Passing the business to the kids sounds great, but it has its problems…
- Exiting a Business
- Succession Planning
Multi-generational businesses are great news stories, however, they are few and far between. Passing a business down from parents to children is a great concept, yet very difficult to do in practice. For those looking at passing their business to the kids, we thought you might find it useful if we outline the common problems and challenges, from a practical perspective.
We often find that full market value is not paid in cash, as would ordinarily happen in a normal trade sale. Businesses being handed down to children are often passed at a discount or no upfront value (with the value to be paid as dividends). This may cause cash flow problems for the parents, together with tax issues associated with Capital Gains Tax (market value substitution rule).
Business generally has debt and that debt is often secured by the assets (home) of the parents. When the business transfers to the next generation, we often see issues when the children do not have sufficient security to guarantee the bank debts. This results in the parents needing to keep their house at risk as it is supporting the bank borrowings. This exposes the parents’ house to risk.
Balancing the estate
In situations where there are multiple children and not all of them work in the business, care must be given to ensure that the other children receive an equal portion of the estate. This may be difficult if the value of the business exceeds the value of the house and other assets of the parents.
These problems are not insurmountable, however, care needs to be taken to address these matters before any transfer takes place. Proper planning involving all members of the family, is critical to ensure a smooth and successful transition from parents to children. Before you being this transition, book an appointment with a member of our team to make the process as smooth as possible.