Killing the Family Business

Business Planning

Several years ago when Congress was debating what to do with the federal estate tax, one of the favorite canards of many politicians was that the estate tax was killing the family business. The thing is, none of the studies that were done ever proved that. They consistently showed that it wasn’t the estate tax that kills a family business; it was the family.

Oftentimes the younger generation is ill-prepared or ill-equipped to take over the family business. They are ill-prepared, because mom or dad never take the time to train a son or a daughter to run the business. They never introduce them to the key players. They may be ill-equipped because their personality or skill set is just not suited to running a business. Maybe they can be a critical piece in the puzzle, just not the person who puts the entire puzzle together.

If a child is not prepared to take over the family business, that can spell disaster for the parents’ retirement. It is nearly impossible to get a bank loan to buy a family business without a guarantee. Banks won’t accept a guarantees from a child without substantial assets of their own, so either the parents will have to guarantee the loan or will have to take back a promissory note.

In either case, the parent is at risk of the child’s failure. I recently heard of the case where the parents had to come out of retirement and take a business back from their son when the family business faltered under the son’s management. More often than not, what I see is the parent selling the business to a third party, maybe even a competitor. Or even worse, as in the case of my grandfather’s construction company, the surviving spouse just liquidates the company to be done with it.

There are ways to keep family businesses in the family if that is what the parents want. But it takes some planning. Typically, the people involved need to be evaluated. Maybe some outside players need to be added to create a team. Control of the business will need to be carefully orchestrated. The structure doesn’t have to be permanent, but it can last for the duration of the buyout to make sure that mom and dad can retire in peace and financial security.

This is not necessarily as easy as the sale to a third party, but it may accomplish a family goal. And family goals are important.

As I said, it isn’t the estate tax that kills a family business, it’s the family. But it doesn’t have to be.

Are you a business owner who wants to retire but not sure if your heirs can keep the business going? Or perhaps you want to avoid a fight among siblings to control the business.  Find out the options by contacting Fred today by calling:   (314) 241-3963 or complete and submit the form on the right. 

You haven't worked this hard to build a business without planning for the next steps. Call today!