Three Things You MUST not Forget when Transferring a Business to Heirs

When you start a business and make it successfully over the years, the vision is usually to pass it on to the generations when you become too old to run it effectively or even when you die. This sounds easy. Just transfer the business in the name of your oldest child or get all your children to jointly own the business.

Through estate planning, transfer of non-controlling equity, and steadily bringing the children through board managerial positions, you would be preparing them to take over when you leave. Unfortunately, and unknown to most parents with businesses, transferring a business successfully to the next generation involves a lot more than that.

Let’s dig deeper;

  • Source of funds to buy out the founders

One of the most technical aspects of the transfer to consider is how the children, whose only income and source of funds would be the business, would raise enough money to buy ownership and cash out the founders without bringing the business to its knees.

Usually, the children may not be individually wealthy enough to purchase the business because they too might have been relying on it for all their financial needs. So, to buy the business, they would need to take money out of the same business they intend to buy.

  • Transitioning management responsibilities

Will the founders and managers smoothly hand it over without compromising the quality of management? In most cases, the parent who probably founded the business might be the only one who has ever managed the business from inception.

Perhaps, the children might have been simply working as employees in the company. Now, they have to become managers! Do they even have the management skills to take over the business?

  • Dealing with more than one child

How do you ensure that no bickering ensues amongst your children after the business is passed on to them? What if the children hate each other? How do you ensure that their quarreling doesn’t kill the business? It is entirely possible for them to take a business loan from and disagree on how to pay it, which could cause untold consequences for the business.

All these factors should be taken seriously, and where possible, involve experts to make the transition process smooth.

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