Attorney Sandy Ard, of the Ard Law Firm, PLLC, writes about Estate Planning, Medicaid Planning, Veterans Benefits Planning, Wills, Trusts, Living Trusts, Pet Trusts, Special Needs Planning, Asset Protection, Elder Law, Farm Trusts and Non-citizen Spouse Estate Planning, Probate & Estate Administration, Business Succession, and Family Business Planning in Houston, Texas, and the surrounding areas.
When you are a family business owner looking to pass the torch, the business is typically your greatest asset and likely the center of the family's wellbeing. You cannot afford to mess this up.
Succession planning is unique because business is business, and so a successful succession is a careful one.
There are a great number of moving pieces to your business and to your family. Nevertheless, there are some basic guiding principles to help tie it all together. A recent article in The Business Journals offers “5 tips for a successful family succession.”
While you should consult the original article for the details, here are the “five tips”:
1. Be Transparent
2. Clarify Ownership Values
3. Plan Ahead
4. Consider Financial and Tax Ramifications
5. Stay Connected
Essentially, respect the family as family and the business as business. Family is here to stay and everyone has to come out on top, while the business requires leadership, sharp decision-making, and a business mindset. It pays dividends to work with the family and maintain transparency regarding your plans to make the “handoff” and their plans to receive.
Ownership is a big issue to clarify, since ownership and a voice in the company straddles that fine line between merely family-owner and head-honcho decision-maker. These may be roles some loved ones are designed to occupy.
What are the issues that most directly affect you and your family? How can or will you work through them to pass on the business?
These are not simple questions by any stretch. More to the point, succession is more a process of working out the solution than just offering up the plan. You might say that succession is always a process unique to each family and family business, but one during which it is essential to have a steady hand guiding the process.
Reference: The Business Journals (December 9, 2013) “5 tips for a successful family succession”
If you own a small business, what will your last day at work be like? What is your exit strategy? The answer hinges on whether your exit will be by design or by default.
To exit your business by design requires coordinating your personal estate with the estate of the business. Oftentimes the two are intertwined. Ask yourself the question recently posed in the title of a recent Forbes article: “How Will You Leave Your Small Business The Last Time?”
Will you sell it? Apparently as many as a third of business owners surveyed by the author planned to do so. However, the business brokerage industry reports a successful sales record of not much more than 20%.
Going to pass it on to the next generation? Some 14% of survey respondents said they were, but only roughly 30% of family businesses actually continue to the next generation.
In either case, the numbers simply do not add up well for casual business exit planning.
Just as you have worked hard to build your business, it seems you will need to work hard to successfully leave it. Accordingly, plan now for that last day or risk losing your investment by default.
Reference: Forbes (November 4, 2013) “How Will You Leave Your Small Business The Last Time?”
If you have come into a sudden
amount of wealth – whether by windfall, asset sale, or inheritance, etc. – then
now is also the time for some immediate asset protection planning.
Structuring your ownership and
protection of those assets is an important step you cannot afford to overlook.
However, such structuring and protecting can get complicated. Much of what you
can do (and cannot do) hinges on the very nature of the assets and the risks
Thankfully, there are some
common strategies worth exploring. Forbes
recently offered six proven asset protection strategies to shield both you and
your important assets.
If you are
pressed for time, here is a capsule summary:
1.Increase liability insurance: insurance is a product to
solve risk, after all, and liabilities are exactly the kind of lightning rod to
2.Separate assets: shared assets, with a spouse or family
members, means doubling the risk on those assets, so separating them into your
own accounts (or entirely out of your estate and control) can shield them.
3.Consider a business structure: the business exists as
an entity that is not “you” and its liabilities are not your liabilities, so
owning special assets (like rental properties) through an LLC or corporation
will work to shield you and your individual assets.
As a business owner, it can be
an especially rude shock to see so much of your hard-earned wealth snatched
away in taxes when you go to sell the business.
bite is a bit bigger these days, too.
So, whatever you can do to
shelter the business sale from taxation can mean a world of difference for your
retirement and even for the whole family. Turns out there are more than a few
important tools at your disposal.
First, why is the tax bite
bigger these days? The American Taxpayer Relief Act of 2012 (ATRA) befriended a
new surtax added through Obamacare and this friendship brought the capital
gains tax up from last year’s 15% to 20%, or even a whopping 23.8% for some
earners. But wait, there’s more.
An extra provision of ATRA is
set to add yet another 1.2% as of the new year. Then add state taxes. It just
adds up, and that is really bad math for you.
While you will want to read the
original article, here are the three ways:
·The ESOP Plan,
·The Qualified Small Business Stock Plan, and
·The C-to-S Corporation Conversion Plan.
Essentially, the plan (as far as
capital gains taxes) is to either find a way to defer the taxation until you
leave assets to your heirs (to secure the capital gains eliminating stepped-up
basis), to fall under a discounted category, or to actually change the form of
the business so as to skate right below that low ceiling.
There are a few more ways of
doing any one or all of these steps cleanly and efficiently, especially with
those with the foresight to plan well in advance.
Succession really is a two way
street. In one lane, it is the king stepping down to name his successor. In the
other lane, it is his successor seeking to prove himself worthy to be the king.
The principal is the same in business, and yes, even in small family
The perennial problem is that a
business requires tested leadership and ability. Unfortunately, real life
experience is a very difficult thing to acquire until you are actually holding
the reins. That noted, few business owners are comfortable handing over reins
even to their own successors.
If you are a would-be-king, then
there are some principles to learn to prove yourself, to stand out, and to step
up to the task on your own. Fortunately, the original article offers some
And then there is the other
side. As the current business owner – king of all you oversee – you also need
to be mindful to give your successor some “playing time” while you can coach
The actual act of transferring
the business can be complicated, for reasons legal and financial. As with any
“dance,” timing is key.
If your family business is worth
keeping afloat, then the successful succession of its leadership is as great a
goal worthy of your time and focus.
There is a right way to sell the
business to your own managers or your own family members, and then there is a
wrong way. Since you cannot live long enough to make all of life’s mistakes,
then it is wise to learn from the mistakes of others.
Essentially, there are two types
of owners when it comes to the sale or succession of their business. First,
there is the one who knows they will sell the business, but procrastinates all the
way up to the bitter end. This is not the owner/manager to emulate, and the
article showcases a proof-positive example.
While you might think your
managers are ready and willing to buy your business, they may have other ideas.
Regardless, they likely will need time to acquire the capital and then
structure their affairs accordingly. If nothing else, managers are not owners
until they start thinking of themselves as such, and a bit of lead time can
instill such a feeling.
But what about the other type of
owner? Again, the article provides an example of an owner/manager who has a
very decided life-goal in place and can therefore work to instill life-goals in
his managers. Accordingly, if you plan for yourself, and allow your managers to
plan for themselves, then you can train managers who can transition into
When the succession planning is
successful, the transition is almost nothing more than economics. True,
sometimes these transitions just do not work out, but it is rarely out of an abundance
of planning or understanding. Instead, more than a few deals fall apart simply
because they are all too sudden and unplanned.
In an economy starting to show
some signs of life, many business plans that have been mothballed are being
reconsidered. As an heir, is it ok to want your inheritance now? As a parent,
is it ok to give it up early? Well, yes to both.
All parties concerned must be
mindful of tax issues, as well as future financial needs that include planning
for retirement, old age, health issues and even the rest of the estate.
The original article explores
the emotional aspects of this issue, too. Indeed, it can be difficult to ask
for an early inheritance and, conversely, it can be difficult being asked for
an early inheritance.
Regardless, whether you are
asking or being asked, you will need competent legal, accounting and financial
counsel to guide you. You do not want the potentially competing dreams of
business success and a secure retirement to turn into nightmares for all