Family Business Transfers
Part Two: The Recipe For Success
Ingredient 1: Owners Must Undertake The Seven Step Exit Planning Process
In the previous issue of this newsletter, we identified many of the obstacles to a successful transfer of a family business. Despite those obstacles, some transfers do succeed. The question raised was, "how?"
There is a "recipe" for creating a successful intergenerational transfer. It isn't the only recipe that works, but because it depends on six carefully chosen ingredients, its chances for successful completion are greater than others.
If any of the following six ingredients is compromised, or worse still, missing, the result will change.
Ingredient 1: Parents must undertake their own Seven Step Exit Planning Process.
Ingredient 2: The one child active in the business becomes the sole successor owner.
Ingredient 3: The business transition plan is fair to all children.
Ingredient 4: Parents have achieved financial security (independent of the future cash flow of the business) before business ownership and control is transferred to the business-active child.
Ingredient 5: The business-active child has demonstrated the capacity, ability, and willingness to run the business for a significant time period (at least three years) before the parents transfer control and ownership.
Ingredient 6: There is a back-up plan.
Just as baking bread at sea level is not the same as baking at high altitude, this is not a "one size fits all" recipe. Regardless of altitude, bakers use flour, yeast and water but quantities, temperature and cooking time vary. So too, the recipe here may need to be adjusted to your specific circumstances.
All business sales or transfers are challenging, but owners wishing to transfer their businesses to children often find themselves in the middle of their own Desert Storm: your spouse, children (and their spouses) all have opinions about how you should exitand they are not afraid to share them!
If you find yourself in this position, we have one suggestion: get off the rollercoaster. Undertake the process that all savvy owners use to plan a successful exit: The Seven Step Exit Planning Process. In your case, the Process will enable you to craft your exit and take into account the concerns of all family members. Believe it or not, this Process can integrate all points of view into a single, unified strategy. It organizes your priorities and can be easily modified (as illustrated in red below) to reflect additional considerations unique to family business transfers.
Here is that process:
Let's look at each Step in more detail.
This is just a brief overview of the first ingredient in a successful family transfer. If you would like to discuss this first ingredient or family transfers in greater detail, please contact us. Watch for our next issue:
Ingredient 2: One Child Shall Succeed in Business Ownership
Subsequent issues of The Exit Planning Navigator® discuss all aspects of Exit Planning.