ANDERSON, Ind. —
Mark Motluck, business law professor at Anderson University, points out that 76 million Americans were born between 1946 through 1964 and many of these baby boomers are business owners who will be retiring and leaving the business world over the next 20 years. If you are one of the boomers, he asks, have you planned your exit strategy?
Motluck further elaborates that many business owners simply plan to pass on the business to next generation family members. Many successful businesses boast of the generations that have made it successful and how long it has remained in family hands. However, this may or may not be a good strategy. Before agreeing to pass on your business to your children, you need to critically address these five questions with an objective eye:
- Is your child really capable of running the business? Does he/she have the desire and drive to make it successful? How would you feel if you turned over the business only to see it fail because the person you passed it on to had neither desire nor ability to run it?
- Will you be able to step back and allow your child to run the business the way they want to run it? That is, will you sit back idly while they make changes that perhaps you don’t feel are in the best interest of the business?
- If you have more than one child, will they all be involved in the business? If so, how will the “leader” be determined? Will it potentially cause a rift in the family?
- If not all of your children will be involved in the business, will the child acquiring the business pay a fair market price for the business? If not, will you account for this in your overall estate plan?
- If you are financing the sale of the business for your child, what happens if or when your child starts missing payments? Are you prepared to take legal action? Will their failure to pay affect your retirement lifestyle or plans?
There are many factors to consider with a decision this important. If you have decided to move forward and transfer/sell the business to your children, you must seek legal and financial counsel. There will be income tax and possibly estate or gift tax implications that will need to be considered. For example, if you transfer the business for less than its fair market value, it will trigger gift tax implications. However, if you start the planning process a few years before the complete transfer of ownership and power, you may be able to eliminate some or all of the adverse consequences.
Your attorney will need to draw up the sales contract and all necessary documents. For a matter this delicate and important, it’s best to treat this in as much an arm’s length manner as possible. That is, separate this business matter from your family affairs. In fact, having separate attorneys to represent each of the parties is the most prudent course of action. Above all, don’t risk family harmony.
Columns from the Falls School of Business at Anderson University appear Tuesdays in The Herald Bulletin. This week’s columnist, Emmett Dulaney, teaches marketing and entrepreneurship.