Business Exit Scenarios: Transferring vs Selling

According to a PwC US Family Business Survey of 2019, when a business is making a transition it moves from an entrepreneurial start-up to an organization that’s more complex and structured, which makes the process very difficult and laden with pitfalls. In the same report, only 12 percent of all businesses transferred to family members are expected to reach the third generation while only 30 percent of family-owned businesses will reach the second generation.

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Even worse, around 47% of individuals who own family businesses are planning to retire within the next five years though they lack a plan of succession. Considering the challenges that afflict a business when transferred to a family member, you might want to just sell it and for very good reasons.

Succession plans

Where businesses are sold to family members their longevity is immediately threatened due to unclear succession plans. In 80 percent of businesses that intend to transfer ownership to a family member, only around 19 percent have started a succession plan. Lots of businesses owned by family members do not optimize themselves for growth and success as they transfer to the next generation.

Every family member, especially children, is gifted, driven and unique in his or her individual way. While a specific family member may have business acumen, experience, leadership qualities and education, others may just be good contributors to the overall running of the business but not really good leaders. In fact, some family members might want to be elsewhere and not interested in running a family business. It means that if leadership positions will come up and family members, such as children or close relatives, cannot take them up then the business will be in trouble.

Sometimes even when you want to create a working succession plan the complexity of the transfer and unwillingness of family members to accept roles in the business might make it really hard. Obviously, you’ve grown your business through your own unique gifts, skills and experience that at times are irreplaceable. Most family-owned businesses have long-serving and trusted staff members who may have been significant in the stability and growth of the firm. Ensuring control is transferred to family members who will have the duty of motivating these individuals or replacing them can really affect the future of the company.

In case you don’t really know how to approach succession or how to handle family members unwilling to run the business and showing no interest in it you might want to just sell.

Threatened financial security

If there’s something that threatens the future of a business, its existence and the financial security of the owner, it’s transferring ownership to a family member(s). You’ll be gambling its survival in case the family member is unwilling or incapable of running the business steadfastly and professionally.

Desire to retire and leave others to move the business to the next level might move the business owner to transfer diverse rights such as voting control and decision making to a family member way before they’re financially independent or way before the individual is willing to manage and run the organization profitably.

Such a bleak future could seriously destroy a company that has been built for decades yet selling it to willing buyers could actually save it and create lasting financial security for the seller.

When time is of the essence

Transfer to a family member could take forever more than other ways of exiting a business and receiving the entire full value of the organization can take you a very long time. In fact, if the buyout time frame is very long, the finances of the company owner will be under intense business risk. It means if a stronger competitor, new brand or global and local recession happened they could risk your financial security and existence of the investment.

It might also take very long before the family member is able to bring the company round to a position where the business is making a profit again. However, if you just sold it all these issues won’t matter.

Tax implications and concerns

So many people don’t expect tax issues to be a concern if they transferred their companies to family members. However, this isn’t the case since equity transfer to a family member will still have tax implications. Note that there’s tax consequences related to allowing a family member take up the equity. Since many business owners simply transfer equity without considering the huge issue of tax, the repercussion to the business can be significant.

Related: Tax Considerations When Selling a Business

For instance, in many jurisdictions exclusionary gifting is capped (slightly above $5 million in the US for instance), which means a family member cannot be gifted more than that amount without incurring additional taxes. If gift taxes are significant than they could if you just sold the business the equity value will be thoroughly eroded.

Unforeseeable problems

When it comes to selling private businesses to third parties the process can be tedious, long and complicated. Lots of owners are just exceptional at running their companies though incapable of addressing the diverse complexities associated with the process of selling. In such a scenario, unforeseeable problems cannot be avoided.

The selling process can be quite long. The business need to be professionally appraised, ensure all documents and reports are in order, make sure the fair market of the equity has been negotiated, assure stakeholders of their earnings and stability after exit, drafting all the needed legal documents, among others.

As a result, business owners believe transferring to a family member rather than selling to another entity can save them from such a tedious process, children or relatives, who can show up the next day and take over. What many owners miss is that transferring businesses to family members also include a careful process of ensuring spouses are assured of a comfortable financially-secure future and children are catered for.

It means the owner has to make up their mind on the equity they can afford to let a family member take while ensuring that his future and that of a spouse isn’t in jeopardy. Also to be considered is the fact that the business equity might be transferred or sold to family members who might not have the funds to pay for it. At the same time, potential accruing taxes have to be considered with the business transfer.

Related: Selling a Business During Divorce

Without a solid and well calculated plan critical details will be overlooked and the firm will face serious issues later. If all these concerns are already hard as they’re, selling the business once and for all might be a better idea to save yourself a lot of headache down the line.

Zero interest in running the company

If a successful transfer to a family member is to happen, they must be interested and involved in its day to day operations. However, it might be a good reason to just sell it when you realize you’re aging and the second to third generations aren’t interested in it. It will save you a lot of heartache and panic when you realize one day over dinner that no family member want anything to do with your company.

Also, the family member could die or get sick before a successful transfer or prior to the business fully recovering from the exit of the owner. At the same time, currently uninterested family members might want to take over in later years but the management running the organization might find it hard to let go or lack the vision desired leaving the company in serious problems and uncertainties.

Emotional than financial decision

The decision to transfer a business to a family member and have them run it is largely emotional than financial in nature. Essentially, you probably have controlled the company for decades and grown it to what it is, including creating lots of value and wealth in the process. Naturally, you’d love to maintain your legacy and protect your workforce. Letting the business go and allowing others to come in and take over can be hard if you consider what’s at stake.

You don’t need to force transfer to a family member who will never be you in any way. Clear future uncertainties among your dear employees and family members by selling the company.

Fragmented ownership

Transferring a business to a family member where the ownership is way fragmented, particularly within the family can be dangerous to the stability of the company. It means people will never agree on anything and no decision will be made without a fight. If you don’t discover this early and rectify it on time the situation will get out of hand; transferring to a single family member will cause problems and severe infighting at a time when everyone should be coalescing around the new leader for a successful transition.

However, each of these people would gladly understand and accept a good deal for the purchase of the business. Even if you own the entire organization alone, don’t forget it’s still a family business and there will be rivalries that will stifle decision making processes. You might want to just sell it instead.

You lack the right succession team

As a business owner who want to transfer your ownership to a family member you could find yourself using the team and persons critical in running the company to help you with transfer. Believing that you can rely on such a team can be very wrong and costly.

To transfer a business to your children, for instance, does require that you find proper experts and advisors from diverse backgrounds to transition successfully. This includes a business controller, valuation experts, lawyers, financial advisors, planners of family business and accountants, among other professionals.

Avoid such headache and using a lot of money for a transfer process that won’t bring you any profit per se by just selling the business after the input of all these professionals.

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Family disharmony

Transferring a business to children or other family members can be a trying a moment for the entire family as already noted. For example, transferring the business to children could actually turn over a company to individuals who might have totally different visions about how the company needs to run.

Also, where family members don’t agree with the owner’s selected successor family disharmony cannot be avoided. The family successor to the business might lack the taste, aptitude, drive, ambition and desire of the owner meaning that the company could be disrupted and affected months or years later.

Also, as parents or kin to individuals, people usually overlook certain behavior that would be unacceptable and troubling were it ascertained from successors unrelated to the owner. It’s possible for the owner to brush aside certain things observed in their kin and children that could bar other candidates.

To avoid such potential family disharmony and a wrong successor assuming the management of the business and run it down you might want to just sell it instead.

Conclusion

Fundamentally, transferring a company to a family member should be smooth and efficient. Disagreements professionally within the business may have some effect on the professional life of the owner but transferring the ownership to a family member could have far-reaching and devastating effects on the family and business lives of the owner. Selling it to non-family members is a perfect solution to avoid such dire turn of events.



Published by ExitAdviser |

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