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Summer 2017 ACROSS THE TRADES
9 5
H
ere’s a tricky question to ponder
while you’re driving to the next
job, or when you’ve got a quiet
moment on site: what will happen to
your tradie business when you retire?
If you’re like most tradies, your
business is probably individually or
family owned. And if you’ve never
considered who will run your business
when you’re gone, you’re certainly not
Robinson Crusoe: studies have shown
that only about 25% of family businesses
have a formal succession plan.
Will your kids take over when you’re
gone? And if so, what’s the best way to
go about it?
In all honesty…
The thought of
passing on the
family business
to your kids is
enough to make
any parent feel
warm and fuzzy.
But as with many
things warm and
fuzzy, cold reality
may intrude. You
need to start with
a dose of brutal honesty: is this what
you really want? Is this what your kids
really want?
If you have ever attempted to sit down
and have a conversation with your child
or children about their plans for the
future, you will know just how fraught
this subject can be. They may be candid
with you. They may not. If they are still
young, their main priority will probably
be just to get you off their back!
That’s the reason why you should
never make assumptions about
transitioning the business to your
children without having an explicit
understanding about what they want. If
this is an uncomfortable conversation
(and it often is), it may be preferable
to ask an independent person, such
as a trusted friend, to have this
conversation and find out what your
children really want.
The other side of the equation is that
you need to be sure of what you want
too. We see many cases of parents
handing over the business to their
kids and then trying to wriggle their
way back in because they haven’t
prepared emotionally for retirement – or
financially either. So think it through
and consult a financial planner. Find out
how much you need to retire and plan the
transition around that. Never forget the
emotional investment you’ve made in
your business. This has been your labour
of love – are you ready to step aside and
find something new to fulfil your days?
Eggs in a basket
I have heard many business owners
say things like ‘we will never sell; this
business is our children’s inheritance.’
However, there are many ways to
ensure that future
generations
are financially
secure that don’t
necessarily
involve giving
them your
business.
This is
particularly the
case if the children
are not ready to
take on running
the business or
have other plans or aspirations.
By passing the business on to your
children, you may be putting all of
their financial eggs in one basket. In
contrast, selling the business and then
setting them up with the sale proceeds
would allow them to spread their risk by
investing in a broader and more diverse
portfolio of assets.
Show me the money
Once you have decided to proceed
with the transition, the next question
that arises is how you conduct the
transaction. Do you give your child
the business? Do they buy it at a fair
commercial price? Or perhaps at a
discount?
While there are many valid exceptions
to this ‘rule’, we generally recommend
selling the business to your child or
children at a fair commercial price, and
supported by an independent valuation
report. This is for a few reasons. First,
if you have multiple children but only
one child is taking over the business,
you’re opening up a real can of worms by
giving that child the business or giving
them a discount. To put it mildly, it is
going to put a strain on any perception
that you’re dealing the other kids a fair
hand – especially if your business is the
main asset in the family. Secondly, even
though you didn’t make any personal
profit on the transaction, depending
how you structure the deal this may not
stop the ATO or State Revenue Office
coming around to take its cut.
For these reasons, it’s preferable to
keep your business dealings with your
children at arm’s length. This means
treating them just like you would treat
any other business associate. Preferably
they should have separate legal and
accounting/financial advisors.
If they are already working in the
business, pay them a fair market wage.
No more, no less. It may sound old-
fashioned, but taking the place of a
normal employee and paying fair price
for the business will give your kids
a far greater sense of achievement
and appreciation of the business than
preferential treatment or a gift.
For similar reasons, we generally
don’t recommend so-called ‘sweat
equity’ – paying a child less than the
market rate on the understanding that
the business will one day be theirs. If
you do this, you are locking in a whole
series of assumptions about what will
happen in the future and, from the
point of view of any other children you
might have, creating a less transparent
state of affairs.
Slowly but surely…
The key to successfully transitioning
a business to your children is to allow
adequate time. Experts recommend
allowing two to three years as an
absolute minimum period to transition
your children into the business and
getting them to the level of competence
necessary to run it.
You may wish to transition the equity
or ownership structure of the business
in line with this process. This is called a
‘staged succession’ and it occurs when
you sell your interest in a business over
time. So you would commence with
100% ownership of your business and
sell it down gradually to your children
over a number of years, transitioning
Once you have decided
to proceed with the
transition, the next
question that arises is
how you conduct the
transaction. Do you give
your child the business?
Do they buy it at a fair
commercial price? Or
perhaps at a discount?