So you’ve decided to sell your business and you want your children to earn a living after you retire. Why not combine both objectives and sell the business to your kids? For many business owners, a sale to family members is a chance to maintain a legacy through the next generation. And there are benefits to keeping the business in the family.
• As an exit strategy, transferring the business to a family member allows you to handpick and groom a successor and may also create an opportunity for estate tax avoidance planning.
• A private sale to a family member also may be a solution to a lack of marketability for your business.
• If the family member is already involved with the business, there is less ramp-up time to familiarize the new leader with the inner workings of the company.
• Finally, a sale to a family member may let you stay involved without the same level of daily responsibility.
On the downside, developing a family succession plan can be enormously difficult. According to the Family Business Institute, 88% of current family business owners believe the same family or families will control their business in five years, but statistics undermine this belief. Only about 30% of businesses survive into the second generation, 12% are still viable into the third generation, and only about 3% of all family businesses operate into the fourth generation or beyond.
Setting aside the very real impact of taxes, a major issue that business owners often overlook is whether there is a viable successor. You may want your first-born child to take the reins, but he or she may not have the interest or skills to handle that responsibility. Perhaps another family member is better suited. Resentment may develop among the remaining children who were not selected. Or it may be that no one is able to pick up where you want to leave off. Examine the strengths of all possible successors as objectively as possible and think about what’s best for the business.
Stay tuned for tips on succession planning strategies to make sure your business stays in the right hands when you retire.