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What to do When Your Kids Don't Want the Business

By Peter Weinstein |

A common assumption among family business owners is that one day they will retire and their children will take over the company. After years of hard work and dedication many consider this transition inevitable. But what happens when the children are not interested in following in the family footsteps?

Looking outside the family for an exit strategy may not be something many business owners have seriously considered. The task can seem daunting at first but once emotion is taken out of the discussion, business owners realize that there are many options available to them.

Some of the factors for owner-managed businesses to look at if they need to go outside the family to plan their succession are:

Step 1: Take a critical look at your business. Identify if there are any issues to address well in advance of a sale. Key areas to examine are:

  • Extent of dependence on key employees;
  • Diversification of key customers or suppliers to mitigate risk;
  • Transfer of non-operational assets in the most tax efficient means possible;
  • Documentation of discretionary related party transactions, such as management compensation or real estate leases;
  • The potential value of the business, assessed in a realistic manner.

Step 2: Identify potential purchasers. If family members do not want to acquire the business, there are two categories of potential purchasers, employees and third parties not involved in the business.

  • The Employee Advantage: You know them. They have knowledge of the business and experience in its operations. There is the possibility for you, the seller, to stay on in some capacity and it is often easier to arrange an orderly transition over several years.
  • The Third-Party Advantage: Someone outside the business will likely pay more. This also allows the seller to walk away from the business more quickly. There is often less emotion as this is mostly a business transaction.

It is worthwhile to consider employees and third party options when initially looking for buyers. With whatever path you choose, be sure to decide which option is best early on as the process of selling a company can take a long time.

Step 3: Once potential purchasers have been identified, look carefully at the deal. This can be done by asking the right questions:
  • Is the price being discussed reasonable? Analyze the terms of the transaction, on your own or with a valuation expert, to make sure it is acceptable taking into account the risks and opportunities of the business.
  • Will this be a share or asset sale? Have opportunities for tax planning been considered including the opportunity for the $750,000 capital gains exemption on a share sale?
  • Will payments be made immediately or over time, and will there be an earn out?
  • Will you be required to remain at the company for a certain period of time and how will you be compensated?

There are many options to explore if your children decide not to work in the family business. The key is choosing an appropriate course early on and committing to the direction you take. In order to protect yourself, care should be taken to ensure that appropriate non-disclosure agreements are in place and agreements are reviewed by legal advisers before being signed.

Proactively considering all succession options well in advance of a sale ensures that you won't have to worry what to do if your kids don't want your business.

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