Transferring the Business 

 to Your Children 



Michael Sciabarrasi 

 Extension Specialist, Agricultural Business Management 



PLANNING FOR THE TRANSFER of your firm's 

 assets is one of the most difficult, yet important, 

 activities dealt with by a family business. As with 

 any long term planning, you start by assessing the 

 present situation, defining future objectives and 

 identifying the alternatives to achieve those objec- 

 tives. Good communications among all family 

 members and a clear understanding of everyone's 

 personal and family goals are critical for successful 

 continuation of business operations between genera- 

 tions. 



ASSESSING THE PRESENT SITUATION 

 Initial assessment of possible business transfer re- 

 quires deciding whether you and one or more of 

 your children should try to run the business to- 

 gether. Don't assume your child can't "afford to 

 pass-up" the opportunity. Instead, you should be ad- 

 dressing questions such as: 



• Are your son or daughter (and his or her spouse) 

 willing to commit substantial time and effort to 

 the business? 



• Are all family members able to work and 

 manage a business together? 



• Is the business profitable enough to provide an 

 adequate living for everyone involved? 



• Is there potential for future business growth? 



• Are your willing and able to transfer business 

 property and shift management responsibility to 

 your child over a reasonable time period? 



Honest answers to these questions will give you 

 and your children some indication of the possibility 

 of running a successful business together. If the in- 

 dividuals involved are uncertain of the answers to 

 these questions, a testing stage may be necessary. 



The testing stage should last about 2 to 3 years; 

 it should not be indefinite. For this time period, 

 you may simply enter into an agreement with your 

 child to pay him or her a reasonable wage plus an 

 incentive (year-end bonus) for above-average perfor- 

 mance in a specific aspect of the business. In some 

 family situations, the agreement may call for more 

 involvement by the child during the testing stage. 

 Arrangements where the child provides some per- 

 sonal property for business use, such as a pickup 

 truck and equipment, as well as labor, are common. 

 If your child already has a separate ongoing busi- 

 ness, sharing labor, machinery or facilities may be 

 appropriate during the testing stage. Eventually, 



those involved must make a decision to continue 

 operating the business together and plan for transfer 

 of business property or to go their separate ways. 



Assessing the present situation also involves tak- 

 ing an accurate and complete inventory of all real 

 and personal property you own and the associated 

 debts and liabilities. The inventory should include 

 an estimate of the fair market value of each prop- 

 erty and identification as to how the property is 

 owned (i.e., sole ownership, joint tenancy, tenancy- 

 in common). Joint ownership may have a restrictive 

 effect on your plans to transfer business property to 

 a child. Since many family-run businesses are 

 closely held, it is important to note whether an as- 

 set is considered for business or personal use (or 

 both) and which members of the family are listed 

 as owners. Wills, trusts, and other estate planning 

 documents will need to be reviewed and probably 

 revised once you have decided upon the means of 

 transferring business ownership. 



DEFINING FUTURE OBJECTIVES 

 Objectives should describe the overall intent and 

 means of transferring business ownership. Shifts of 

 personal property and management responsibilities 

 are usually the initial steps. The long-term goal 

 should be to transfer interest in business real es- 

 tate. Targeted and acceptable income (wage) levels 

 for you and participating children need to be identi- 

 fied. You should also identify the anticipated time 

 required to accomplish the objectives. The amount 

 of time will depend, in large part, on the relative 

 ages of participating family members and on the 

 size of your business. Although many parents who 

 own small businesses are able to transfer a major 

 portion of business property to their children prior 

 to retirement, complete transfer of all business 

 property may not occur until both parents' estates 

 are settled. 



As you establish objectives for transfer of the 

 family business, remember to consider the effects 

 on all family members. How will your decision im- 

 pact spouse(s)? Do you need to address the needs of 

 children not involved in the business? Lastly, be 

 certain that your plans allow you and your spouse 

 to maintain a secure financial position during re- 

 tirement and upon the settlement of each other's 



continued on next page 



December 1992 & January 1993 

 15 



