In previous articles, we explored some of the issues that business owners must consider when selling their business. The steps involved in selling a business can be tricky to navigate; but what if you plan to sell or transfer your business to a family member?

Personal relationships often bring an added layer of complication. Perhaps more than one relative may be vying for control. Perhaps nobody in the family wishes to continue in the business yet the family doesn't want to sell.

Perhaps the original owner and the family members are quarrelling because the owner doesn't want to let go of the reins. It's no wonder that such a small percentage of family-run businesses get passed-down beyond the second generation.

Nonetheless, if planned and implemented correctly, transferring ownership of your business to a family member can be a rewarding process. Positives are that this approach may allow you to continue controlling your business, to rearrange your lifestyle, to take care of estate concerns and to provide an income stream during a full or partial retirement. With ample planning and preparation, you can hand down your business while minimising family feuds.

Preparing Your Family

We recommend that business owners start to think about an exit strategy from the moment that you first open your doors. If you're thinking about passing your business down, you should consider grooming children from a relatively early age. Get them involved with small tasks like cleaning, stocking inventory or filing, running errands, etc.

As they mature, increase their responsibilities and sense of ownership, explain more of the intricacies of the business to them, and begin showing them the value of their efforts to the business. An added bonus, this early mentoring process will make a future transition easy for clients and staff as they get to know and bond with the future owners well in advance of any ownership transition.

One important consideration is that children may have alternative life plans, and it is dangerous to assume that they'll have the same passion for the business as you. Give them the opportunity to get a broad education. A solid business or industry-specific education will be valuable down the road for your business; but it will also give them the opportunity to make their own decisions about taking over the family business.

Avoiding Family Feuds

Here are some important tips to consider that can help avoid or at least minimise conflict during succession:

• Recognise and accept differences. Your heirs may have different management styles, different approaches, and different plans in mind for the business. They may even want to be involved in the business in a different role than you had originally envisioned.

• Take experience and personality into consideration. Your heir can run into potential problems if they don't have the necessary experience or haven't established strong relationships with employees and customers.

• More than one heir? Consider what is equitable. For estate purposes, consider the value of different assets that will be passed down. This may require getting a business valuation done, and even in some cases, having the heir who is taking over the business paying money back into the estate.

Preparing the Business for Succession

Once you have a successor (or successors) in mind, it is time to think about your transition plan. Two major questions to keep in mind are:

1. How will you transfer shares? We've previously talked about the importance of having a buy-sell agreement in place. A buy-sell agreement can be used to establish the framework of the succession and the means by which the shares will be transferred. Consideration should also be given to the issuance of two types of shares — shares with voting rights for your successor, and shares without voting rights for other family members not involved in the business or part of management.

2. What are your tax options? We recommend getting input from a qualified accountant or financial planner, versed in local and — when appropriate — overseas tax law. It is important to note that if family members or you have US citizenship, options including gifting, trusts, outright sales and private annuity sales must be examined from a US and Bermuda perspective, to address the many potential tax and estate planning issues.

Keeping your business all in the family may initially seem like an ideal plan. With careful, proactive planning and the support of a solid team of professionals you can make succession a smooth process.

This article is part of a series reflecting on some of the 'best practice' issues and considerations relevant to owners of privately held companies.

Jennifer Patterson, of Patterson Partners Ltd. also contributed to this column.

Asgill Post provides Business Intermediary Services: Business Valuation and M&A Assistance. For comments or queries, contact Kumi Bradshaw CBA, BVAL via email at kumi@asgillpost.com or phone at 295-3301

Patterson Partners Ltd. provides Bermuda/US cross-border tax, estate and investment planning services. For more information, visit www.patterson-partners.com or contact Jennifer A. Patterson, CFP®(US), CIMA®, TEP via email at info@patterson-partners.com or phone 296-3528.