By John Wollenberg, JD, CPA, and Leonard C. Green, CPA, MBA
Editor's Note: Chris McGrath's popular TDN series “Succession” about horse racing-industry businesses passed from one generation to the next sparked this column by Len Green and John Wollenberg.
The odds are frightening that only 50% of family businesses that are successful are passed to the second generation.
Only 10% are successfully passed on to the third generation.
There are many reasons for this and volumes of material have been written on this subject.
But few provide you with the answers on how to successfully do it.
We are going to give you a strategy and business plan to succeed.
We will start by listing:
- The challenges
- The strategies
- Some of the best tools
- Tax considerations
CHALLENGES
Structuring a succession plan should evaluate:
- The current owner's desire to retain control during his or her lifetime and the willingness to transfer interests now or wait until death.
- Weighing the importance of an income stream if transfers are made now.
- The skills and qualifications of the next generation.
- Family dynamics and relationships.
- Equalizing asset transfers to family members who will not be participating in the business.
- The welfare of employees and preserving the goodwill that has been built up.
- A plan to meet the new demands of the business.
STRATEGIES
Discussions and implementation should facilitate:
- Assemble a team of both inside and outside experienced people who have expertise in your business and the industry.
- Compose a business plan with objectives.
- Provide alternative structures and possibilities for discussion purposes.
- Hire an appraiser to perform a valuation.
- Evaluate liquidity needs, including life insurance.
- Discuss a buy/sell agreement with a professional.
CONTENTS OF THE PLAN
Benefits of a written plan would include:
- Provide a blueprint to resolve differences and reach a consensus.
- Establish transitional timetables, including gifting of interests.
- Put in restrictions which could substantiate valuation discounts for minority interests, lack of control and limited marketability.
ESTATE TAX DEFERRAL
In order to alleviate liquidity problems, an attractive provision is available to offer relief from the necessity of a “distress sale” of a business solely to pay estate taxes. By spreading out the period for payment of the liability, the estate tax could be paid from future earnings, enabling the beneficiaries more time to raise funds to pay the estate tax, thereby “keeping the business in the family.” This 14-year elective deferral is available if the decedent owns an interest in a closely held business that exceeds 35% of the adjusted gross estate. The Green Group can work with you to determine whether your estate would be eligible.
For more information, contact Len Green at The Green Group at 732-634-5100.
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