It’s been called the silver tsunami. Over the next 20 years or so, we will witness the single largest transfer of privately held businesses in the history of the U.S. The baby boomer generation produced more entrepreneurs than any generation before. Now those entrepreneurs, many of whom run family businesses, are nearing retirement and have to make choices about the next phase of their lives.

If you or someone you care about is facing this situation, I’d like to help. I’ve had the privilege of working closely with privately held businesses, often family businesses, to create strategies for the future of business owners and their families. These are complex situations that require careful thought, strategy and timing. Here are eight guiding principles that I’ve found to be the most important questions you can ask yourself as you consider how to transfer your business.

 

TRANSFER IS INEVITABLE

Before we look at those eight questions, I want to address a situation I’ve seen many times. Far too many entrepreneurs, especially those running family businesses where the business is also their legacy, really don’t have a transfer plan. They’ve avoided the topic for years, even though they knew the time was coming when they could no longer ignore it. Many people in that situation are now in a tough spot.

If this sounds like you, I’d like to present a different way of thinking about this. I view exit planning as growth planning, not “how do I get out” planning. In other words, a great exit plan is really a growth plan for how the business will operate at its next level—a level where you’re not running the business day-to-day.

I believe that business transfer is a process far more than an event. You can’t sell a business the way you would sell a home, an expensive automobile or another high-value asset. The sale of a business, whether to family members or not, is complex. It takes time. It requires a lot of people to be involved and do their part. It takes coordination and leadership. It probably also means you’ll need to talk to professional advisors you may not know all that well right now about topics that are deeply personal to you.

So, if you or someone you care about has been avoiding this conversation, my advice is to start right now. Start thinking about these questions and begin building your transfer strategy. Start developing relationships with the professional advisors who can really help you. In many instances, the most satisfactory transfer will require up to five years of planning and execution before the actual transfer occurs. Think about that a moment—five years.

Some people avoid this topic because they simply can’t envision life without their business. They wouldn’t know what to do with themselves. I get this. However, it’s inevitable that your business will transfer. What is not inevitable is whether or not the transfer will work out the way you want it to. The questions I raise below will definitely stack the odds in your favor.

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"I enjoy serving multi-generational families because I value trust and discretion. They often have very complex financial lives and multi-generational stakeholders who see things in different ways. I find satisfaction in leading a team of advisors in a united effort to serve these families exceptionally well."

THE EIGHT QUESTIONS

After working with numerous entrepreneurs going through the family business transfer process, I’ve come to identify eight essential questions I believe you should ask yourself:

  1. Will you transfer to another family member or to an outsider?
  2. Are you ready to transfer?
  3. How will you take care of partners and key employees?
  4. What tax implications do you need to anticipate and manage?
  5. Who are your advisors and what gaps still exist in your plan?
  6. What financial results do you need to produce for your family?
  7. What will you do with your time after the exit?
  8. How will you manage your wealth once it comes to you?

 

WILL YOU TRANSFER TO ANOTHER FAMILY MEMBER OR TO AN OUTSIDER?

This is a foundational consideration. Many family business owners do plan to transition to a younger family member, often a child or grandchild. This can work out well, in the right circumstances. But there are also risks. I outlined several of these risks in an article entitled “Transitioning Strategies For Family-Owned Businesses.”

However, sometimes it’s more beneficial to the founder and their family to simply transfer equity to a third party. This can create a windfall of wealth for the owners, while also transferring the headaches and stress of running the business to an outsider. Whichever path you choose, my advice is to get with professional advisors who can help you sort through your options and evaluate them based on what you want to achieve.

 

ARE YOU READY TO TRANSFER?

A few years ago I wrote an article entitled “The Five Biggest Mistakes People Make When Transferring A Family Business To The Next Generation.” This popular article lists mistake number one as “not having a plan.” No matter to whom you intend to transfer your business, whether a family member or a third party, the most important thing is to be prepared. The article identifies five core areas where you can take action to ensure the transfer goes the way you want it to.

 

HOW WILL YOU TAKE CARE OF PARTNERS AND KEY EMPLOYEES?

Most entrepreneurs who run successful businesses for many years build deeply meaningful relationships with business partners and key employees. It would be painful for these business owners to see partners and long-term employees suffer financially because of their exit. If you are concerned about this, I’d like to suggest a couple of resources that can help.

First, I produced a case-study entitled “Private Family Business Successfully Transfers To Next Generation.”  This case study shows how a successful family business transferred equity to children while also taking care of long-term employees, some of whom were third-generation workers.

Second, I’ve written an article called “Five Reasons Business Partners Need Formal Contingency Plans.”  This article presents several options for building contingency plans to ensure business partners are taken care of and also that the business remains solid and stable, even through a liquidity event.

 

WHAT TAX IMPLICATIONS DO YOU NEED TO ANTICIPATE AND MANAGE?

Whether you transfer your business to a family member or a third party, there will almost certainly be tax implications. However, there are probably many more options available to you than you might realize. To get the best options on the table, I recommend that you work closely with both a CPA and a qualified financial advisor who has been through several liquidity events. If you are planning to gift all or part of your business to a family member, please read this article to be aware of gift tax considerations.

 

WHO ARE YOUR ADVISORS AND WHAT GAPS STILL EXIST IN YOUR PLAN?

Business transfer is a team sport. I recommend that your team should include these types of professionals:

  • Family business planner to shepherd the process
  • Lawyer
  • Accountant
  • Financial advisor
  • Business valuation expert
  • Business CFO/Controller

I also recommend that you start the process of uniting these professionals to serve you as one cohesive team several years before you plan to exit. I recommend this group of advisors because, in my experience, if you don’t get the best ideas on the table from knowledgeable professionals, your plan will almost certainly have gaps. This team will produce financial benefits that far outweigh their fees.

 

WHAT FINANCIAL RESULTS DO YOU NEED TO PRODUCE FOR YOUR FAMILY?

This is one of the most important outcomes that family business owners want to realize. After working with quite a number of entrepreneurs on this process, I’ve come to recognize that their plan should be as unique as their family situation. Since your family is unique, the plan to capitalize on proceeds of the business transfer should match your distinct goals.

To help you think about options to consider, I’d like to recommend a couple of resources. First, I recorded a webinar called How To Transfer A Successful Family Business To The Next Generation: Seven Key Areas To Build Your Action Plan. In about 20 minutes, I present a scenario from a complex family situation and outline several ways the business owner can take care of family members financially. I’m sure this resource will provide ideas to think about.

I’d also recommend the article called “Transitioning Strategies For Family-Owned Businesses.” This presents a case study based on some experiences I had helping a family business realize their goals. In this instance, I helped a business owner think through several scenarios that impacted his family.

 

WHAT WILL YOU DO WITH YOUR TIME AFTER THE EXIT?

While this might seem like something to think about after you exit the business, I would not advise that. I find that not having a plan for what to do with your life after you leave your business actually prevents you from building the plan in the first place. When you know what you’ll do with your time and energy after the exit, you begin to anticipate it and look forward to it.

You should also know that a significant portion of entrepreneurs who transfer their business are not happy after having done so. To help you avoid this, I’d like to recommend this article: “What To Do After Your Liquidity Event.”

 

HOW WILL YOU MANAGE YOUR WEALTH ONCE IT COMES TO YOU?

Most of the entrepreneurs I’ve served who have completed liquidity events were affluent before the exit. But after the exit, they were suddenly dealing with a level of wealth that they had never managed before. While this sounds like a good problem to have, it can create a lot of anxiety because people know they need to protect and grow their wealth. They might have been great entrepreneurs with core expertise in their business, but managing wealth is a completely different discipline.

This becomes especially challenging as the family grows. Entrepreneurially minded parents often give rise to entrepreneurially minded children and grandchildren. This can lead to numerous entities—like trusts, corporations and charitable organizations—across three or more generations. This level of complexity can be overwhelming. A family office can really bring peace of mind and a structured approach to managing and preserving family wealth for the generations to follow. If you’d like to understand more about this, let me recommend a couple of resources.

First, I wrote an article called “Is A Family Office Approach Right For Your Situation?” This article explains who needs a family office (hint—it’s not just the ultra-rich). It also discusses the four sources of complexity that make managing wealth so challenging.

Second, I co-wrote an article with my colleague Lisa Olson called “How A Family Office Reduces Complexity.” This article explains how a family office approach creates real peace of mind for affluent families by taming complexity.

 

CONCLUSION

The baby boomer generation gave rise to more entrepreneurs than any generation in U.S. history. As they approach retirement, members of this generation will need to create a plan for the best way to exit their business. The eight questions I’ve outlined here serve as a guide to prepare you to have the best transfer possible. Please carefully consider these questions, especially if you’ve been putting off your transfer plan. Please also know that my door is open to you to talk about any of the ideas put forth in this article.

 

© 2020 Whitnell & Co.  The information contained in this article is provided for informational purposes only.