Succession Planning For Your Family Business

What Will Become Of Your Business?

When the president of a large, corporation quits, dies or becomes ill does the corporation fall apart? Not usually. Large corporations have an established hierarchy that is not dependent upon any one person. The structure is in place long before a problem arises to provide for a smooth transition. However many smaller businesses could fail when the head of the company no longer is available to, run the business. Succession planning is the orderly transfer of a business interest for fair market value to others well suited to continue its operation. Generally few thoughts are allocated to replacement of the company “engine”
until something goes wrong. Most focus on the day-to-day operations and urgent business needs as they arise.

How much is a business worth? Many owners perceive no reason to investigate valuation unless and until the business is to be sold. Estate and gift taxation are the predictable consequence of transfer of a business interest at death or by interfamily gift.

Since estate transfer tax may exceed 55% of the fair market value; it is incumbent upon families to understand the mechanics of estate taxation. Few businesses have the financial wherewithal to handle so large an amount of liquidity without planning. Often owners value their business at cost, or book value from financial statements, or at the value of the inventory. The IRS values, and thereby assesses taxes based on fair market value -- what a willing buyer would pay a willing seller. The value of a business may be a multiple of earnings, considering the business type, potential growth, and market conditions. It takes an expert to place a defensible value on a business, to permit planning to take place. Families often underestimate their businesses’ fair market value in relation to taxing authority guidelines by omitting perks and benefits.

Families rarely use coordinated professional planning team advisers in order to coordinate strategies. The business CPA and other “as needed” advisers rarely even know one another making planning for the unforeseen unlikely. Family businesses can be lost; heirs squabble and blame each other for years over differing opinions of “what is right”. Key employees who do not own a business interest should be incentivized toward remaining with the firm even after ownership has changed.

Well managed successful companies to not subscribe to “trial and error” type management. Family businesses should be equally diligent in nurturing and protecting the lifetime investment that most American family owned businesses represent. The operating family needs to take a proactive role in assuring that as many of the perils and unforeseen events that may occur are backed up by a plan to prevent the disaster of business failure. Advisors should be selected based on their knowledge and experience of how to grow, protect and transfer the family business. A management “board of directors” involving the family as well as seasoned successful outside members should be convened periodically to review contingency planning strategies as one would stage fire drills. Many in place advisers do not own businesses of their own or have wide ranging experience to draw upon. . It may be difficult for them take you where they have never been. Seek seasoned experienced professionals, ask hard questions and don’t bet the family farm.

Ray Chodos and Adam Chodos, JD, CPA and are members of the Wealth Preservation Group LLC, a Greenwich, CT based planning group specializing in wealth preservation, business succession, and tax minimization. Www.WealthPreserve.com Email: Chodos@WealthPreserve.com