Pitfalls When Transferring Business Ownership to Children
1. Can Junior Run the Business?
A major problem we encounter here is the failure to adequately consider whether children are capable of managing the business and the related issue of whether children really want to own and manage the business. Frequently, mom and dad simply assume that the children are their natural business heirs and the assumption in the family is that junior will take over the reins someday. Sometimes children feel this subtle family pressure from an early age and don’t feel they have any real choice in the matter. The best gift that parent business owners can give to their children is to seriously consider whether the children are a good fit to run the business. This might mean, for example, bringing in outside professionals to assess the child’s management ability.
Are you going to sell or give the business to your child? If sell, will it be for full fair market value? Can junior finance the transaction, or will it be seller financed, or some combination of bank and seller financing? If there is a gift element, how will that impact any children not involved in the business? If there is a gift element do you need to make changes to your estate plan to compensate the non-business child(ren)?
If the ownership transfer to children involves seller financing, you will have exposure for a longer time to general business risk. If the company or economy experiences a downturn, you risk default on the seller note which might adversely affect your retirement plans, not to mention family harmony. Also, you might feel that you need to stay involved in the business longer in order to help your children be successful. Are you prepared for that commitment?
4. Relationships with your children
What about children who are not actively involved in business management? Do they get ownership as well? Business active children will often resent having to deal with passive family owners. What do they know about running the business? Non-active children often feel that the business management siblings are getting a special deal by way of salary and perks. If not addressed head-on, these feelings can undermine family harmony and have adverse consequences for business management
Business owners often fail to identify the consequences of a poorly coordinated ownership transfer to children until it’s too late. If you’re considering transferring your ownership to your children but aren’t sure whether you’ve addressed these potential problems, contact us today.