Exit Option One: Transfer to Family Members

Owners who consider transferring their businesses to family members usually do so for a host of non-financial reasons. These reasons may include:

  • They want to put the company in the hands of a known entity - specifically their own flesh and blood – someone the owner believes will care as much as they did and will run the company as he or she did
  • They want to continue to provide for the well-being of their spouse and family
  • They desire to perpetuate the company’s mission or culture
  • They want to keep the business in the community and
  • They might also want to remain involved in the company’s leadership

The major disadvantage to a transfer to family members is the owner’s heightened exposure to financial risk. In almost all cases, family members are incapable of paying an owner the amount of cash they want or need for the company. As a result, owners remain tied to the company’s future financial performance. To mitigate this risk, most owners choose to stay active with the company to ensure its’ (and their own) financial success.

Since family-member buyers have limited financial resources, owners often receive little or no cash at closing. That’s a clear disadvantage to owners who must then convert their largest, illiquid assets (their company itself) into cash for retirement. Realistically, all owners are not blessed with children who share their vision and are able and willing to assume ownership of a company, particularly one that is much larger and more complex than when their parent was their age. Even children who have demonstrated success in managerial roles may not be equipped to assume the responsibility of ownership.

In summary, the disadvantages to an owner of a family transfer are:

  1. Without planning, there is little or no cash at closing available for the owner’s retirement
  2. On-going financial risk to the owner
  3. Requires owner involvement in company post-closing
  4. Children may be unable or unwilling to assume the ownership role and

Family issues complicate treating all children fairly or equally.In terms of advantages and disadvantages, the sale to key employees is remarkably similar to the transfer to family members. We’ll talk more about this exit plan option in our next blog.

Remember, effective planning well in advance of one’s departure date will minimize or eliminate many of these disadvantages.  Contact Covenant Consulting Group if it’s time for you to review your Exit Plan options.