It’s the dream of many business owners to one day pass the company they worked so hard to build down to their children. For many, it’s more ideal and satisfying to transition to a family successor than to sell to an anonymous buyer.
When preparing to transition your business to your children or another family member, it’s often seen as a more casual transaction and at times, business owners fail to put the structure in place to ensure a smooth changeover for all parties.
When we help business owners shift to their retirement phase and pass a business down to a family member, one of the first things we want to make certain is that there is a well-thought out shareholder agreement in place. This agreement will dictate various aspects of the new arrangement. For example, if the business is being passed to more than one child, the agreement will stipulate what would occur if one child wanted to step down from running the business. The agreement will also specify a formula for how to value the business and how the former owner will be paid and in what timeframe. The agreement is essential to guarantee that all family members are in alignment on how the shares of the business will be transferred.
The next step is putting together a reasonable buyout structure. Essentially, the business owner is turning the business over to his family successor and the owner needs to be bought out in some form. We help our clients design a realistic payout schedule to guarantee income. Taking into consideration the retiring business owner’s current standard of living, we work to duplicate that same income in the buyout structure.
One might think that passing the business down to a family member is less complicated than selling to an anonymous buyer. However, many times it’s a very gradual, emotional and complicated transition that requires a different planning process. Be prepared, make smart decisions and work with your trusted advisor and in the end, you will realize that satisfaction of retiring and watching your business succeed with future generations.