Be Prepared to Transfer the Family Business

Bigstock-Couple-running-bookshop-13904324Many family-business owners aren’t sufficiently prepared to transfer their businesses. There are several reasons why business transition planning is critical for business owners who want to protect the future value of their enterprise. One element of this preparation is an effective business transfer plan.

Convenience Store News’ recent article, “How to Create a Transferable Family Business,” outlines several concepts that will motivate you to take the necessary actions to ensure your business will be transferable for the value you expect.

Get the Big Picture. You need to keep the business moving in today’s business environment. Define your vision for both the company and yourself, so you’ll have a core for meeting threats head-on. Without it, you may be trapped in your business or not get the value you anticipate when you exit. Be certain that you and your business are prepared for the future. Protect owner value and increase the likelihood of a successful transition to a new owner.

Start the Planning Process ASAP. Commit to an assessment and review planning process, and review your current strategic corporate and personal planning to reveal threats and identify opportunities. There are four steps:

  1. Examine your personal and business goals and objectives.
  2. Ascertain your level of financial and mental readiness.
  3. Consider transfer options.
  4. Review your financial, estate planning, and investment plan to be sure it’s aligned with your transition plan and family wealth plan.

Decide on Valuation Strategies. Determine how much money you’ll need to cash out. Understanding the value of your business and how it fits into your financial and estate planning is vitally important. Work with a business broker and find out what your business is really worth.

Look at Industry Trends. Evaluate the trends in your market to see what future owners may value in a company they purchase. Investigate the competitive position and comparable values in the industry and gather industry intelligence to help with your preparation for making decisions when the opportunities arise.

Calibrate Your Company’s Owner Dependence. The value you get for your business may be based upon the level of control you want to maintain. The less your company depends on you, the higher the value of the company.

Find and Keep Executive Talent. Talented managers can be a real value driver for your company. Look at your key executives rank in terms of skill and ability to operate the business. Be certain you have the best people on staff to help the business grow and motivate them through incentive-based compensation that is in sync with the company’s goals and succession plan.

Leadership and Collaboration. Leverage the expertise of an advisor team to review and make sure all of your planning is on track to accomplish your goals. Investigate goals for the business and strategic issues, like contingency plans for unanticipated circumstances.

In addition to your estate planning attorney, consider partnering with an independent business advisor who specializes in business transition planning.

Reference: Convenience Store News (October 4, 2016) “How to Create a Transferable Family Business”


Don’t Horse Around with Estate Planning and Your Stable

Girl on horseThere’s no one-size-fits-all approach to estate planning. These are personal decisions you should make after carefully weighing all of the options with a qualified attorney. This advice was recently reinforced in thehorse.com’s “Estate Planning Tips for Horse Owners.” The article also gave tips on several important topics to consider when planning for your estate with your horses in mind.
Your horses’ future can be challenging to formulate, but it’s important for a successful transition and for determining and specifying with precision what you want. Selecting a responsible person to be in charge who will make wise decisions for your horse is key. Some racehorses may be sold, which can be done through private sales or at an auction and might result in a greater amount of money for your estate. However, retired or special needs horses might be more difficult to sell or place in good homes. Some owners leave money for their care and designate a beneficiary to receive the horse and those funds.
Similarly, it’s important to be specific regarding who will inherit your belongings. You’ll need to be able to assign an accurate value on items like trophies, saddles and farm equipment.
As far as your land is concerned, you might want to ensure that the property doesn’t end up becoming a shopping mall. A good way to do this is with what is called a conservation easement. This is a legal agreement that limits certain types of uses or prevents development on the land. Conservation easements are helpful in that they include income tax and land preservation benefits. On the downside, the easement can decrease the land’s value and make it more difficult to sell. This limits the potential of its future use.
Negotiating conservation easements can also be complicated, so work with an attorney who is familiar with them to evaluate whether this might be a good option for your estate and your legacy.
If you own an equine business, you need to decide what you want the future of the business to be when you pass away. A qualified estate planning attorney can help you decide what to do and then address all of the related issues.
Once you’ve decided what you want to do when you die, you need to get it in writing. Spend some time with a qualified estate planning attorney and discuss your individual situation to see which options will work best for you. That way you can make certain that your horses, your land and your other assets are handled according to your wishes.
Reference: thehorse.com (July 17, 2016) “Estate Planning Tips for Horse Owners”


Make Certain Your Dynasty Succeeds After You’re No Longer in Power

Bigstock-Extended-Family-Outside-Modern-13915094The Yakima Herald article, "Passing the baton: 6 challenges for family business succession," says that maybe one reason family dynasties are of interest is that they're so tough to achieve. While 88% of family business owners believe the same family or families will control their business in the future, only about 30% make it into the second generation—and fewer than 5% make it to the fourth.
Whether it's a national chain of supermarkets or a mom and pop corner grocery, owners will face several obstacles when seeking to ensure that their business legacy continues with and through their children. Here are some common challenges to consider.
Conflict. Very few—fewer than 25%—of family businesses have done any succession planning. This fuels the potential for disharmony. One of the big reasons not to have a formal succession plan is that it'll cause family conflicts. There are tough decisions to be made—and it's often seems easier to avoid them.
Income. Revenue distribution and work compensation is a potential minefield. When you bring in someone from the next generation to the company, some folks try to combine that person's compensation with their anticipated inheritance. That's no good because it will provide more compensation than is right for the position, creating a family member's inflated sense of worth to the business and angry employees.
Interest and Involvement. An owner with several children may have some offspring who are just not interested in being a part of the family business. Nonetheless, they'll all expect an equal share, which might frustrate those siblings who worked years to make the business successful.
Technology. An owner may be reluctant to accept changes in methods and procedures, resisting new technology they don't understand. But the technological advances that a young generation brings can translate into efficiency and improved profit margins. It's a balance.
Uncertainty. Some business owners postpone succession planning because they think they'll be around for many more years. But illness and death can occur suddenly. With that in mind, the most successful succession plans are typically those that are in place the longest.
Regulation and Taxes. When a business is transferred to a new generation, there can be serious tax consequences. This needs to be part of the plan, especially as an onerous tax burden could force heirs to sell all or part of the business to raise capital to pay the tax bill. That's why business owners need up-to-date estate plans that leverage tax regulations on wealth transfer and gifting.
The most important part of any business ownership transition is to create a strategy well in advance. Review that plan periodically to be sure everything is on track. Regular communication can help avoid any surprises and confusion. Creating a well-thought-out plan gives your business the greatest opportunity to make a successful generational transition.
Reference: Yakima Herald (May 20, 2016) "Passing the baton: 6 challenges for family business succession"


Estate Planning Ideas to Help Business Succession

Tablet with penThe Huffington Post says in "5 Things Estate Planning Can Do for You and Your Business," that co-owners, family members, and ex-spouses can suddenly come out of nowhere to claim some of your successful business. Your company is reduced to nothing in less than a year. However, proper estate planning protects your business in case there are unexpected circumstances.
Estate planning can be used by business owners to avoid unfortunate events and to prevent seizure and depreciation of the business assets. This can decrease the stress and hassles that occur immediately after you die. Here are some good estate planning ideas to help your business.
1. More options for your business. Solid estate planning gives you the option of buy-sell agreement. If your business has one or more co-owners, this agreement ensures that upon the death of any owner, the interest of the deceased is automatically purchased by the other owner(s). The beneficiaries of the deceased owner, such as the spouse, children, or other family member won't unintentionally become owners. This strategy can alleviate some stress in an already stressful situation, immediately after the death of an owner or part owner of a business.
2. Guarantee the longevity of your business. Sole proprietors, small businesses, and big companies all want to pass their enterprises to future generations to keep their legacies alive. Estate planning can ensure the longevity of your business with a business transition plan.
3. Minimize taxes. A business owner can transfer business assets to his or her children and retain a source of income by establishing a grantor retained annuity trust (GRAT). This will help make sure that when business assets grow over time, the appreciation in equity and value of your business will not be hit with huge tax bills.
4. Succession planning for your business. Good estate planning will ensure that your business is preserved and operating the way you'd want it to run. Any issues in the transfer of management and ownership when you're gone are conducted effectively with wise estate planning.
5. Plan for the future. A good succession plan for your business could take several years to create, so start early. This can help you see the bigger picture for your business and present new ideas.
Reference: Huffington Post (March 31, 2016) "5 Things Estate Planning Can Do for You and Your Business"


Think About What’s Next for Your Business

Bigstock-Couple-running-bookshop-13904324"What Are the Essentials of a Business Succession Plan?"

Small business owners will devote much of their time to growing their businesses, but frequently they forget to think about what will happen to the business if they retire, become incapacitated or die. That's why it's critical to have a business succession plan.

Interestingly, business.com's recent post, "The Show Must Go On: The Importance of Business Succession Planning," explains that there are some key underlying factors that determine whether a business succession plan is necessary. In some instances, it's easiest just to sell the business entirely, but other times there are partners who may want the business to continue operating after the founder is no longer involved. After determining if the business has the potential for long-term viability, an owner should have a succession plan that includes selecting a successor and getting the business appraised.

Selecting a Successor

Sometimes a small business owner will select a family member to assume the leadership role. However, you may not know if that person has the skills or experience to make a go of it and ensure that the business will continue to grow. You can't assume your children will want to continue the family business, and there actually may be other business partners or key employees who are better suited to take over. In any event, it's important to select and train your successors in all phases of the business. Then the business owner needs to be able to step aside and let the successors start to make the transition.

The Valuation of the Business

There are three ways to determine the value of a business. Let's look at each one. In the Asset Approach, the value of a business is determined by examining the stated assets and deducting the liabilities. However, this look focuses mainly on the balance sheet and doesn't consider important elements such as market conditions or good will. The Income Approach analyzes business income, requiring a review of past earnings, projecting future earnings and factoring future cash flow and capitalization to arrive at the present or future value of the business. Finally, the Market Approach, which is basically a comprehensive analysis of comparable companies that have been sold in the same industry, accounts for differences in the size, duration, and market risk of the business. An objective evaluation of present or future value of a business requires the services of a business valuation expert such as a CPA with business valuation credentials.

Creating and implementing a well-thought-out succession plan helps business owners in several ways. If the value of the business is determined, there should be no need for valuation in the event of death, and the price for a partner's share can be agreed upon. Also, a succession plan, along with a comprehensive estate plan, can expedite the settlement of an estate if the owner dies.

A well-designed business succession plan provides the opportunity for the fair and equitable transition of the business. In order to do this, your team of advisors should include a CPA, a tax advisor, and an experienced estate planning attorney.

Reference: business.com (January 21, 2016) "The Show Must Go On: The Importance of Business Succession Planning"

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