Family Business & Succession

A family-owned business succession strategy is a complex, delicate and often times extremely stressful process. Whether it’s a strategic sale or change in leadership, planning years in advance is not only critical but will help alleviate family conflict. At its core, every family's wealth preservation plan should have a foundation of family cohesion, transparency and trust. A poor family governance system with major disconnects on value, passion and direction reflects entropy and is a recipe for disaster. 

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Business founders can begin the thought process by asking qualitative questions. For example: Will I ask my children to take over the family business? If my family wishes to retain control of the company, will they have the cash flow to maintain their lifestyle? What if I have nepotism concerns if a member is not capable or deserving? What if my children want to be successors but differ in direction? Each of these components are interrelated, and it is important that there is a framework for understanding family wealth, family values and responsible prosperity before discussing quantitative measures. At the end of the day, what legacy do you truly want to leave behind?

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Additionally, to limit potential catastrophic surprises down the line, it’s imperative to have a thorough updated review of the paperwork. When was the last time you’ve received a business valuation? What type of business entity is your family business? Have you examined your operating or partnership agreements? What are the voting rights of non-employee beneficiaries? Although the process can seem overwhelming at first glance, it’s important for owners to surround themselves with domain experts who can not only assist every step of the way, but also understand the sensitivity and gravity of what the transition means the family.

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Transferring Ownership To Children

 

To pass the business ownership and management to family, a succession plan may include:

• Gifts of equity to children, either outright or in trust, in a tax-efficient manner

• Gifts of equity at death along with a liquidity plan for estate taxes

This can often create complex challenges related to family governance, family dynamics, estate planning and the operation of your business. Current estate and gift tax rules can make it expensive to transfer ownership to the next generation of family members. In some instances, it may be helpful to begin to transfer ownership before retirement using gifting or other wealth transfer strategies. 

These include, but are not limited to:

• GRAT’s (Grantor Retained Annuity Trusts)

• IDGT’s (Intentionally Defective Grantor Trusts)

• Outright gifts of shares under the lifetime gift/estate tax exemption

 

The federal estate tax generally is due nine months after the date of death. If the estate consists primarily of illiquid business interests, life insurance funding is a possible solution. Additionally, under current law if the business represents a significant part of the taxable estate, the executor can potentially defer estate the tax and pay in installments over a 10-year period. An installment sale is another option, allowing children to pay the retiring owner with cash flow from the business.

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Again, it’s important to be mindful of the governance and dynamic implications and consider the allocation of equity among family members. Will each child inherit an equal share? Should the equity pass only to the child who works in the business? Business owners should address family conflict issues that may arise based on shared ownership. Whether children will be operators of the family business or passive owners, it is often helpful to understand and manage transfer taxes by implementing planning in advance of significant appreciation in the business. 

 

 

What Are The Exit Options?

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Working with a private wealth advisor, banker and attorney can help owners identify and structure a proper exit strategy consistent with business and personal goals. Potential exit options include a sale to a strategic acquirer/private equity/ESOP, recapitalization or IPO.

If the decision is to sell, owners should incorporate three important steps:

• Get In Order: Confirm that the necessary corporate information is gathered, organized, complete and accurate.

• Maximize Value: Most business owners often view and value their private business much differently than prospective acquirers. It is often up to a three-year process to strategize an exit and adjust accordingly.

• Create An Elite Team: A team of trusted advisors helps to ensure success, maximize value, and manage risk. These typically include: Lawyer, Investment Banker, Trust & Estate Attorney, Private Wealth Advisor, Accountant.

 

For employees or management to continue operating the business, methods of transferring ownership to key employees include:

• Employee Stock Ownership Plan (ESOP)

• Sale To Existing Or New Management

• Gifts To Key Employees

 

A number of governance issues will also need to be settled to ensure that a company can continue to operate effectively: Who are the key employees who will oversee day-to-day operations and serve in management positions? If your family retains a significant ownership stake in the company, will any or all of them participate in management? 

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Sophisticated financial and estate planning requires a blend of personal and business directives that implements tax planning, family governance, estate planning, insurance, compliance, education and an overall clear direction of your legacy. 

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Original article here from Crain Currency.