2 key questions when passing on the Family Business

When is the ideal time to pass on the reins of the family business to the next generation? We’ve picked out 2 key  questions to help with Family Succession Planning. Often it’s simply a case of getting it done before it’s too late.

If passing on the business to your children is high on your agenda, you should be contacting us at Potts & Schnelle to talk through the process. We have helped numerous families through this transition from a wide variety of backgrounds.Trying to pick the best time often raises more questions than answers. Let’s look at two of the key questions.

Firstly, are the kids capable of running the business?

This is often the first hurdle that needs to be overcome by the parents. Passing on the business means handing over the reins of control. So, you want to be confident that the next generation can handle the task.

The best solution to this is to start early in educating the children. Encourage them to learn from you, from others and even to gain experience and/or qualifications from afar. Then actively mentor them into the role by sharing decision making responsibilities and trusting their judgement, massaging their involvement into the managerial role. Once they are competently managing the operations, it’s easier to confidently hand over financial control too.

At the end of the day, if you don’t think they are up to it, better to make that call and send them off on a different path and support them in a different endeavour, rather than risk the loss of the business and the inherent wealth that you have built up.

If you are the child and your parents are not giving you the chance you feel you deserve in the family business, then, maybe you should set off on your own and ask for some financial support. Alternatively, actively encourage them to let you be involved more in the managing and decision making of the business operations, whilst still giving them space to gradually let you build their trust.

It is important, if the children are keen, to give them a go, but it is also important to ensure that they get good training and mentoring to ensure a greater chance of future success.

Secondly, how much should they pay me for handing over the business/farm?

The starting point on this one is to determine what you could realistically get if you were to sell to an independent third party. Then you need to decide what, if any, you expect the child(children) to pay you instead.

A factor that may influence this is whether you have been paying them proper market value wages for the work they have put in to date and for how long that has been happening. If you have underpaid them, then arguably, this amount should be deducted from the purchase price.

Another factor is to consider other children in the family and how the passing on of the business will impact your ability to help them financially in the future. It is a good idea to keep some resources personally that can be shared amongst other children either now, later or via your Will.

Of course, a major influence is to decide how you are going to pay for your own ongoing living costs if you pass on the business. You may have already set aside enough wealth in, say, superannuation to cover your future needs, but if not, the children may give you a lump sum now, or pay you off over time. Alternatively, they may agree to pay you a wage, or rent, or to contribute to your super on an ongoing basis into the future.

At the end of the day, whatever Family Succession Planning arrangement you come to needs to be affordable to the children and sufficient to you to justify the decision to pass the business on to the children instead of selling out to an external party.

If you want expert advice about passing on your Family Business contact us on: 02 6033 2233