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Business Succession: No One Size Fits All

Although there are certainly trends in business succession, this doesn’t always mean that the general approach is the best one. Planning ahead and carefully considering the implications of any one choice is the best way to approach this delicate subject. shutterstock_133797656

In the past, it would have been assumed that it’s best to keep the business in the family by passing it along to the oldest child. While there are certainly situations where this is true, it doesn’t mean that it should be your default option. If you’ve seen the hit drama on Fox called Empire, you’ll recognize that succession planning is often more complex than you’ve expected. Communicating with your loved ones and determining their interests and talents is part of the equation, but don’t count on this being your only or best option in the process of succession planning.

In fact, 83% of business owners expect that the family will still own the business in 5 years. In reality, only one-third of them are right. Your future intent has to be clear when it comes to business succession planning. Factor in all the possible outcomes and the desires of the other stakeholders involved to make the best possible decision. If you’re ready to start the conversation about business succession planning, contact us at info@lawesq.net.

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Benefits of an Annual Business Protection/Continuity Planning Review

Business owners are continually focused on managing risks, expanding the company, and enhancing profitability. As your company grows, it’s especially important to look at your vulnerabilities on a yearly basis to evaluate the plans you already have in place as well as future plans you may need. canstockphoto8307303

One of the primary reasons to do this every year is that your tolerance for risks you’ve identified in the past may have shifted, opening your eyes to new challenges. There are a few key questions you can ask during this annual assessment for risks and vulnerabilities, including:

  • Have you taken any actions during the past year to reduce some common risks?
  • Have your risk environment changed due to alterations in your facility or surrounding location?
  • Has the environment changed such that previously identified “low risk” concerns should now be a higher priority?
  • Has the external environment altered to impact your profitability or existence, like new transportation types, regulations, or population changes?
  • Has the structure or size of your company changed such that you may want to reconsider the internal structure and the tax implications associated with it?
  • What challenges have you found yourself facing as a business owner, and can outside experts help you manage those challenges?

Business protection planning is an important part of being able to succeed over the long run. To meet with our planning specialists for your first annual review meeting, get on the calendar by reaching out to info@lawesq.net.

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Structuring Your Business Succession Plan With Taxes In Mind

If you feel overwhelmed or confused by the process of business succession planning, you’re not alone. In fact, this is a common challenge facing many of America’s business owners. To further complicate matters, many business owners are not informed about the possible tax implications of a succession plan they choose. This is why it’s so important to choose a business succession advisor who is familiar with the implications for both your business and your tax situation. shutterstock_223513792

One common mistake made in the process of business succession planning is to sell all or a portion of the stock to your children. This can have negative tax consequences that you didn’t realize when you put the plan into place. For example, if you use a stock purchase agreement or a stock redemption agreement that required insurance on the owner’s life in order to provide company stock to someone else, the IRS could collect estate taxes on that amount if you don’t structure everything with details in mind. While life insurance can be an important part of your overall estate planning, it might not be the most appropriate vehicle to pass on company stock to your children. A trust or other business succession planning strategy may be more aligned with your business needs while also taking into account the tax implications of such an action.

The bottom line is that you need a business succession planning advisor who is familiar with creating a comprehensive strategy aligned to your needs. Contact us today to learn more at info@lawesq.net.

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Family Business: Steps to a Viable Succession Plan For Your Family Business (Part 2)

There is no doubt that working in a family business can be rewarding, but it might also come with some challenges. With regard to succession planning in particular, here are some of the top tips you need to consider when multiple relatives are coming to the same table on a family business.

Family Business: Steps to a Viable Succession Plan For Your Family Business (Part 2)
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  • Make clear goals and objectives. Getting everyone on the same page with where the business “is” and where it’s “headed” is not easy, but you can bring things full circle by thinking about common goals and visions.
  • Create a process for making decisions: Don’t rely on the way you have always done it as a family. You may need more formal structure and written explanations of how decisions are to be made. Don’t forget to factor in your methods for resolving disputes. This can save you time and hassle in the future.
  • Generate a comprehensive succession plan that determines active and non-active roles for family members, establishes successors, and determine if additional support for that successor will be required from other family members. Documenting everyone’s role makes it easier.
  • Have both a business and owner estate plan. Don’t forget one or the other, as they are both important in a family business. Think about minimizing taxes and protecting assets together.
  • Determine the most appropriate avenue for transition. There are numerous options for buyouts or agreements, and this is something you definitely want to discuss with an attorney.

To learn more about how we can help clients with proper succession planning for a family business, call us at 732-521-9455 or send an email to info@lawesq.net.

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Steps to a Viable Succession Plan For Your Family Business (Part 1)

Are you planning to keep the Family Business “in the family”? Did you know that family businesses now make up as much as 50 percent of the gross domestic product of the entire country? We’re not just talking about small storefronts or website companies, either. Over one-third of Fortune 500 companies are controlled by families in some sense. It’s critical that as a small business owner, you plan ahead for the future with a succession plan. Here are some of the most common issues facing small business owners with a family connection.

Steps to a Viable Succession Plan For Your Family Business (Part 1)
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  • Align your family interests: As members begin to retire or hand off control to other generations, the interest alignment of these individuals becomes all the more important.
  • Generational transitions: Think about the future, because only one third of all family businesses actually end up passing the business on to the second generation. You might want to have alternative plans.
  • Interfamily disputes have the potential to dominate family-owned businesses especially when perception of needs is not lined up between key players. This becomes even more complicated when there is a death or divorce involved.
  • Retirement income: A buyout agreement doesn’t have to be complex, but it is harder to do with a family business because retiring individuals might be more focused on a balance sheet rather than an earnings capitalization model.
  • Estate and inheritance issues: While individual planning is important, there should also be plans in place that relate to the business.

All of these issues are just a sample of concerns for those involved in a family business. Contact our office today to learn more about our Business Succession Planning practice. Email info@lawesq.net or contact us via phone at 732-521-9455 to get started.

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Risky Business? Manage that Risk: Captive Insurance Companies

A captive insurance company is a company created by a business owner to help insure risks of affiliated businesses. When set up appropriately, a captive allows a business to manage risks while allowing the affiliated company to reap benefits, too.

Risky Business Manage that Risk Captive Insurance Companies
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A Captive will receive premiums that are then invested as opposed to premiums sent to a traditional unrelated insurer, which are essentially “lost”. Over time, those premiums accumulate. In the event of a risk loss, the premiums are available to be paid for those self-insured losses, thus protecting the business’s bottom line. This crucial benefit is the biggest advantage for business owners.

A Captive can issue casualty or property insurance to protect against a broad array of risks. Where the business owner has the most potential to capitalize on this opportunity is through risk protection for those risks that are typically too expensive to coverage or uninsurable, period. With possible major tax increases coming in the future, the Captive Insurance company remains situated as one of the most effective solutions for business owners. Captive Insurance benefits go beyond tax advantages by providing business owners with opportunities in wealth transfer, estate planning, and asset protection, too.

At Shah and Associates, we work with you individually to determine how a Captive can best suit your business needs. With vast experience in the field, we have helped our clients use Captives to minimize taxes, protect assets, manage risks, and improve cash flow. We understand the peace of mind and confidence that comes from a comprehensive approach to risk management, and that’s why we remain committed to the business community.

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The Business Owner’s Parachute: Get Your Exit Plan Ready

While “now” is always the time you should start getting your exit plan ready for your business, there are some guidelines about specific year marks that you should use to think about what will happen next. Here is the best advice for exit plans.

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Starting ten years in advance is the best way to maximize opportunities. This is because at this marker, you can start really considering whether the business is intended as a family legacy. If a family member will be taking over the business, the ten year period is a great planning point for incorporating those family members into training and education. Ultimately, this will make the transition period much smoother. Saving taxes is another primary concern at this stage. If a business owner has recently converted the company from C Corp to S Corp filing status, you should wait a minimum of ten years before selling the company.

Five years out is a good place to review because you are a little closer to the finish line here. Cash flow, tax deduction, and tax leverage should all be explored with your planning specialist at this time. Changes regarding cash flow can allow for a strategy in which cash flow to the owner is a focus rather than company growth.

Finally, even one year out provides planning opportunities. For example, we have implemented strategies which could save the Seller the entire [9% – 13%] tax some states collect upon the sale of a business. If the company will be sold, the owner should identify a business broker or investment banker to actually put the business on the market. This gives enough time for a due diligence review, drafting the sales agreement, and delays related to regulatory issues. No matter what stage you’re at, you need to put some planning tactics in place for your exit plan. Contact us today at 732-521-9455 or email info@lawesq.net to get started with your personalized plan.

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Now What?: Dealing With Remorse After Selling A Company

Most entrepreneurs have the same idea; build their company and then sell it for big bucks.

But most owners who do that usually end up staying with the firm for a few years after the sale is consummated. What they don’t necessarily expect are the mixed feelings they have, according to an article in the New York Times.

Family Business Awards 2011-68
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First, they may feel uncomfortable as a “soldier” rather than as a “general.”

Second, their strengths are often in starting up the company – making something from nothing.

Third, even if they are ready and willing to be a good soldier and carry on the work they started, they may feel uncomfortable in the new culture of the new bosses.

Fourth, they may not like the changes that are being made to their “baby.”

In many cases, the sellers find they cannot stay on as planned. Some are able to make the adjustment.

The article says owners who plan to sell their businesses but stay on should give some thought to whether that is likely to be a good idea. Basically, let the seller beware.

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Keys To Selling Your Family Business

There are plenty of challenges to running a successful family business. But they can look like a hop, skip and a jump compared to the challenges associated with passing your family business along to your children or other relatives.

English: Pugh's Garden Centre A family-owned b...
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Only 33 percent of family owned businesses survive the transition from first generation ownership to the next, according to an article in the Vail Daily.

Why so hard?

In some cases, it is because no one in the family is interested in taking the business over.

But more often it is because there no good succession plan in place.

To come up with a workable succession plan, you must collect the thoughts and opinions of all family members as to who wants to be involved and how. You must know who wants to do what kind of work.

You must also discuss retirement goals for family members, cash flow needs and the goals and needs of the next generation of management.

Key decisions, of course, include who is going to be in control and who will eventually own it.

Your succession plan could be based on setting up a family limited partnership, where you, as the general partner, control day to day decisions, but over time sell off shares to family members. Eventually you give up control to who is ultimately going to run it.

Or you could set up a buy-sell agreement, which allows you to name the buyer — it could be one of your children — and establish a price. Then your child could buy a life insurance policy on you and eventually use the proceeds to buy the business.

But there are many strategies that can be considered. Best to consult an attorney with expertise on business succession and business buying and selling.

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Minding Mom & Pop’s Shop: Five Steps to the Succession of Your Family Business

Succession planning for a family business is often no easy task. Recently, an article in Forbes outlined the five necessary steps for a viable succession plan. The five steps include:

English: Demise of a family business? Coulson ...
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  1. Planning for the general transition of the business: The article notes that only one third of family businesses successfully make this transition.
  2. Creating a plan that aligns the family interests: This is important because the succession of a business must serve many family goals. Not only must it pass the business on to the next generation, but it must also provide a retirement income for the current owners.
  3. Creating a buyout agreement that balances financial returns: Often it is difficult to value a family business. While the retiring owner may look to the balance sheets for the value, the real value of the business is often based on a model of earnings capitalization.
  4. Creating a succession plan that quells any potential interfamily disputes: Often, interfamily disputes can spell the end of a family business. These disputes are most typical where the interests of all family members are not aligned. Pay particular attention when there is a divorce or death that leaves a non-involved family member stock.
  5. Avoid potential estate and inheritance issues, such as tax and probate delays that may hold up the succession of the business.  
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Make Sure Your “S” Is Covered: Estate Planning Considerations for S Corporations

It is important for those who hold shares in an S Corporation to carefully plan for the distribution of those shares. The stakes for these transfers are high, as a faulty transfer may result in the inadvertent termination of the corporation’s S status. A recent article discusses several considerations to make when planning for the transfer of S Corporation shares.

Individuals or entities such as estates or certain types of trusts may hold shares in an S Corporation. The types of trusts that are qualified to hold S Corporation shares include grantor trusts, qualified Subchapter S trusts, electing small business trusts, testamentary trusts, and voting trusts. All other trusts are considered to be non-qualifying shareholders.

If a shareholder’s estate plan inadvertently transfers his or her S Corporation shares to a non-qualifying shareholder, not only will the S Corporation be inadvertently terminated, but corporate level taxes may be triggered on the other shareholders. To avoid this fate, it is important to review your estate plan to ensure that your plan does not transfer S Corporation shares to a non-qualifying trust. On the other hand, the right kind of trust can be a powerful tool to achieving Estate Planning, Asset Protection & Business Succession Planning goals.

S Corporations can also work to avoid costly missteps by employing shareholder agreements, which provide that the shares may only be transferred to qualified shareholders. Additionally, S Corporation shareholders should carefully monitor shareholder trusts to ensure that the trusts remain eligible to hold S Corporation shares.

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The Difference Between an LLP and LLC

In order to transfer assets to the next generation, some people may choose to use an LLP or LLC. Both of these are legal business arrangements that can be implemented into any estate plan.  A recent article discussed the differences between the two.

An LLP, or limited liability partnership, is a general partnership. In this type of partnership, ownership of the business is split between the partners. Profits from the business are distributed based upon the percentage ownership of each owner. An LLC, or limited liability company, is a partnership wherein owners are issued shares of stock. Profits from the business are split between the owners based on their share of the stock.

The use of an LLC or LLP may be beneficial for those Americans who have estates valued above the federal estate tax exemption, are seeking asset protection, or both. This is because these devices lower the value of the entire estate by dividing ownership of the business between yourself and your children. Moreover, if you gift a portion of your LLC or LLP to a child, that gift can be discounted by 20 percent or more for purposes of the federal gift tax exemption. By giving such gifts, you increase the value of your allowed $14,000 gift by 20 percent.

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Surprise! You Now Own a Business! When There Is No Succession Plan

By creating a succession plan, a business owner can determine what will happen to his or her business once he retires, becomes incapacitated, or dies. Often, succession plans can mean the life or death of a family business. A recent article discussed the story of clothing company Bari Jay, which was passed on to the owner’s daughters without the benefit of a succession plan.

The article profiles Susan Parker and Erica Rosenberg, who are co-owners of Bari Jay. The two sisters became owners of the business suddenly when their father unexpectedly died. According to Parker, their father never even informed them that they would be inheriting the business. Moreover, the sisters did not work at the company at the time of their father’s death.

The sisters faced many problems when they took over the business. Not only was it in the red, but they also lost a key employee who was not willing to partner with the girls. Rumors quickly spread around the company that, soon, it would no longer exist. Although the transition was rocky, the business continues to thrive. Too often, however, this is not the case.

If you own a family business that you plan to pass on to your children, take time to create a succession plan. Be sure to discuss the succession plan with your heirs, as well.

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When the Conference Table Meets the Family Dinner Table

Often, succession plans for family businesses only consider the technical aspects of the business. However, it is just as important to consider the softer sides of the business. A recent article discussed the importance of creating a succession plan that considers the technical, as well as soft aspects of a family business.

When engaged in succession planning, most family business owners focus on the technical elements of business planning. This is important, as business transfers carry significant tax and legal implications. However, the technical elements of the transfer should not be the business owner’s sole concern. Business owners need to also consider the “qualitative aspects of leadership, communication, and control over decision making.”

One business owner set his company up for failure when he ignored these considerations when he passed his company evenly on to his five sons. The owner left no outline for a decision making structure between the sons. The business quickly fell apart, as the sons had no clear sense of direction and engaged in a power struggle.

In order to plan for the softer side of a business transfer, it is important to create a plan that will manage family relationships. Through this type of plan, the business owner can dictate a decision making structure for his or her successor children to follow. Such a plan can help avert disaster when successor children disagree about leadership and direction.

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After Success, Don’t Forget About Succession

The amount of work required to start a business, make it successful & keep it growing is substantial.  Unfortunately, the business owner isn’t done even when all that has been accomplished.

There are many challenges to developing a successful succession plan for your small business. Common challenges to succession planning include fear, confusion, uncertainty, an undefined action plan, and dysfunction. A recent article discusses how to overcome some of these challenges.

Many succession plans are hindered about uncertainty regarding the economy, as well as the success of the business itself. To best shield the succession plan from uncertainty, be sure to hire the best employees possible for the transition. Moreover, attempt to lock in key employees who are vital to the businesses continued success.

An undefined action plan is particularly harmful to a succession plan because it can lead to gaps in ownership and poor follow-through. It is important, therefore, to integrate the succession plan into your strategic plan for the business. To keep the plan on track, consider documenting expectations, creating a timeline, and crafting ways to measure success.

Lastly, dysfunction is often rampant with family business succession. Although this may be hard to avoid, consider communicating every aspect of your plan with your heirs. Be sure that your children understand the reasons for the decisions you have made, and listen to their concerns and opinions.

Importantly, remember that there is no standard solution for every business. If your business succession plan should stall, seek help from an experienced attorney or financial advisor.

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Estate Planning for Business Owners: Make it Salable

Many business owners do not have a plan in place to sell their business. Therefore, when it comes time to sell the business, approximately 80 percent of businesses are not salable. As a recent article explains, businesses are not salable because “they offer no strategic fit to a buyer.”

It is therefore vital for business owners to put a strategy in place that will protect the business by ensuring that, when it is time to sell, the business is salable. The author suggests crafting such a plan at least five to seven years before you plan to sell the business.

Before considering whether your business will be salable, it is important to determine what personal goals you have for your life beyond the business, and determine how the business can help you reach these goals. For example, if you determine that you need $7 million to retire, but your business is only worth $4 million, you will need to determine a way to close that gap by increasing the value of the business. Increasing the value of the business may also make it more attractive to potential buyers.

If you decide that you want to transfer the business to a key employee or family member rather than sell it outright, the buyer may not have the funds necessary to purchase the business outright. In this case, you will need to have a plan in place that will assist the new owner in determining how they will get paid from the cash flow of the business.

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Succession-Planning: Separate Ownership & Management

A succession plan is an important tool for any business owner who wishes his or her business to continue on after his or her death. Essentially, a succession plan allows a business owner to dictate who will take over the business and under what terms after his or her death. A recent article discusses one major mistake that many business owners make in this process.

In the process of succession planning, the current business owner must consider the ownership and management of the business. These two areas are “different, but inextricably linked.” The mistake that many business owners make is that they attempt to deal with both ownership and management simultaneously. This decision to deal with these two facets combined often proves to be risky.

There are a multitude of reasons why ownership and management should be dealt with separately. First, changes in both areas may become quite complex. There may be many internal and external stakeholders with expectations for each role, which would be easier to manage on an individual basis. Secondly, dealing with these areas separately reduces decision-making pressure on all parties. Moreover, it allows you to address each separately, with more clarity and objectivity.

Considering ownership and management separately allows a business owner to create workable solutions for a successful transition.

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Lacking a Business Succession Plan? You’re Not Alone

An alarming number of business owners do not have succession plans for what will happen to their businesses when they retire, die, or become disabled. Financial professionals expect the demand for business succession planning to grow as the baby boomers continue to age.

When creating and growing a small business, many business owners never think of succession plans. However, all small businesses should have a plan for succession if they want their business to continue on after they are gone.

As with any part of a business, the earlier you create a succession plan, the better your chances that the plan will be successful. With such a plan, you can not only decide who your successor will be, but exactly how the business will be transferred. Moreover, a solid succession plan can assist you in transitioning into retirement.

The first key step to creating a succession plan for your business is determining how profitable the business may be after you are no longer running it. Along with this consideration, consider what steps you need to take in order to keep your business profitable. You also need to think about what your ultimate goals for the business are, whether you want a family member to run the business, or whether you want to sell it to a key employee.

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Equalizing Inheritance for Your Children

When one estate planner hears his business-owning clients say, “I love my kids equally, so I want to share my assets equally,” what he actually hears is, “I don’t know how to handle this, so when I’m gone, I’ll leave the business to the kids and let them sort it all out.”

The article in Forbes goes on to state that clients who truly want their business to continue to grow and thrive after their death, but also want their children to succeed in whatever career path they have chosen, should speak with an estate planning attorney about logically equalizing their children’s inheritance.

One potential method of inheritance equalization is through life insurance. Using this strategy, one can set up their estate plan so that, upon their death the children who would like to take an active role in the family business inherit your stock in the business, while those children who have chosen another career path receive monetary inheritance equivalent to the value of the stock through life insurance death benefits and other non-business assets you hold at the time of death.

Through inheritance equalization, parents can create equal and equitable transfers to the next generation.

 

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