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Retirement & Family Business Succession: 5 Things to Ask

By Deborah Jeanne Sergeant

You’ve built and grown a family business: an enduring legacy that will help your family financially for decades to come. Ensuring it continues relies upon answering a few questions.

1 — Does your adult child want the business?

This question surprises a lot of family business owners, according to Robert Griffin, regional director of the Onondaga Small Business Development Center at Onondaga Community College.

“Invariably, the biggest mistake business owners make is assuming the children want the business at all,” said Griffin, who is also a certified exit planning adviser (CEPA).

“Sometimes, this may even need the help of a family counselor to help them literally talk through this. As uncomfortable as that may be, children will often be hesitant to disappoint their parents if they are really not committed to the business.”

It’s possible the children help out because of their respect for you and a sense of obligation. Or perhaps they’ve felt little interest in any other occupation because of a lack of exposure.

2 — Do you have a team in place?

To begin a generational business transition, Griffin recommends using teams, which include an attorney, accountant, insurer and wealth adviser for each party.

“It’s not about trust; it’s about a proper transaction where everyone understands the framework and everyone is properly protected legally,” Griffin said. “Done properly and in a spirit of cooperation, this does not need to create friction, but to alleviate conflict during the process or in the future.”

Each party can ensure a fair transaction.

3 — Are your heirs ready?

Many adult children of business owners have performed the daily tasks of the business since they were tots. However, they’ve never seen the ledger. They have no idea if their parents’ business is in the red or black or that the business teeters on bankruptcy. Griffin wants business owners to offer complete financial disclosure to their heirs. No one wants to inherit a financial disaster. And heirs should also understand the ebb and flow of the business.

Often, the children have never hired an employee or served as a manager. Working only as an equal to the majority of the workforce will not prepare them well for a leadership role.

If they don’t have relationships with the vendors, buyers or other key players that make the business successful, they won’t know how to interact with them.

Although not every heir is great at each administrative role; parents and their team need to help them “identify gaps in terms of operational management,” Griffin said. “This is particularly true in the case of larger family-operated enterprises, where perhaps the next generation is better at finance, but not great at the technical aspects of the business or vice-versa.”

4 — Do you know the value of your business?

Robert A. Rolfe is a financial adviser with Harmony Financial Services in Oswego.

Simply handing over the keys and ledger is not a great idea, according to Robert A. Rolfe, financial adviser with Harmony Financial Services in Oswego. Much of your financial security for retirement may be tied up in the business, he said.

“You have to have a vision for what you want your retirement plan to look like and when you want to retire,” he said. “You have to look at the valuation of your business. There’s a lack of understanding as to what a business is worth. Find an accountant who specializes in this.”

Both you and your heir should agree on the value, but it should be determined by a third party who is neutral.

What is your business structure and sale method?

Rolfe said that a DBA may not be the most tax-efficient business structure to transfer. Paying over a long period time may be easier for the buyer, but most people want money upfront. Some choose a percent of revenue over time, which can be easier for the buyer, but risks the business failing.

“You have to insure it for life and disability as either party could pass away prematurely or become disabled,” Rolfe said.

5— Do you know what roles your heirs will take?

Kathryn Canzonier is the Farm Credit East regional financial services leader.

As alluded to above, not all heirs are equally as good at each aspect of the business. Some may surprise their parents with skills they’ve cultivated elsewhere; others may need more coaching.

“The leadership and management transition that typically proves to be the most difficult and is often the greatest indicator for the success of transitioning the business across generations,” said Kathryn Canzonier, Farm Credit East regional financial services leader. “It requires a multi-faceted approach accompanied with open and honest communication because there are often interpersonal issues that come up in the process. Our consultants have to be part business advisers, but also adept at understanding the human side of the situation to navigate the family dynamics.”

Farm Credit East works with farm businesses on generation transfers, among its numerous financial services.