Wednesday, August 11, 2010

What to do when your kids don't want the business

Viable options are available when you know what to look for

TORONTO, August 11, 2010 /Canada NewsWire/ - A common assumption among family business owners is that one day they will retire and their children will take over the company. Who better to understand the pride, commitment, challenges and needs than those who have lived through its development and growth? But what happens when the children are not interested in working in the business?

"Looking outside the family for an exit strategy may not be something many business owners have seriously considered." said Peter Weinstein, a chartered business valuator and partner at Stern Cohen Valuations Inc. "Once the emotion is taken out of the discussion, business owners realize there are a lot of options available to them."

Stern Cohen Valuations suggest the following advice for owner-managed businesses that need to look outside the family to plan their succession:

Step 1: Take a critical look at your business. Identify if there are any issues to address well in advance of a sale. Key areas to examine are:

The mix of employees to determine how reliant the business is on you and whether there is enough of an institutional knowledge-base;

The diversification of key customers or suppliers, or the establishment of long-term agreements to mitigate this risk;

Which non-operational assets, such as real estate or marketable securities, can be transferred out of the company in the most tax efficient means possible;

Whether discretionary-related party transactions, such as management compensation or real estate leases, have been clearly documented; and

The potential value of the business, assessed in a realistic manner.

Step 2: Identify potential purchasers. If family members do not want to acquire the business, there are two categories of potential purchasers, employees and third parties not involved in the business.

The case for looking at employees: You know them. They have knowledge of the business and experience in its operations. There is the possibility for you, the seller, to stay on in some capacity and it is often easier to arrange an orderly transition over several years.

The case for looking at a third party: Someone outside the business will likely pay more and have greater financing resources. This also allows the seller to walk away from the business more quickly. There is often less emotion as this is mostly a business transaction.

"It is worthwhile to consider both options initially but to decide which option is best early on," said Weinstein. "It is important to plan ahead as each option can take a long time."

Step 3: Once potential purchasers have been identified, look carefully at the deal. This can be done by asking the right questions:

Is the price being discussed reasonable? Analyze the terms of the transaction, on your own or with a valuation expert, to make sure it is acceptable taking into account the risks and opportunities of the business.

Will this be a share or asset sale? Have opportunities for tax planning been considered including the opportunity for the $750,000 capital gains exemption on a share sale?

Will payments be made immediately or over time, and will there be an earn out?
Will you be required to remain at the company for a certain period of time and how will you be compensated?

If your children do not want to work in the business, there are still viable options that may prove to be equally rewarding.

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