Passing Down The Keys

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Running a business isn’t easy.

Retailers spend hours upon hours every day at their store. They miss weekends, holidays, birthdays, vacations and more. They do it so their business can thrive.

As a result, the business becomes a part of the owner’s legacy, something they built from the ground up and something that has become successful because of their hard work and dedication. Many times, it also becomes an integral part of the family unit, as retailers build vacations around trade shows, have their kids work the register when they are old enough and teach them about the industry.

So, it’s not surprising that many times retailers don’t want their store, or business, to end with them. Many, look to passing it down to their children.
While this has become a more popular trend, many retailers don’t know where to turn first and who to ask. While every retailer’s situation is different, the most important place to start is with you and your child.

“The first question is, does your child want the company,” Joel Freimuth, president of Blue Pearl Consulting in Chicago, said. “When I say that, I mean does your son want to be the active manager of the company. It’s one thing to keep a company in the family and it’s another to have it run by the successive generation.”

Blue Pearl Consulting specializes in succession planning. It focuses in generation to generation planning of small business owners.

Even though the first question may seem like a no brainer, it’s an important one to start with. When it’s been established that your child does want to take over, it’s time for the current owner to reflect.

“Assuming the child does want to take over the company then we ask the father, or the older generation, what is your vision for the company and are you OK with your child having perhaps a different vision,” Freimuth said. “So it’s a lot of soft talk in the beginning because what derails a lot of these deals, is the older generation is not ready, or not willing, to give up control because they don’t agree with the direction the child will take it.”

One example that Freimuth has seen is the younger generation will want to invest more in technology, while the older generation doesn’t see the use for it. They had built the business without using much technology and they don’t see the benefit of it.

“As minor as questions like that may seem on the surface, they pave the way for the next big question,” Freimuth said. “Which is directed at the child, which is, how are you going to pay for this.  Ultimately if you own your own company, the sale of that company or the transfer of ownership for that company funds your post work lifestyle. That leads to evaluations, is it a lump sum or installment sale, what is the role of the older generation after the sale is completed.”

Right before the deal is finished, Freimuth will bring a lawyer in the last minute to draft a paper which keeps the cost of the transaction very low.

“The lawyer really serves to benefit to the younger generation, it makes it real, it makes it formal,” Freimuth said. “The transfer of stock, on the flip side, makes it real for the older generation and in our experience we have benefited, and the relationships have benefited the most, when there has been a formal signing ceremony.”

Getting a Trustee

Sometimes passing down a business isn’t as easy as one might think. There may be complications that happen in life where the older generation may have suddenly become ill and can’t keep working till the younger generation is ready.
There is the option of a trustee to help run the company during the transition period.

Susan Didriksen, a licensed professional fiduciary in California, is one such person that provides these services.

“What I am finding is that more business owners are wanting to pass their businesses to their children, especially since more children seem to be active in the business,” Didriksen said. “A typical client of mine would have had children later on in life and they themselves start to experience some medical problems. So their financial advisers tell them to set up a trust, they can place the business in the trust and the trust can manage it and manage their interest. Then they would need a trustee to provide that management.

“What I would do then is call the successor trustee, so the business owner is the current trustee, then in the event when they are incapacitated or pass on, the successor trustee comes in and takes over the management. The typical reason a successor trustee can’t take over right away is that they are in college still and are not ready to take over the business yet. So I work with that younger generation to equip them with the necessary skills, and maintain the profitability of the business, so when the certain milestones are reached in the trust, that business can be transferred over to the child.”

Didriksen first suggests talking to your accountant and your attorney to help understand the ways you can structure a trust.

“You’ll want to speak to your tax adviser and your estate planner,” Didriksen said. “Those two people speaking together can come up with ways for you to pass your business along in the most tax efficient manner and with the least disruption.”

For Didriksen, the process of her becoming a trustee starts when she is interviewed by the owner and the owner feels comfortable with her.

“There is a period of time I am involved in the business,” Didriksen said. “I am not acting as trustee or anything but I have to be well versed in that business. I have an extensive business background in finance and accounting but I need to understand how they are operating the business because I am going to step in their shoes and provide that management oversight.”

CPA Help

Bob Brackett, president of Crandall & Brackett, Ltd., is a business valuation expert that participates in 10 to 15 generation transfers a year.

“CPA’s bring cash flow issues to the table,” Brackett said. “Can it work, not work, with the structure. They have been the trusted financial and tax partner to the business owner for years. Thus, when they crank the numbers again and explain the future impacts, they know the emotional issues that are triggers and those at the onset.”

To get ready, Brackett suggests that business owners encourage their kids to work for someone else, somewhere else for a few years.

“They may decide they do not want to work at the old place, they can make their youngster mistakes away from their future work force,” Backett said. “They can see what the real world is like. They might even see other ways to do things that are better or worse than the way it is done at the old place. Then, when the kids do want it, make sure they spend 6 months or more working at each part of the business. On the loading docks, on the production floor, in billing, in collections, wresting with cash flow decisions, such as how am I going to make payroll this week. Who makes what, how to make more, what areas will grow with the kids touch. Work with the accountant to figure it all out then get the attorney to structure it.”

Advice From a Lawyer

Lauren Keenan, an attorney for Bean, Kinney and Korman in Virginia, said the best time to begin planning for the company’s future is right away.

“If you’re a small business and operating even on the smallest scale, if you have at least one employee other than yourself, you should consider what your succession plan is,” Keenan said. “Perhaps you have family that is working in the business with you and you know that they will take over the reins if you can no longer lead the business. If that’s the case, then it’s best to get this in writing and talk with an attorney about how to best accomplish your goals.

“In planning for the future of your business, it’s critical to put it in writing. You need to make clear what your intentions are. In some cases you may transfer your ownership interest into a trust and dispose of shares to family members within that document. In other cases, where there are multiple owners, you may need to have a buy-sell agreement which establishes the sale of one partner’s interest to the other(s). In such a case, you should work with an attorney to determine how to fund such a transfer.”

Keenan said the first step to making the transition of a business a smooth one, is to make a plan and put it in writing.

“First, it’s important to revisit the plan on a fairly regular basis and be sure it’s kept up to date,” Keenan said. “Another thing to consider is introducing your successor to new aspects of the business. If they have been a manager and front of house employee and suddenly may be in charge of finances and other roles that to date you’ve exclusively handled, then it’s probably wise to introduce them to how you handle the ins-and-outs of your business on a day-to-day basis. Whether it’s introducing them to key suppliers or walking them through the books in greater detail, etc., starts to groom them for taking over the business now and the transition will be that much smoother.

“If the transition is imminent you may also want to discuss it with key employees so that they know the plan and they know who will be in charge and that things will not change dramatically if/when you’re no longer able to run things.  The fear of the unknown can be stressful to employees and knowing that someone is ready to lead the future of the business may be a big relief to them.”

Common Problems and Advice

Some general advice from Brackett would be to take it slow, and be deliberate.

“Do not expect the kid to pursue the same clients the parents did,” Brackett said. “Make sure the kid has to suffer the problems of making payroll, chasing clients, dealing with opportunities that are interesting but too big or do not have any money. Talk and share money issues and problems. Do not save it all until you are dead and they have to pick up the pieces.”

When working with different companies and helping them, Freimuth has seen a few issues that hold up the transitions of companies from generation to generation.

“It happens most of the time when the younger generation has a completely different vision,” Freimuth said. “The child has all these ideas but all they focus on in general, and this is a gross generalization, but in general they focus on this idea will bring us more money or this one will make it faster to do business and it’s generally marketing or technology or maybe we will buy another practice or something like that. The older generation will want to put the brakes on, up to and including the point of wanting to hold off on the sale, saying to the child they are not ready to run this practice or business.

“What is really interesting to me is as we work with the child the next 2, 3 or 5 years following, they would come around and say, ‘You know what, my dad used to do business this way and it makes a lot of sense.’”