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Financial Consulting

Choosing the Best Path for Ownership Transition

Transferring Ownership to Children

By Maurie Cashman

As discussed last week, the purpose of Ownership Transition Planning is to select the best path to achieve your lifestyle and financial and objectives after you leave your business. One of the key objectives that must be decided early in the Ownership Transition Planning Process is selecting your successor.

“It takes less time to do a thing right than to explain why you did it wrong.”

–Henry Wadsworth Longfellow, American poetBest Plan

Only a small percent of business owners want to sell to an outside third party. However, in many cases the people they first identify as their successors do not end up as the ultimate owners. In at least 50% of the transition planning that I have done, the ultimate path changed as we examined our options. Much effort is wasted focusing on the wrong successor or wrongly assuming a child or employee wants to own the company and then discovering that they do not or cannot. In these cases the owner typically has not considered or prepared alternative plans.

For the next few weeks we will strive to save you some pain by setting forth the advantages and disadvantages of transferring the business to each category or potential purchaser: family member(s), co-owners, employees and outside third parties. There are advantages and disadvantages to each choice. Knowing what they are will help you determine which method is most suitable for you. Take time to compare the virtues and disadvantages of each transfer option before making your decision.

Option One: Transfer of Ownership to your Children

If you are a typical business owner, there is a 50 percent chance that you want to transfer the business to your children. If you are a typical owner; however, there is a significant possibility that you will end up transferring the business to someone else because of the difficulties associated with this type of transition. Therefore, it is wise to realize the difficulty of this transaction, as well as prepare the business for the possibility that it will be conveyed to another type of buyer.

Advantages

This last point is especially useful in situations in which the business is worth less to a third party than the amount needed to live on. When you keep the business in the family, you can sell for what you need to live on even if the business value does not justify that sum of money.

Disadvantages

Many of these disadvantages can be minimized or avoided through proper planning, but it is important to be knowledgeable of both the advantages and disadvantages associated with the transfer of ownership to children when choosing a successor.

Next week, we will look at the second Ownership Transition option – sale to other owners or employees.