Money Matters: Passing the Baton

Written by Doug O’Rear

This article is courtesy of Mature Living magazine.

Q: Years ago I started my own business. I anticipate retirement soon, and I need advice on the best way to pass ownership to my children. Can you give me suggestions for such a transition?

A: Many family–business founders and second-generation owners face the challenges associated with what will happen when the founder and primary operational person needs to pass ownership to the next generation. This could occur at retirement, disability, or death.

Since more than 90 percent of all business enterprises in the United States are family owned and in the next five years will experience change in leadership, it is time to face reality. Few of these businesses will survive without a well-orchestrated succession plan. Since the decisions to implement these changes will require things to be done differently, the natural tendency is to procrastinate, think of other priorities, and generally refuse to acknowledge the inevitable.

The answer is a combination of financial and psychological decisions. The family has one agenda, and the needs of the business have another. When the two can be blended, a better solution is possible. Issues regarding family relationships and management decisions must be communicated fairly and openly.

For instance, parents often expect to pass the business to adult children who previously have shown no interest in the operation. These children have taken different professional roads. Yet, the parents will offer the business to the children out of their necessity or personal desire.

To get started, the “business” and the “family” need to communicate. Issues such as finances, retirement, and estate planning need to be evaluated realistically by the family. The business must address succession management training, organizational structure, and stock and asset ownership.
This may require the services of a principal advisor who can bring to the process financial planners and legal and accounting experts. In some situations, family counselors should be involved.

The process is not to be accomplished quickly. It may involve putting a transitional system together for a business that has its roots deeply planted over several decades. Competing and conflicting Issues should be addressed and balanced against each other.

Begin the process by determining which family members need to be involved in discussion. Initial meetings may need to start with just Mom and Dad, but as issues expand, so does the circle of involvement. Educating decision makers is imperative. All components of the decision need not necessarily be known by all family members, but certainly those that involve their respective areas of expertise should be discussed. For instance, the operational component of the business needs a general knowledge of the financial component, and vice versa.

As a result of this process, different outcomes may emerge. For instance, it may be advantageous to all concerned to have the business sold before, or at the death of, the primary operational person. Why pass the business to Mom for the rest of her life if she has not been involve in many years? Plan an exit strategy as early as possible, even if it may not occur for 10 to 15 years. Be realistic in planning. Be ready to be bold and innovative. Look to key employees and managers who may be in a better position to take over than non-involved family members.

Comprehensive estate, financial, tax, and successorship planning is time-consuming and may seem expensive initially. A well-designed plan that is properly implemented will be well worth the expense in the long term. Don’t put it off.

Doug O’Rear is a certified financial planner.

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