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As an example, there was a successful second-generation property casualty business with a market value of 8 million dollars. The father needed to retire suddenly because of health issues and wanted to pass on his legacy to his 32-year-old son who was working in the business as a salesman. Without any input from his other children, he weighed the risks and sold the business to his ill-prepared son for 3 million dollars, taking a deep discount to avoid taxes and to keep the note within the cash flow of the company.
One year later the son sold the business for 8 million dollars, paying off the debt to his father, and fracturing the family. Three years after that, he had squandered his gains and is now working for the company that purchased the business. The entire family remains in turmoil due to hidden agendas and poor communication.
Although it was always the father’s goal to preserve the family business started by his father, he had not started any planning. When the illness hit and the need arose to transfer the business, he was not at his best and could not handle the stress of the transfer. Because of this, he was rushed and did take into consideration the strengths, weaknesses, goals and expectations of his children. He ended up destroying his father’s legacy and ultimately causing strife in the family.
Confusing Legacy with Wealth Are you trying to transfer a legacy or wealth? The answer to that question will determine if you should start an intra-family transfer or sell your business to a third party. The most important indicator of success of a transfer from one generation to the next is a passion for what the family business does in the first place. Do you really want to shackle your kids to a business they may hate?
I cannot think of a better example of passion than that of a stainless steel metal fabricator that I toured some years ago. It was owned by two brothers in their 70’s. They had already transferred control of the day-to-day operations to their sons. That morning during my tour of the company, the three sons took me through the huge 90 foot tall stainless steel tower in mid-construction. The sons were giddy as they showed me the quality of the welds. The CEO son in his mid 40’s looked at many welds and described which welder completed the work. The more I talked with each of the sons, it became apparent that each of the sons did not only love the business they breathed it. The business and the family legacy in this case were in safe hands.
Summary A family business is a unique model that requires extensive planning to preserve its strength after an intra-family transfer. Mapping out a strategy that prepares your business to be buyer ready, communicating those plans to your family and employees and instilling a passion in your children for the business, can make all the difference between a thriving business and a broken family with a ruined legacy.
About the Author: William Meyer, ChFC, CLU, RIC President of Strategic Group Phone: (503) 222-9737 Email: bmeyer@investwithstratetgic.com
Mr. Meyer has helped families invest over $200 million and has planned for, funded and supervised over $750 million of intra-family transfers and outright business sales. |
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The information presented in this article is not a guarantee on returns or loss, implied or otherwise. This is not a substitute for good judgment on the part of the reader. We are making no recommendations. However, various investment categories may be mentioned in order to provide an overall educational experience. No information provided in this article is intended to replace specific advice given by Strategic Group’s advisors.
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(Published June 1, 2010) |
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Copyright 2010 © Strategic Group. All rights reserved. |
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