Thoughts on transferring the family business
By JEFFREY ROTH Transferring the family business can be a difficult process. Statistics indicate that only 30 percent of an ongoing family business continue into the second generation and 15 percent make it to a third generation. Most failures are not the result of taxes or the economy but rather the people involved. What dad wants and what the children want may be two different things.
A few reasons for failure are as follows:
• A child takes over the business out of duty rather than desire. It is the parent’s dream rather than the child’s.
• More than one child takes over and they cannot get along with each other.
• The wrong child is in charge.
• Jealousy among children or even worse, jealousy among the children’s spouses.
• Non-family individuals make the company run. They have worked with dad for 20 years, but working for the child is another story.
• The business market and environment has changed over the years. Dad wants operations to continue as they have while the son has different ideas that are not accepted by the parent.
To be successful, a business succession plan must be thought out and followed. This transition must be viewed through the eyes of many people such as the attorney, the CPA and the long time non-family employees. Input from all these individuals must be sought and compromise from all the personalities must be obtained. Many times, the non-family employees must be retained for the continuity into the next generation. Mixing family and non-family is a difficult process.
Dad and mom have worked to create the family business. The business has sent children to college with some returning and others going on to endeavors outside of the business. What is the dad’s real concern? Is he (or mom) willing to give up control? Is the owner concerned about his financial future and how he will be supported? Is he forcing the business on the next generation who is not ready or does not actually want to take over the business? It can be the job of a third party to look at the worst case scenario and ask the loaded questions to insure that this is the best decision and that the right structure is implemented.
We have normally two sets of children. The insiders who work in the business and the outsiders who have no actual connection to the business. This can be the greatest source of friction and disaster. A plan will need to be in place to allow the insiders to actively move forward while allowing the outsiders to feel that they have not received less than their fair share.
Are there voting and nonvoting shares? Do the outsiders receive all the non-business assets while the insiders get the business at a reduced price? This can be a complicated process. Add kids from two marriages and the possibility of success is low. There is no correct way to give control to one child over another. Again, a third party with knowledge of business succession planning can be the key to success. Having a plan implemented during life is far better than waiting until the owner’s death and let the children figure out what to do with the business.
Bottom line, there is much to be considered in passing on the family business. Many times, the best option is to close or sell the business. Families can be destroyed by trying to continue a business that has run its course. On the other hand, many businesses enjoy generations carrying on the family tradition.
Jeff Roth is a partner with David Bacon and Jessica Moon of the firm Roth and Bacon with offices in Port Clinton, Upper Sandusky, Marion, Ohio and Fort Myers, Fla. All members of the firm are licensed in Ohio and Florida. Roth’s practice is limited to wealth strategy planning and elder law in both states. Nothing in this article is intended for, nor should be relied upon as individual legal advice. The purpose of this article is to provide information to the public on concepts of law as they pertain to estate and business planning. Roth can be reached at firstname.lastname@example.org or 419-732- 9994.