave the planning to the last minute! Implementing a transfer of a company takes time, and you don’t want to be left without someone to carry on the business you’ve worked so hard to build. iBi