‘We've spent over 20 years building our family business. One of our adult children works in the business and wants to take over; the other works elsewhere. We’d like to retire in the next year or so, but much of our wealth is tied up in the business. Selling would upset our child who works in it, but we’re unsure how to retire and eventually treat both children fairly. We're also unsure if our child is ready to manage the business fully and independently. What should we do?'
This is a common scenario that is likely best addressed with a structured plan that includes your income requirements, ensures fairness (not necessarily equality) between your two children, and protects the future value of the business. It’s likely that several advisors (legal, accounting, family business) may be required to assist.
The Plan could consider the following key topics:
Understand Financial Needs and Value:
Clarify what you need for retirement, what the business is worth, and whether future dividends from the business could help support you in retirement.
This information will help shape options that could help you determine if you can exit, leaving the business in family ownership and your financial requirements met.
Equalisation Strategies:
Equalisation is one of the great challenges when it comes to passing wealth to the next generation, especially when a complex asset such as a business is involved.
There are options, though expert advice is definitely required. Some strategies, include superannuation, life insurance or other assets to provide equivalent value to the non-working child.
A staged ownership transfer or vendor finance could also support your retirement, where the child working in the business pays for some of the business over a period of time.
Support and Oversight:
- Consider establishing an Advisory Board to mentor your child who wants to take over and provide strategic input.
- Set clear Delegation of Authority guidelines, defining what business decisions your child can make independently and what requires your or the board’s approval.
Create a Family Charter:
Document how you’ll transition out, what decision-making structures apply, and how ownership or shareholding will be managed.
The non-working child could be involved via the advisory board or as a non-operational shareholder.
Communicate Clearly:
Be transparent with both children to avoid future misunderstandings and support long-term family unity. Once a high-level plan has been considered, it is often best to start communicating with your children and your decisions will have a major impact on them individually, and possibly on their relationship.
A family business advisor may help provide ideas for how to navigate these conversations.
This approach allows you to consider how best to develop a fair, supported transition and a secure retirement without compromising the family or the business. Remember too that passing a business to the next generation does not require you to pass it with all the benefits that you have worked for decades to create. The next generation may need to make sacrifices in order to take on the business, with you continuing to receive some of the future benefits that you helped generate.
By South Australian-based Family Business Accredited Advisors
James McGill | Chatham Capital
