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The Strategic Outlook |
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Strategic Group · 4380 SW Macadam Ave, Suite 260 Portland, OR 97239 · (503) 222-9737 · www.InvestwithStrategic.com |
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3 Pitfalls to Avoid in an Intra-Family Transfer
The integrity of the family unit with its common values, beliefs and loyalty gives a family business the competitive advantage in the market place. Transferring a family business and by extension your legacy is a natural progression for any business owner, but it can be fraught with mistakes. Throughout the years, I have seen many business owners make mistakes when transferring their businesses however there are three main pitfalls that seem to repeatedly appear: Not being buyer ready, Putting money between family members, and Confusing legacy with wealth.
Not Being Buyer Ready It goes without saying the family business is a dynamic entity subject to change as it matures. The biggest change a family business faces is transferring from one generation to the next. The biggest challenge the business owner faces is the necessity to release control to the next generation. It is tough on both generations but, to give up control too soon or too late can have a detrimental impact on the future earnings of that business. This means creating a plan and time frame that works for both you and your heirs.
The proper time frame is contingent on your type of business; however the path to transition can be moderately smooth. The owner should drop the duties of laborer, then manager, and should eventually become the CEO with little involvement in the day-to-day activities of the business. The final step, and often the hardest to accomplish, is to position yourself mentally and physically into a board member position and relinquish control to one of your children as the CEO. Failure to do so reduces the value of the enterprise and jeopardizes the success of the intra-family transfer.
If this sounds like you are getting ready to sell the company, you are right. If you were selling your company, you would make sure things were in ship shape to get the most value out of the company. The ‘Buyer’ of the company would expect that your business is currently growing with room for future expansion and profitability. He would expect this because he is taking on substantial risk to purchase your business with an expectation of return and success. Yet, many family businesses fail because their growth is sluggish and they haphazardly transfer the business to an unprepared heir.
Transferring a company to a family member is like selling any kind of asset-- you fix it up before you put it on the market. Shining up the business for intra-family transfer requires owner time, professional help, and substantial planning. If done correctly, it can make all the difference when it comes to the future of that business and the maintenance of family harmony.
Putting Money Between Family Members Nothing good ever comes from putting a dollar between family members. The transfer of a family business inevitably stirs up emotions. It is often the owner’s desire to pass on the family legacy, keep everyone happy and provide for his own retirement.
Failure to ensure you have enough assets to retire on will inhibit your ability to give up control of your business. Discounting your business to sell to an heir is acceptable as long as it does not jeopardize your retirement. By carefully planning out the details of the transfer and communicating this information clearly to the family, the owner effectively creates trust within the family. The other benefit is that it will help keep non-family member employees informed preventing them from leaving to a competitor.
As children move away from home, they expect someday to inherit some of the proceeds from the sale of the family business. It is normal, but it is often a hidden financial agenda. The parents tend to fuel this fire by avoiding the subject entirely or glossing over the strategy surrounding funding their retirement income. To complicate matters worse, if one of the children enters into the business, the other children see him as an immediate threat to their hidden agenda. Not communicating early how they will be taken care of and their role can often ruin even the strongest of families. |