For many business owners, the objective is to pass a profitable and successful business through to the next generation, but this is not something that simply happens and the planning you undertake for a business sale should be similar to transferring a business within the family group.
If you are a business owner, you may want to keep your business within the family when you either leave, retire, or pass away. If you do plan on transferring the business to a family member, you need to think about how this will affect both the business and your family. Prior to transferring the business it is prudent to examine a number of aspects:
Are they interested or sufficiently skilled to run the business?
We often deal with parents that are looking to hand their business to their children, and then disappointed that they are not interested in taking it over. So working out if your children are willing to take it over is the first step. The second is to see whether or not they are skilled to do so. Just because they have worked in the business it is valuable to take an objective view as to whether they can run the business without you.
Can the business sustain more than one of your children?
Your business has worked for the first generation but can it sustain additional family members, for example if the profit or takings are $100,000 a year, will two children be able to financially able to survive with 50% each. Will working in the business reduce the staff cost sufficiently in order to increase the income that they are able to draw?
Will the new ownership structure work?
For parents looking to share their business with multiple children, is the business able to sustain it, and equally are they able to work together. We recently assisted a family group where the father had given the business to the children equally but one child had no interest in the day to day operations but was focused on improving his golf game. The child working in the business was forced to buy out their sibling in order to get full control of the business, requiring substantially additional debt in order to retain the business.
What does your exit look like?
Like a normal business sale we would be expecting releases of personal guarantees, reduction of lease liabilities and a finalisation of debt facilities but is this practically going to occur. Many lenders and financiers will not let the parents leave when they sell the business to their children, so are you actually leaving the business or simply handing over control without any protection mechanisms.
Receiving Money and Equalisation
Many businesses are a simple handover to their child, and if the child has been working in the business for a number of years this may be a consideration of what is the obligation but equally how will this be viewed within the rest of the family, are they of the opinion that there is an unfair advantage to the child receiving the business or that there will be future disputes in the will.
If the business is being sold, how is it being valued and what are the terms of any repayment or loans. If the business is not as successful as it was, what will be the consequence for the child if they cannot afford the repayments?
Leaving it to chance?
One of the main things to consider with succession planning is whether the successor has the appropriate skills and commitment to drive the business forward.
It is estimated that 70% of family businesses will fail or sell before the second generation takes over the business. A succession plan can help prevent this from happening. One reason why so many businesses fail to survive through generations is simply a lack of planning. Succession planning should be used to capitalize on opportunities and grow your business.
We have worked closely with first and second generation business owners looking for a solution to the succession planning option and generally this occurs in conjunction with your accountant in order to maximise not only the tax effectiveness but also the estate planning objectives and the family harmony. Call us on 1300 023 782 for a no obligation discussion as to your options.