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Business Growth
Jun 22, 2016

Equality And Fairness In Transfers To Children

Sponsored Content provided by Dallas Romanowski - Managing Partner, Cornerstone Business Advisors

Stan Briggs was perplexed when he told his adviser, “My son, Patrick, has worked in the business for the last 12 years. In that time, the business has tripled its revenues and its profits. I’ve started to think about scaling back my activity and I realize how important it is (for my own retirement income) that Patrick be motivated to continue to grow the company profitably. Since I’d like to have him own the business someday, is there a way to start transferring it to him now? It seems unfair to make him pay for all of the business value since he created so much of it and since he is so important to my financial security. My son, of course, agrees wholeheartedly with this analysis but I’m not so sure that his mother and sister are on the same page. What issues do I need to consider?”
 
Equal Versus Fair
 
First, Stan must determine if his son is already paying for the business through “sweat equity” (more working hours, greater risk and lower compensation than he could have earned elsewhere). If so, any reduction in the purchase price is not a gift, but rather recognition of Patrick’s contribution.
 
Second, are Patrick's efforts adding value to the business? If so, should Patrick have to pay for his efforts by receiving a reduced share of Stan’s ultimate estate?
 
Third, if Patrick’s involvement in the business is critical to Stan’s retirement, Stan should consider tying his son to the business using “golden handcuffs,” such as awarding ownership if Patrick stays to run the business – and the business stays profitable.
 
Fourth, in many business-owning families, every child is offered the opportunity for involvement in and ultimately ownership of the family business. Many times, however, only one child forgoes the allure of the “outside world” to commit to working in the sometimes uncertain and illiquid world of a closely held business. (Not to mention that having you for a boss should have some payoff!)
 
Where to Start
 
Analyze the transfer issue in light of your own goals. Be certain that any transfer to children will satisfy your exit objectives. Explore with your advisers other issues and concerns that may arise as you begin to transfer ownership to a child. For example, how much money will you need after you leave your business? What, if anything, needs to be done for your key employees or for your other children? Temper and qualify all transfers to children in light of your over-arching exit objectives. In short, make certain the transfer of ownership to a child is also a good business and retirement decision.
 
Using Advisers
 
When considering a transfer of your business to a child, don’t underestimate the value of using experienced consultants and advisers. Their counsel, experience and input are perhaps never more important than when dealing with your own family. The need for independent, non-emotionally-charged advice can be critical. Having worked with other family businesses, these consultants along with your other advisers can offer practical advice.
 
Decision Framework

  • First determine the level of contribution your business-active child has made to the value of the business.
  • Second, determine the contribution that child must continue to make to ensure the achievement of your exit objectives. Those determinations can form the basis of what is “fair” with respect to both the business-active child and the other children.
  • Third, use your advisers to help explain, guide and implement the transfer of the business.
We are happy, as always, to assist you with analyzing the issues involved with a transfer of ownership to children.
 
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial adviser. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit planning is a discipline that typically requires the collaboration of multiple professional advisers. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
 
The Cornerstone team includes former C-Level executives, successful entrepreneurs and advisers who offer unmatched experience in delivering advanced, custom-tailored, results-oriented solutions for business leaders. As a member of the Business Enterprise Institute (BEI), Cornerstone is an authorized distributor of BEI’s content and Exit Planning Tools. We developed the Performance Culture System™ to help clients implement best practices and drive high performance throughout their organization. For more information, visit www.launchgrowexit.com, call (910) 681-1420, or email [email protected].

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