LLOYDMINSTER, Alberta — Several months ago, the Wall Street Journal reported that the next several years will bring about the largest intergenerational transfer of going concern businesses in history. The entrepreneurial baby boomers wish to phase out, with more than two-thirds wanting their business to remain within the family. However, some express legitimate concerns. Many business owners, including those who own and operate drycleaning plants, have developed a profitable enterprise only to see it frittered away.
Not all children share their parents’ commitment and expertise. Many lack experience and day-to-day management skills. Some may not want to be in the drycleaning business. Others may have the desire but lack management ability. Is the Boy Wonder really the Boy Blunder?
The problem becomes how to find the best way to pass the drycleaning plant to one’s progeny with the minimum of sibling rivalry. How does one properly structure an interfamily company transfer that satisfies everybody? Can one pass the business to one family member yet bypass the others?
WHAT DO YOU WANT?
Before contemplating the mechanics of an interfamily business transfer, parents should give serious consideration to what is most important to them. Is it a large lump sum in cash, an annuity-type retirement income, seeing the kids set up, or keeping Dad’s name over the door?
What’s in it for you? What’s in it for them? Hard though it may be, perhaps impossible, before doing anything, an objective and totally unbiased inward look is a prerequisite. The basis for all business decisions should be as if you were selling to a stranger. Otherwise, what you want may not be what you get.
There are some advantages for the offspring to acquire their parents’ business:
- Planning for an orderly transition can commence well ahead of the takeover date.
- The family knows what it is getting.
- The retention of credit lines, suppliers, key staff and customer loyalty is easier for an insider.
- The element of continuity is greater.
- It will not be necessary to hang out the “Under New Management” sign, to offer the business for sale on the market, to pay a commission to a broker, or to spend hours with wishers, wanters and tire-kickers.
THERE ARE SOME DISADVANTAGES, TOO
It’s easier for a parent to walk away when the enterprise is sold to a stranger rather than to their own son or daughter.
Selling to the offspring makes the job of letting go still more difficult. Every day, Dad will want to go down to the plant to “help out.” Maybe he will be welcome, maybe he won’t. Few parents will accept the fact that the “kid” might be a better manager and have better ideas than the “old man.” And, a parent could be less patient with knowing that many inheritors are equally interested in their own families, a social life, community projects, and taking vacations.
From a monetary perspective, the parents might not get as much cash up front and may allow more liberal terms than they would to an outsider. In times of financial difficulty, the family may think that they can make smaller payments to the parents than to a bank, or perhaps not pay at all. Who forecloses on one’s own?
EQUITABLE DOES NOT MEAN EQUAL
Sibling rivalry has probably brought about the break-up of more second-generation businesses than any other factor.
Since most family members will anticipate equal wealth distribution, how does one treat each family member equitably? Being fair to all is ultra-important, but being equitable does not necessarily imply equal distribution. Some may have contributed to the business, and worked in it, while others made like the prodigal son. Some may be interested in continuing with the plant while others could care less. Sons always think that they should be favored over the daughters. Few men will accept that the females might make better managers than they would be.
If several children are involved, who manages the business and who presses pants? Are all siblings prepared to accept the anointed chief? Although keeping the business in the family could make economic sense, common bloodlines do not guarantee a solid working relationship. An overly zealous attempt to create equality among family members could backfire and generate unwanted family disputes and pressures.
Check back Thursday for the conclusion!
Have a question or comment? E-mail our editor Dave Davis at [email protected].