Over the past fortnight we have worked on two succession planning issues for families where a business is to be transferred to one child out of four in each case.
In the first situation the family is doing this as an open discussion and making sure that the child actually wants to acquire the business and understands the financial ramifications. It is important that it is the child’s wish to acquire the business and not that of their parents which is forced upon them or imputed to them.
In that case, the child’s principle concern is financial, ie what happens if they cannot maintain the business as a result so as to enable the repayment of the debt to the parent? This can be handled so that perhaps the debt is limited recourse, but the negative is that then removes a valuable asset for the other children.
Typically, the family business represents a very high percentage of the wealth of Mum and Dad when we come to look at succession issues. If they want to transfer it to some but not all of their children, then it is important that equality between the children is considered.
In the second case it involved a farm as opposed to a family business but the logic is the same. In this case the child that worked the land had got into the ear of Mum and Dad’s independent trustee who also happened to be his chartered accountant. The parents, owners of the land and farm operation, were convinced to sell it to the child at a very concessional price with extremely concessional repayment provisions including that no repayment of the principal was to be made for 10 years. While there was interest to be charged, again it was concessional.
A large part of the value of the farm was being transferred to a child without equal consideration for the other children.
At the last minute, Mum and Dad did realise there could be an issue and arranged a family conference where the whole exercise was sprung upon the other 3 unsuspecting children who to say the least were somewhat gob smacked.
When you are dealing with children and potentially transferring an asset to one of them and not the others, the key concern is to ensure that there is a perception of equality and fairness. Even if there is to be some benefit for the child, in recognition of past service, endeavour or the like, it is very important that this is discussed openly and in a proper forum within the family or it has the potential to divide the family and poison relationships for the future.
Succession will continue to be one of the principal issues for families owning businesses over the next 10 years. With many baby boomers reaching retirement age, what they do with their business is increasingly weighing upon their minds and keeping them awake at night. Do they sell the business to third parties? Do they transfer it to children? What should they do with it?
There is never a right answer to this but what is important is work through a process so the family can see the options and understand the implications of each. As always, we are here to assist.