November 30th, 2007
Thomas A. Muldowney, MSFS, ChFC, CLU, CFP®, CRC, CMP®, AIF®
To make the transition of the family business smoother, Dad not only needs an exit strategy, he needs to know that he needs an exit strategy. It should include: when to exit, how to exit, at what price and terms to exit, and finally, what is he going to do in retirement. Lots of planning is needed.
This is also a time for bringing in capable advisors. Succession planning will include some legal, accounting, financial, banking, and insurance advice. The accountants will help answer the question, “What will be sold and at what price?” The lawyer will coordinate the paperwork for the transfer and coordination with the estate. The financial advisor will help coordinate the retirement’s cash flows, the banker will help arrange for the financing, and the insurance agent will address what happens if someone dies during this transition. This is a time where good advisors can be of substantial advantage…they’ll help you avoid mistakes and help connect you to resources that you may not have on your own.
Dad…this little scene study is intended only to remind you of the importance of planning for your transition into retirement. It will not happen by accident. By opening the discussion, you’ll provide clarity for you, your spouse, your children, successors, and customers.
Take the first step…make a phone call to your advisor. Your advisor can help you assemble the transition team and develop a transition strategy, well in advance. If you do this, everyone in your family will have more confidence and more peace of mind…of knowing how this delicate transition will take place.
November 28th, 2007
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!
Thomas A. Muldowney, MSFS, ChFC, CLU, CFP®, CRC, CMP®, AIF®
