Middle-market business transitions are rarely simple, and family dealership transitions are among the most complex.
Typically, a dealership begins after one family member opens a dealership and then decides to add more over time. Indeed, successful dealers say the best way to expand wealth in the industry is to increase the number of dealerships held.
As the number of dealerships grows, so too does the number of family members involved in the business. An owner’s children may decide to work in the business and some might even make it their career, while others may choose to work in another field.
As their children become adults, dealership owners begin to wonder how they can plan for the succession of their business and the distribution of its assets amongst their children without risking the business itself or family relationships.
When owners have multiple dealerships and several children working in the business, they ask, “Should I put my children in business together, should I separate the dealerships and divide them amongst my children, or should I just sell the business altogether?”
When owners decide to keep the business, they want to know how to provide for their children with other careers.
Take Marty, for instance. He started with one dealership and now has five, with a combined worth estimated at $150 million. Additionally, Marty owns the land where the dealerships are located, which is worth a combined $50 million.
Outside of the business, Marty has about $10 million in assets, including a $3 million home and a $3 million beach property enjoyed by the entire family. But most of his wealth—like the airplane available to all family members—is tied up in the business.
Marty has three children. Alton and Betty grew up working at the dealerships and want to continue working in the family business. While they have quite different personalities, neither can run the business alone. The third child, Carl, is happy with his own career outside of the business.
Marty’s total estate is $210 million, or $70 million per child. He has three goals: expanding the dealerships under the family name, giving each child a fair share of the wealth, and doing so in a way that maintains family harmony.
However, accomplishing these goals may become complicated. For example:
- If Marty divides his estate by three, there aren’t enough personal assets for Carl to receive an equivalent value to that of his siblings without including some business interest.
- If all three children receive a third of the business assets, the dealerships may suffer if they disagree on business goals. Moreover, Carl may resent salaries paid to his siblings and they may resent him for taking a third of the profits when he doesn’t contribute.
- If Alton and Betty can’t run the business together, there isn’t an even number of dealerships to divide between them and the dealerships may lose value by not being part of a larger group.
- The airplane and beach home may present a source of conflict if certain family members lose access to an asset they’ve enjoyed for years.
And so, Marty is left with two crucial questions: “How do I treat each child fairly? And does the division have to be equal to be fair?”
Eight key points for a succession strategy
- Interview your children to determine the intent and desires of each. Do they want to work in the business? Can they succeed together? Can they manage the business as a whole?
- Educate your children about what it means to be in business together.
- Explain how assets are not equal. Why might a fair share not be an equal share? Why is $20 million in cash not equivalent to a dealership valued at $20 million?
- Set clear expectations on what your children must do to maximize the benefits of your plan.
- Involve your children in the business so you can mentor them, assess their capabilities, and examine their ability to work together.
- Guide your children on managing their own personal financial lives and assess their ability to use the business’s assets responsibly.
- Set a plan for children not involved in the business. If your children can work together but don’t all want to work in the business, consider including the other children as non-voting owners, communicating clearly what they might receive based on your projected growth strategy.
- Consider alternative ways to pass value to children who aren’t working in the business. You’ll need a different approach for a child who doesn’t want to be involved with the business or whose involvement would disrupt the family dynamics or the business. Consider options like a life insurance policy, a dividend recapitalization to extract value, selling a business asset (including one or more of the dealerships), or prolonging a growth strategy for the business to keep that child’s inheritance on par with the other children. Discuss your approach with your child, showing your commitment to a fair—but not necessarily equal— distribution to a child who has chosen to pursue other opportunities outside the business.
What are the keys to creating a successful plan?
- Time - Allow enough time to prepare the proper strategy. A succession plan is neither created nor accomplished overnight.
- Education – Ensure you and your children have a thorough understanding of the options available within your business and outside of it so you can structure an appropriate plan.
- Communication – Set clear expectations for your children, make sure they understand your approach, and get their buy-in at every step of the process.
- Flexibility – Make your plan flexible enough to accommodate changes in your business operations, family dynamics, and personal goals of your children.
The Truist Business Transition Advisory Group has helped many dealership owners prepare and successfully transition their businesses, breaking through roadblocks with an integrated approach that leads to success and peace of mind for owners and their families. Developing a transition that supports both the needs of your business and your family ensures your hard work will provide for generations to come.