Baby boomers plan for life after the rigors of business
Tom LockePlenty of baby boomer business owners are taking a hard look at selling their firms, whether it's because they see the grim reaper peering around the corner or they're burned out from running a business for a couple of decades.
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But selling a business typically means lots of planning. If the owner experiences tragedy one day and there's no plan for succession or transition, the value of the business is likely to plummet.
And failure to plan the future of the business after the owner's death can lead to family discord, said John Brown, a Denver attorney and founder and president of Golden, Colo.'s Business Enterprise Institute, which trains advisers in exit planning. It becomes a case of "who controls what and who gets what" and "who did Daddy love more."
There are a variety of exit options.
"One in three of affluent business owners plans to sell the business to an external buyer; another one in three plans to sell to family members; 18 percent of business owners plan to sell in some manner to current employees; the remainder will liquidate and close the doors," wrote Roger Winsby, president of Wakefield, Mass.-based Axiom Valuation Solutions, in an Aug. 27, 2003, article for the Association for Corporate Growth Hub News.
Transferring to family: Ownership transfer to the next generation is fraught with perils and lag time, said David Tolson, who heads his own Denver-based business-valuation firm, CapitalValue. To transfer to either employees or family members typically takes five to seven years, largely due to lack of capital and for tax reasons.
If a company's value is appreciating rapidly, one strategy is to sell it to the children and freeze the value, possibly with the parents providing low-interest financing, said Denver tax attorney Jeremy Cohen. Another strategy is to transfer minority interests in the company, which can cause a discount of 30 percent to 45 percent compared with a majority stake.
Brown also pointed to the advantage of such a transfer, and before a firm is sold. For instance, if a business is worth $3 million, a one-third stake might be transferred for $300,000 rather than $1 million due to the discount assigned to a minority stake.
If family members don't have the skill or desire to run the family firm, an intra-family transfer can lead to huge problems.
Litigation between family members after a transfer to the next generation isn't uncommon, Tolson said. "It's very sad."
