Family Business Matters 11/03 09:28
Four Ownership Conversations You Need to Have With Heirs
Here are the ownership conversations you should have with your spouse and as
DTN Farm Business Adviser
Multigenerational family farms and ranches face important decisions about
their futures. Some decisions focus on how the business will grow or adapt to
changing markets or new opportunities. Some decisions have to do with who will
eventually lead the business. Yet another set of decisions determines how the
business -- the land, livestock, inventory and equipment -- will be owned in
the future. Here are the ownership conversations you should have with your
spouse and as a family.
1. Who will own the business? There are two levels upon which to consider
this question. The first is on-farm owners versus off-farm owners. Should all
siblings inherit business assets equally regardless of their involvement in the
enterprise? This may solve the parents' goal of treating the next generation
equally, while simultaneously creating problems and conflict by mandating a
business relationship between your adult children who don't work together.
The second level of ownership relates to the differing amounts of time spent
by the younger generation working in the family business. Should everyone own
equal proportions of the business, even if some have worked there longer than
others? Equal ownership may create resentment by those who have invested more
time in the business, but a differentiated ownership structure can feel
punitive to those who were born later and, by no fault of their own, can't
catch up to their older siblings' years of service.
2. How will the ownership transfer occur? Outside of agriculture, small
businesses are often sold to finance the senior generation's retirement. But,
in agriculture, the capital intensity and generational buildup of wealth, the
opportunity for land rent to provide retirement income and the potential estate
tax lead most families to gift assets to the next generation. When families
don't specifically talk about this "gift or sale" question, people end up
guessing or assuming an answer. The assumption of a gift can give an impression
of entitlement. And, with an intended sale of some assets (for example,
equipment), a window of time for tax planning and financial preparation is
beneficial. A conversation well ahead of a transition is helpful to all.
3. When will the ownership transfer occur? If the ownership transition will
happen upon the death of the senior generation, the "kids" who inherit the
business may be retirement age before they become owners. Many family members
resent the fact that when they inherited the business, it was time for them to
consider passing it on to their kids. They never felt like owners. But, if the
ownership transition happens before death, the senior generation may find it
hard to give up control. Finding the right time to start the transition is hard.
4. How do partners get out of business together? When business ownership
transitions from a two-person parent structure to a next-generation sibling
partnership (with in-laws nearby), the odds are high that someone will
eventually want to exit the partnership. A thoughtful approach to potential
exits is one of the best gifts the senior generation can offer. Should a
selling partner's equity be discounted? What terms protect the business while
not creating animosity between siblings? How will assets or company shares be
valued? There are no cut-and-dried, easy answers to these questions, but there
are models and examples that can help you tailor a strategy that fits your
goals as a family business.
These discussions are difficult but necessary, and a "right" answer is
elusive. Your job for many years has been to run the farm or ranch, or to
manage the family assets. Now, your job also includes leading your family
through an ownership transition. Tackling the four questions mentioned here
with help from your professional advisers, if needed, can prepare your family
business for a successful transition.
Write Lance Woodbury at Family Business Matters, 2204 Lakeshore Dr., Suite
415, Birmingham, AL 35209, or email firstname.lastname@example.org.
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