Is the Family Business Transition Planned for?
Statistics show that a business owner may average more than 900,000 hours in the creation and running of the business, and yet spend less than 4 hours on planning its transition. The business owner may be so solely focused on the running of the business that they have not even thought about how the business would run without them. Businesses with numerous family members involved may have a very different mindset than a business operated primarily by one Founder.
I knew one business that was operated by two (2) brothers. One of the brothers brought his adult son in to work in the business. The other brother came to me confessing, “His son is an idiot! We’ll never be able to survive if his son takes over the business.”
Exiting the Business.
An important issue is whether the business should be sold when its founder is winding down or looking to exit.
- That may be the time of the highest value of the business.
- It may be emotionally difficult to do as the identity and self-worth of the founder is tied into the business and they can’t “let go”.
- It may be difficult to sell the business when it is at its peak as some family members may feel that the children are “entitled” to the business even though they may run it into the ground.
- Rarely do adult children have the same unique abilities or strengths, or giftedness of the founder. Each person has their own strengths, but they are often different than the gifts of the Founder of the business.
These were some of the issues for J. Paul Getty as he was to transition his oil business. None of his children or grandchildren had the ability, interest, or was capable of running the business and he knew it. We saw it locally when the “Three Brothers Restaurant” did not continue. The sons of the “Three Brothers” fathers did not want to work as hard as their fathers had, nor did they have the high motivation needed to run a successful restaurant.
The Biltmore Estate is fortunate in that one of the adult sons is the Chief Executive Officer and has done a fine job of running and expanding the businesses for a number of years. He is both qualified, knowledgeable and motivated to continue to expand the family legacy. Often this is not the case, but the Cecils are fortunate to have competent family members in the operations of the business. Especially at the helm.
Sale of a Business.
If a business is sold, there are number of different ways to value it. There can be a “Asset Approach” that will look at the balance sheet and good will of the business. There can be a “Market Approach” that can look at the Fair Market Value of the business. There can be the “Income Approach” that is based upon the projected income. The difficulty of this approach is trying to figure out excessive compensation of company cars, condominiums, beach houses, etc. as opposed to the actual costs that are necessary in operating the business and reasonably related compensation.
Often Appraisers are used in valuing the business. They will often use two (2) or more approaches. They will also apply premiums and discounts. There may be a premium in the business if the owner-operator is alive and will continue to operate the business under contract with the new owners. There may be a strong discount if the founder is not going to continue in the business and there is not a real good manager left to operate the business on behalf of the new owners.
Business Brokers are often used in trying to sell the businesses.
Junior Partners & Non-Compete Contracts.
Some business will bring in a “Junior Partner” to train and to later purchase the business over time. Often there is a Contractual Agreement that will be how the parties will work the arrangement. There are Confidentiality and Non-Compete Agreements that the Junior Partner will not come in, gather the Founders information and then go across the street and go into competition with the Founder using the Founder’s years long hard earned tools against them.
Failure to use such Contractual Agreements can lead to a difficult situation. I had a client that had a medical practice and he brought in a young doctor to be an eventual Junior Partner to buy out the Founder over time. Over time the Junior Partner got trained, gathered the Founder’s client list and systems, pulled the key personnel from the Founders business and went across the street and opened up a competing medical practice. There was not a Confidentiality and Non-Compete Agreement. The Founder was seriously injured economically, as he was emotionally as he had treated the Junior partner as a son and never saw the betrayal coming.
There can be difficulty in obtaining someone to train and take over a business. I had a client with a dental practice in rural Haywood County, North Carolina, who had a difficult time bringing in someone. It took someone that really wanted to live in a more beautiful, yet very rural area of the United States that wanted to come into that practice. Eventually someone was found to buy out the dentist, but it took time.
Structure the Sale.
There are issues regarding how you structure the sale of a business. Sometimes the new owner will come in and purchase an on-going entity and add their name to the title of the on-going business, or just keep the old name of the business. Some buyers will come in and just buy the assets of the business and not the business entity itself. This is so they do not acquire any liability of the business, and they think that this is not much “Good Will” to purchase from the business. This version may require certain notices be given on the sale of those assets to the creditors of the business.
At the Law Firm of Steven Andrew Jackson, Attorney and Counsellor at Law, we have helped hundreds of families protect themselves and their loved ones, avoid Estate Taxes and Probate Costs, and keep their Estate Plans current with the law through The Customized Protective Estate Planning Solution™.