Passing the Business to Family
For this exit strategy to work it requires as much advance planning as possible. There are many reasons for this, including the possibility of conflicts and tensions between siblings, spouses, non-family executives, and other investors.
If you decide to pass the business to family, you will need to address:
- Strategic issues such as leadership and management choices, restructuring of the business, or sale of all or a portion of the business.
- Legal & tax issues such as shareholder agreements, prenuptial agreements, marriage or divorce of a child or shareholder, or death of spouses, key employees or a potential successor.
- Family policy issues such as share ownership of family vs. non-family executives, shares for new children or grandchildren, impact of illness or disability, the owner's retirement plans, and employment conditions of family members in the business.
Perhaps the most important question is whether a family succession is even feasible. An owner must be objective in assessing the talents and interests of potential family successors. Questions to ask include:
- Would a family successor be able to secure your investment and retirement income?
- Does a potential family successor have the aptitude, intelligence or skills needed to lead the business forward?
- How would employees, suppliers and customers react?
- What would objective outside professionals or directors advise?
- Can family raise the money for the purchase price?
- Can you divide the value of your business fairly among several family members?
- What is the most tax-efficient way to transfer ownership?
- Do you want to retain control for some period?
To sort out these issues, you may want to try forming a family council. These are regular meetings designed to create trust and understanding around estate planning, retirement and wealth management issues.
The family council is also an excellent vehicle for:
- agreeing on a formal, written policy for family participation in the business;
- developing a formal, structured performance evaluation process for family members; and
- deciding who will have a stake in the business among in-laws, spouses and wider family members.
With a forum for discussion and a basis for assessment, you can deal more effectively with legal, tax and operational issues.