From Parent to Child: Transferring a Business

After careful consideration, you finally decide to sell your shop. It has been a difficult decision to make; the shop is almost like your child. You started it with almost nothing, toiled day and night through all kinds of hardships to see it grow, blossom, and finally become the success it is today.

You are wary of selling it to an outsider because of the recent decline of "mom & pop" shops in New York and in most major urban centers; the national chains are buying up the small independent shops and changing them into large glitzy impersonal stores. So, in order to keep the business you built for a quarter of a century intact, you decide to sell it to one of your two children.

One child, your son, is a relatively successful litigation lawyer and living in Chicago. As a teenager, he worked as a delivery boy in the store during the summer months, and although he showed some interest in the floral business at the time, he never seriously thought about going into the family business. The other child, your daughter, is a twenty-something university dropout who is currently trying to find herself. She too worked in the shop as a teenager, but had and showed no interest in the business whatsoever.

This is an extremely difficult choice to decide upon. Both you and your wife have had many discussions on which direction to take. You consider giving it to your daughter because she is currently unemployed; you feel giving her some responsibility will put her life back on track. One the other hand, you believe passing it down to your son would be the better and wiser decision, because he is a successful and responsible lawyer.

Another problem you will face is offending one or the other if you give an offer to one and not to the other child. At this point, you consider giving the shop to them jointly, but realize they never really worked well together and probably never will. You realize you must think this through before you enter into a business agreement or transaction with your children; a very difficult if not an almost impossible state of affairs. Which child is worthy of carrying on your business? What happens if they both do not want it?

Like the scenario illustrated, parents with more than one child want to be fair to all their children. When retiring from a family business, the owner has to select which child will take over the company, at least on a daily or operational basis. Some parents make the decision based on gender: parents (particularly men) usually like to pass on the family business to their sons because of age-old traditions. Others like to pass on the business to the child who is most responsible when it comes to fiscal issues and management, like the successful lawyer mentioned above. Many decide to sell it to outside parties when all the children show no interest or to keep family unity, but for those who decide to keep it in the family, here is some advice:

Suzanne DeBaca, President of Private Capital Solutions Group in New York City is a financial advisor and outlines six ways you can have a smooth transition when transferring a family business to your children. She shares her advice when a concerned father writes and explains that his daughter is interested in taking over a construction rental business. However, he has a son who has no interest in the business, but wants to be fair to him as well.
Here are six things DeBaca believes he and you should do and consider when confronted with such complex and thorny situations as this. Of course, this advice could apply to other situations as well:

1. Talk to Your Children - Having a frank conversation about your needs and wants and those of your kids can be illuminating. They may have opinions or ideas about what they think are best for you and for them.

2. Get Good Advisors - Working with professionals who specialize exclusively in estate and business succession planning can help you understand your options and create a plan. Assemble your team early and meet regularly to review and update your plan if necessary.

3. Give or Sell - Do you want to give the business to your daughter outright, or will you need income or cash from the sale from the company to fund your retirement?

4. Business Valuation - In order to be fair to your children, an accurate valuation of your business is key. It is important for estate planning purposes to understand the value, and this will also help you and your team of advisors considers how best to divide your assets.

5. Address Taxes - Estate taxes, which must be paid in cash within 90 days of the business owner’s death, may use up over 50% of the business owner’s estate. If there is not sufficient cash, assets – including the business – may need to be sold to pay the government. Familiarize yourself with the basics and surround yourself with top-notch tax advisors as tax law changes frequently.

6. Consider Insurance - As mentioned above, depending on the size of your estate, your son and daughter may need cash to pay taxes. Life insurance can provide the liquidity they need, and can also be a way to even out what you give to each of your children.

Although Suzanne DeBaca's points are all exceedingly valid, three individual points seem to stand out as the most important when wanting to transfer a business from yourself to your children.

Point one is central to everything, as a lack of communication between all parties could "make or break" a smooth transfer of the business and even kindle a family argument or breakup. The goals of both the parent and children must be outlined and understood from the onset. It is important, particularly for the children, as they may not want to bear the responsibility of a family business if it somehow fails. On the other hand, parents must determine whether or not they are able to let go. If they give or sell their business to their children, will they remain present to overshadow their children or allow their children to use their own business model if it does not suit or live up to their own standards? The question is simple and complicated at the same time: are you willing to let go and let them take full responsibility on their own?

Should you give or sell? As mentioned in point three, you must determine if you want to give or sell your business to your child or children. As Suzanne DeBaca mentioned, it is very important when determining retirement security. If you are a parent leaving a multi-million dollar business, you might be more inclined to give your children the business. However, if you are a successful small business owner, you have to determine whether you can afford to give it outright or sell it to your children. Making sure that you are financially secure during retirement is the best thing you can do for both yourself and your children.

Lastly is the problem of taxes taxes. Point five is the most important of all; knowing that your business is financially sound and all taxes are paid in full before and after a transfer. Even if you don’t give or sell your children the business, it is sage advice to have this complicated step dealt with. If you die and leave the business to one of your children as your inheritor, make sure you have it outlined in a will and are educated about federal, state and/or provincial tax laws.

In too many situations, the emotional aspect of leaving a family business is solved before financial considerations are given. When business and family mix, everything is interconnected. Money and the personal well-being for all parties involved are crucial for long-term success. As stressed, be familiar with all tax codes, and make sure that all back taxes are dealt with.

Like the parent illustrated in the opening story, and the father who would like to give his daughter his construction rental business, deciding to retire and transferring or selling your business to your children is a difficult and emotional decision. Giving up years of “blood, sweat and tears” on a project that you have worked on for most of your adult life and made successful is a physical and mind-draining process. Leaving a business, even when it’s only to your children, should not be taken lightly. Treat them as if you were selling your business to a stranger, but do it with care and respect and make sure they care and respect you in kind. But the most important thing of all is to make sure that you and the child or children you hand it over to are ready and up to the task.

Robertstone Goodridge is from Boston, Massachusetts and graduated from Concordia University in Montreal, Canada, with a degree in political science. He was president of Concordia’s Model United Nations for two years and was involved in many social and political causes. During his spare time, Robert likes to travel and discuss economics and politics with anyone who will listen to him. He currently lives in Boston.