It makes most parents proud to see their children grow up and join the family business and then hand the reigns over to their children. Of course many of these family businesses continue successfully for generations but it may be the next generation that falls on hard economic times or struggles to successfully manage the business and it subsequently falls over.
We have recently been involved with such a scenario which has painfully illustrated this point.
A very successful manufacturing business was owned and operated by a family for three generations. Some years ago the father retired and passed control over to his son. Through poor management and other various factors the company went from making a healthy profit to two years of substantial losses resulting in liquidation.
This impacted enormously on the father who was a self funded retiree. In failing to ‘handover’ the business in a real and legal way, his future is now in major doubt.
In retiring he should have actioned the following when he left the business:
· Resign as a director of the company;
· Receive a payout of his substantial leave entitlements owing when he retired;
· Have his son arrange new credit accounts with suppliers to which he had given a personal guarantee;
· Change the company’s banking relationship which included an overdraft account which was secured to the fathers personal real property which by the time of the liquidation blew out to in excess of $150,000;
· As preference payments were received from the ATO through the liquidation the ATO can pursue the directors personally for the amount of the preference payments recovered.
This means he may end up no longer a self funded retiree, become bankrupt and waiting for the next pension cheque to arrive.
The lessons to learn here is while profits are being made in the family business don’t assume that they will continue after you retire and hand control over to your family members. And most certainly don’t leave yourself and your personal assets exposed to future losses the business may incur once you’re gone. Tie off the loose ends.
For professionals associated with the business, scenarios such as these should be considered as part of good risk assessment practices. There is no doubt that the family would not only be eternally thankful from a financial perspective but also from an emotional one too!