Handing over the reins – what to consider if children take over the business

All business owners have been building and growing their business over a number of years. As time goes on, all businesses need a succession plan. A succession plan outlines the steps to take before retirement. These plans are often multiyear arrangements before the eventual transfer of ownership and can take many forms.

The purpose of this article is to assist you in focusing on the transfer of the business to the children of the current owners. As is often the case, when many business owners initially consider succession planning, their thoughts are simply that their children will take over when they want to retire. While this is a worthy goal there are still plans and discussions that should be completed prior to the retirement of the owner. Each family is unique in the needs they have when it comes to passing on the ownership of a business. However, following are some of the common considerations and issues which arise with the transfer of a business to the children.

Planning

A plan should be completed well in advance of any changes in ownership. This will allow you the time to complete any of the requirements below prior to transferring the ownership interest to the children. Depending on your particular circumstances, determining a tax efficient and manageable outcome for the business sale can be a lengthy process. While the process can be completed in a short timeframe, doing so can often lead to less desirable outcomes for the business and the former owner.

Communication

Have you spoken to the children and are they willing to take over? If there is more than one child, how will control of the business be structured? There is no point re-structuring the business and subsequently discovering that your son or daughter does not want to take over the business. Therefore you, in communication with your advisor, need to ensure that common ground between parties is found in relation to the timeframe and future operations of the business.

What about your other children that may not currently be a part of the business? Are they going to accept that their sibling is taking over? Are they being compensated via other assets outside the business structure? These are tough conversations to have. However it is paramount these discussions are had in order to limit family disunity in the future.

Another consideration is whether there are key employees in the business that are hoping to buy the business? Discussions should be held with these key employees to address and manage their expectations. At such a critical stage, the last thing you want is for key employees to walk away due to a miscommunication of expectations.

Training

Your children may have been involved in the business for a long time. However once they take over they will need to learn all aspects of your business. For example, a child that has been working successfully in the sales area, may need additional training or education in the administration, supplier management or employee management side of the business. These skills need time to be acquired and need to be gained prior to the transfer of the business.

Financial Expectations

Much of your personal wealth is often reinvested into the business. When planning for a restructure, you must ensure you have sufficient assets for retirement while considering the future funding requirements of the business. 

As part of this discussion there are various questions to consider including as:

  • Are you going to maintain an interest in the business after the changeover? 
  • Are you going to receive an income stream from the business into the future? 
  • What is the value of the ownership interest being transferred? 
  • Is there vendor finance involved in the transfer? If so, how will this be repaid in the future? 
  • Are you going to continue to work or consult for the business after the changeover? If so, what financial arrangements are being made? 

The answers to each question will depend on your family circumstances and the business itself.  Discussions such as the above are critical to the continued success of the business and a smooth retirement of the current owners.

The transfer of a business between generations is often more complicated than a sale to an external party. The key components to completing the transfer are to communicate openly, find common ground for the transfer, and set realistic expectations. 

Please contact your local Accru advisor should you wish to further discuss any of the above.

About the Author
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James Barlow
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