Someday, son, this will all be yours…just not today - Part I

November 28th, 2007 at 01:36pm Tom Muldowney

 Thomas A. Muldowney, MSFS, ChFC, CLU, CFP®, CRC, CMP®, AIF®

The transfer of a family business to a second generation is often a delicate balancing act.    Junior watched Dad build the business with his own two hands.  When Junior grew up, his ‘extra’ set of hands helped dad spur the business forward to greater growth.  

When Junior came to work for Dad, it was always implied that ‘someday’ the business would be transferred to him.  The problem is that most of these implications are never actually spoken nor are they ever put into a plan of action.   Dad always felt that the business would provide for his retirement but he never created an action plan for his own retirement.   He figured that a business sale would take place somewhere along the way and that this would provide the much needed retirement money.   

If the business  were sold to an outsider, the sales price would probably be enough that Dad could enjoy a substantial retirement.   Dad never sold the business because the annual income that he was able to generate while working, was always more than the income stream that he could earn on the after tax sales proceeds…consequently, the business just stayed in Dad’s hands. 

The potential of selling to a family member changes the dynamics. Dad may have to accept a different sales price and usually, different sales terms. 

Of course, we all hear of those rare transactions wherein a business sold for cash to outsiders, but in many family sales, Dad becomes the banker.  The risks here are substantial.   There’s a risk for Dad and there’s a risk for Junior…Junior has a lot riding on his ability to keep the business successful.   Not only does Dad’s retirement swing on the success of the deal, but the relationship between the two generations and possibly any inheritance for other siblings is at stake.   This potential for conflicts among family members cannot be assuaged simply by cash…each child feels that s/he should also receive something from the business, even though s/he never actually worked in it.  Kids see the business as a money tree, but often do not understand the risks that were taken or the monumental work that was completed or that Junior now must engage. 

Dad has an emotional investment in the business.  He was there when the business was born, stuck with it through the ‘teen-age’ years when the business struggled for survival.  Today, he knows the customers personally and often he knows the equipment, the family, and the needs of those customers.  There is also another side…when Junior came into the business, he was able to help Dad expand the business and gain opportunities and efficiencies that Dad may never have reached on his own…and yet Dad owns the whole business.  It is not easy to quantify how much benefit came from Dad’s efforts or from Junior’s.  In contrast, how much benefit came from the synergy that the two of them, working as a team, were able to develop?    That makes placing a value on the business a struggle. 

Stay tuned for Part II which will make suggestions on how to remedy this common family business dilemma! 

Entry Filed under: Business Succession, Retirement Planning, Financial Planning