Financial Considerations for Family Businesses with Aging Ownership

An issue that family businesses inevitably face is having an owner who is heading to retirement (or planning on working until “the end.”) At this time, the “what ifs” begin to surface. What if the owner passes unexpectedly? What if there is no successor already chosen? What if no one else in the family knows how to run the business? What if there is no actual retirement plan so that the owner may enjoy financial independence? Money in family matters can sometimes be a difficult subject, especially where death may be part of the dialogue. But with the emphasis on business, financial matters can and should be discussed – the sooner the better.

Following are different aspects of financial planning related to aging ownership in a family business:

Succession plans lead to success. Part of any successful family business is the succession plan. The financial investment of creating and updating the plan itself, as well as preparing for the changeover, is of paramount importance. Having the next generation’s leadership planned out and made known to all relevant parties not only puts all minds at ease, but it also makes for a smoother transition within the business and prevents worried clientele that question the capabilities of the next generation.

Retirement requires more than ceasing to work. Having your own business, perhaps for a lifetime, may mean there is no external source of retirement income aside from the seldom financially satisfying Social Security. If your family business has been particularly successful, you may want to plan gifts, trusts and other forms of transfer of money or assets to a spouse and/or children. This is where you get to voice your opinion of the business you worked so hard to build, and outline conditions that meet with your thinking so that your wishes are followed. Also, early utilization of various retirement products throughout your ownership of the business can provide for a more comfortable retirement. You may need to plan differently for the participating and non-participating family members in the business – part ownership of the business for one, liquid assets for another, etc. Though these decisions are often difficult, they will not become easier if put off or completely ignored. Of course, how the retiring owner receives compensation going forward will require an honest assessment of retirement expectations to achieve financial independence. If the financial outlook for the retiree is not very favorable, sometimes it is necessary to go to this next consideration…

Selling the family business. The plan is typically to pass the family business on to the next generation, but for a litany of reasons this doesn’t always happen. Sometimes the company as it exists with the current leadership does retain value based on product, licensing, existing clients, work in the pipeline, valuable equipment and talented employees. It is best to not be put in the position of having to sell to cover bills post-retirement or death. Instead, a planned sale allows the opportunity to increase the value of the firm and execute a positive selling strategy. A business valuation identifies the realistic market value of your family business. A business valuation specialist can help determine if and how you may reach your personal and financial goals by selling the family business. If the next generation truly has little interest in continuing the family business and there is deemed to be worth in the existing company, it may be in everyone’s best financial interest to sell.

Planning for death and estate taxes. Some families prefer to set succession to allow for retirement, but frankly many first generation owners cannot imagine not being at work, or dying for that matter. This optimism may leave the next generation unprepared for cash flow needed to pay for estate taxes, and may prevent possible savings from having a good estate plan already in place. We discussed estate plans in more detail in our May 22, 2013 post. You may have the option to retire first, but there is no guarantee.

Don’t go it alone. Unless your family business happens to be an accounting firm, make sure you are working with a CPA and likely an attorney and other financial experts as well. Most of the recommendations above require written agreements and a working knowledge of state and federal taxes and laws, which are ever-changing and often complex. Your time is better served running the business of which you are an expert in.

We firmly believe that family business leaders do not wish to put the stress of the financial ramifications of transition on the next generation since it is already so much to handle the grief of losing the leader of both their family and their business. Therefore action must be taken while the most control may be exercised.

Contact me at or 732.747.0500 with questions or to receive a complimentary consultation with our family business advisors.