Exit Planning Archives

Bringing Adult Children Into the Business

Nicole Sithithavorn Blog, Exit Planning Exit Planning, Family Business, Small Business

What, in fact, constitutes a family business? The definition covers any enterprise operated by two or more family members, ranging from a local pizzeria to a newspaper empire. That description covers so much ground that 90% of businesses in the United States are considered family-owned, but according to Success magazine, fewer than 15% survive to the third generation. How can your family business beat the odds?

The good, the bad, and the challenges

There are ample benefits to involving your children if you apply realism and caution. In a best-case scenario, kids and parents can combine resources and capabilities to complement one another. The younger generation may bring energy, contacts and a technology-savvy approach. The parents can provide potential capital and a lifetime of work experience. At the same time, older generations may face age discrimination, while the younger ones struggle to find jobs and start their careers.

Both sides share the benefit of familiarity, trust and an understanding of overall objectives. It is noteworthy that today’s boomer generation typically experiences a more adult relationship with their children than previous generations did. Nowadays, for financial reasons, living at home with parents is common among the 18-34 age group.

But your own children may not fit the bill to take on the responsibilities of the business. They may appear to lack interest in following in the family’s footsteps, be ambivalent, or demonstrate no commitment. At this point, they may not have acquired the necessary credentials or qualifications, and there is no guarantee they will eventually do so. A conflict of interest might arise if they choose to sell the family business in order to reap a windfall sooner.

Some parents hope that a role in the family firm could provide a lifeline to wayward offspring and give them a head start to thrive. Sadly, that does not usually happen, especially if the child lacks the proclivity for hard work.

Setting up sons and daughters for success

Start the succession process as early as possible. First, you can sense who has the right aptitude and passion. If you are including your children at the early stages, be clear that you are still the decider-in-chief when it comes to planning your own financial future. By that point, hopefully, you will have inculcated the paramount values that matter most in life and business and schooled your kids in the importance of honesty, effort, responsibility, communication, organized planning, negotiation and compromise.

Encourage your children to work outside the family firm first to gain additional experience.

It is simplest if only one child is involved. Otherwise, you may need to select one — possibly, but not inevitably, the eldest. Letting multiple children compete it out might risk discord and postponements. Alternatively, you could establish a family board or council to encourage cooperation, especially if they display different skill sets.

Make sure to obtain an independent fair market valuation for the enterprise. One route is to separate buildings from the operating company, keeping the real estate as an investment for rental income. Another option is to spin off the equipment into a separate company and lease it back to the business.

To help finance your retirement, you might also sell the business to your child, or underwrite the sale yourself, and let them repay you over time. If you keep at least a 51% share in the business, you can maintain decision-making control. Spell out all loan details in writing and adhere to IRS interest rate rules. It’s best to hire professionals to handle all legal and financial issues.

Best practices

Document everything, from roles, responsibilities and partnerships to compensation and exit strategies.
Conduct all business at the office, not at the family dining table, which would be unfair to nonfamily employees.
Hire from outside the family too, but treat them like family and promote them based on merit with consistent standards and training.
Avoid perceptions of favoritism. Don’t allow your children to take advantage by working fewer hours or avoiding duties.

Show professional respect all around. A time may come when you have to defer to your child, but if you’ve invested the time and strategy systematically early on, the transition will be that much easier for all involved.

Exit Planning for Business Owners

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Whether your business is a start-up or a mature business, exit planning–including winding up the company–should be part of your overall business plan. That may sound counterintuitive, but the fact is that no one knows when they may have to leave their business.

Exit Strategies

Not including an exit strategy in your business plan is understandable when your focus is on growing your business. But exit strategies not only protect against unforeseen events, such as the sudden illness of a company leader, but also provide a clear succession strategy or plans for an orderly closure.

When you really think about it, building the elements of an exit strategy into your business strategy makes good business sense because it enables you to prepare for most contingencies.

Practical Considerations

Following are some practical considerations:

Recordkeeping. All tax and accounting records must be well-maintained and up to date. Have at least two years of records ready to be reviewed.
Company manuals. Keep written documents that memorialize all of the processes and procedures at your company. These manuals should include your company’s human resources policies and procedures as well as job descriptions for all employees.
Cybersecurity. Cybersecurity is a high priority for all businesses. Investing in protecting your business from hackers is critical. Implementing internal controls like requiring dual authorization and regular password changes will help protect your company’s digital assets
Intellectual property (IP). Acquiring, protecting and managing items like proprietary software, licensing and other agreements is important. Failure to do so may affect your ability to transfer your company’s IP to a buyer.
Compliance with laws and regulations. The most important thing you can do to ensure ongoing compliance with the laws and regulations affecting your business is to put a monitoring system in place that alerts you to due dates and deadlines. Your business will run more smoothly as a result.
Elevator speech. Have an elevator speech ready so you can easily talk about what makes your company great. What makes it different than its competitors? What makes it more valuable?
Strategic outlook. What needs to be fixed? What can you do to make your business better? If you’re a start-up, think about what would make your business more attractive to investors. If you’re a mature business, focus on increasing the business’s value.
Sound advice. Don’t be afraid to ask for an outside opinion. Sometimes it takes an objective analysis to see what’s in front of you.

Know the IRS Closing Rules

If you’re closing a business, you have to follow IRS procedures:

File a final return. The type of return you file – and related forms you need – will depend on the type of business you have.
Pay employment taxes. If you have one or more employees, you must pay them any final wages and compensation owed. Also, you must also make final federal tax deposits and report employment taxes.
Report payments to contract workers. If you have paid any contractors at least $600 for services, you must report those payments.
Cancel your EIN and close your IRS business account. To cancel your EIN and close your IRS business account, you need to send the IRS a letter with the complete legal name of the business, the business EIN, the business address and the reason you wish to close the account.
Keep records. You should keep records relating to any property disposed of as well as records of employment taxes.

The bottom line: Have a well-planned exit strategy from the start of your business. Keep in mind that sometimes your exit from the business will be triggered by something outside of your control. The objective is always keeping yourself ready for the unexpected. In that sense, having an exit strategy is an extension of running a well-managed business.

For insight into preparing your company’s exit strategy, contact us today.