Transfer of Ownership to the Owner’s Children

Submitted by John Brown on Thu, 02/13/2014 - 1:41am
Handing Over the Key

If your client is a typical business owner, there is a 50 percent chance that they want to transfer the business to their children. If they are a typical owner; however, there is a substantial possibility that they will end up transferring the business to someone else because of the difficulties associated with this type of transition. Therefore, it is in your client’s best interest to realize the difficulty of this transaction, as well as prepare the business for the possibility that it will be conveyed to another type of buyer.

Advantages

  • Fulfills personal goals of keeping the business and family together.
  • Provides financial well-being for younger family members unable to earn comparable income from outside employment.
  • Allows the owner to stay active in business with their children.
  • Allows the owner to control their departure date.
  • Enables the owner to fix value by starting with the question, "How much do I need or want?" rather than being told, "This is how much I am willing to give you." This is especially useful in situations in which the business is worth less than the amount needed to live on – if the business were sold to a third party. When the business is in the family, the owner can sell for what they need to live on even if the business value does not justify that sum of money.

Disadvantages

  • Great potential exists to increase family friction, discord and the feeling of unequal treatment among siblings. The normal objective of treating all children equally is difficult to achieve because one child will probably run or own the business at the perceived expense of the others.
  • Reaching financial goals is normally diminished not enhanced; although with careful planning and implementation, financial goals can often be achieved while transferring the business to the children.
  • Because family is involved, your client’s control may be weakened. They can lose effective control even though they still have voting control – due, of course, to the vagaries of family dynamics.
  • The real risk of transferring the business – because of family ties – to someone who can’t or won’t run it properly, threatens your client’s financial goals and the existence of the business.

Many of the disadvantages can be minimized or avoided through proper planning. However, it is important to be knowledgeable of both the advantages and disadvantages associated with the transfer of ownership to children when choosing a successor.



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