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”


Millions of Old Wills Now Online

Bigstock-Attorney-written-in-search-bar-97675253Typically, if someone in the United States wants to see what an old will says, he or she has to travel to the county where the will was entered into probate and ask the clerk of the court to find the will. For very old wills, this often requires searching through microfilm. However, that is changing as millions of old wills are now searchable online.

If you have ever been curious about Herman Melville, Eli Whitney or Daniel Webster's will, it has recently become very easy for you to figure out what they wrote in their wills, thanks to technology.

The well-known genealogical website, Ancestry.com, spent two and half years scanning 170 million pages of old wills and probate records, and put them in an online database.

While many other countries have previously placed the contents of old wills online, this is a first in the United States on this large of a scale. This development appeared in a recent CNN article, "Paul Revere, J.P. Morgan wills among millions now online."

In some ways browsing through the wills shows how the United States has changed. Many of the oldest wills do not even mention the testator's first born son or wife. Why? In the early days of the nation, the law of primogeniture was in effect. Among other reasons, this approach helped ensure that the family farm or business remained in the family, even if a widowed mother remarried. Consequently, the eldest son inherited everything except for a one-third share to the widow.

In addition to legal developments over time, the wills also show the shift from handwriting to typing that occurred in the late 19th and early 20th centuries. Clearly, researchers should make even more interesting discoveries as they continue to study this new database.

For more information about estate planning, please visit my estate planning website.

Reference: CNN (September 4, 2015) "Paul Revere, J.P. Morgan wills among millions now online."


IRS Eyes Estate Tax Changes for Wealthy

Estate-tax-cut-300x203The IRS wants to sharply curtail a favorite tax benefit affecting family partnerships and LLCs. The U.S. Treasury Department is zeroing in on new regulation that would effectively raise the taxable value of assets transferred into family partnerships and LLCs, currently granted a discount. Private bankers are nudging their wealthy clients to get out ahead of the likely new rules and set up such partnerships now, in order to capture valuable discounts while they still exist. Current speculation is that the new rules will be announced in early September.


Any changes to tax benefits affecting family partnerships and LLCs could have significant consequences, according an article in Barron’s titled “IRS Considers New Tax on Wealthy Families.”


The article explains that partnerships and LLCs currently let families pass on a minority stake in the family business or in a pool of privately-held investments to their children with little or no tax consequences. This is because minority shares in a private business are illiquid, or unable to be easily sold or exchanged for cash without a substantial loss in value. They are worth less, from a tax perspective, than their stated market value. This is a big help to families who want to lower the taxable value of their assets, and in some cases below the $5.43 million gift-tax exemption. It also works even if the underlying investments getting passed on are liquid. The discount could be as much as 20% to 25%.


The article gives this illustration: the family business is worth $25 million and is entirely private owned by the family. You decide to pass on a 25% minority holding in it to your daughter via a partnership or LLC. The current IRS rules let you to discount the shares up to 35%, because they are illiquid. This works to your benefit, as the IRS discount means that instead of passing on $6.25 million in shares—and paying taxes—you’re only passing on shares valued by the IRS at $4.1 million. That amount makes the transfer tax free because it’s under the $5.43 million gift-tax exemption.


The Treasury Department has put the estate planning community on notice that this may change and has hinted that new rules on family partnerships could be released before the fall. The rules would restrict definitions and possibly decreasing narrowing discounts for certain assets.


The article suggests that you speak with an attorney if you are thinking about forming or making changes in the organization of a family entity. With all of these changes in the wind, this may be a great time to get going with these discussions, as any stricter rules that are created could be made effective immediately, with the fine details sorted out later.


For more information about estate planning, please visit my estate planning website.


Reference: Barron’s (June 30, 2015) “IRS Considers New Tax on Wealthy Families”


Planning Your Family Business Legacy / York, PA

MP900422638These two experiences taught me a lesson about family businesses. Making a family business a family legacy takes planning and preparation. While each family business has its own unique issues, there are some common strategies associated with succession planning.

Sometimes, passing along your assets to the next generation is simply a matter of passing them along. You just let the gift and the potential represented by that gift be your legacy (emphasis on the “sometimes”). However, when the asset is a business, it is rarely that simple.

A business is not merely a thing. No, a business is a mindset, an activity and, oftentimes, even a lifestyle. It can get complicated. If your legacy is the family business, then with great responsibility comes the need for equally careful planning, preparation and dialogue.

Because every business is different, as every family is different and every individual is unique, what is right for a family business is something to be figured out and understood. That said, businesses have been coming and going for generations. Some have transferred successfully and others less so. Consequently, there are some tried and true strategies to consider when planning for your own family business succession.

Whether your objective is a sale, windup or succession, Forbes has provided a practical roadmap in a recent article titled “Six Steps For Making Your Business A Family Legacy.

Here are the six steps by heading alone:

  1. Give the family a reason to continue the family business
  2. Develop a management team
  3. Structure a business succession plan
  4. Fund the business succession plan
  5. Wealth replacement for other family members
  6. Have a successful business

So what is right for you, your family and your business? I recommend reading the original article and then consulting with your team of professional advisors. Your attorney, accountant, financial planner and insurance agent will each bring a valuable and unique skill set to the table.

For more information about planning your family business legacy, please visit my estate planning website.

Reference: Forbes (February 3, 2014) “Six Steps For Making Your Business A Family Legacy


Family Wealth And Financial Entropy / York, PA

Bigstock-Extended-Family-Relaxing-On-So-13907567The numbers also show that roughly one in three businesses pass to the next generation.  Just about 10% of family businesses pass to the grandchildren’s generation.  Still fewer make it to the subsequent generation.  Regardless of the reasons, family money seems to move away from that which created it.  Among wealth advisors, there is a saying: the first generation makes it, the second generation spends it, and the third generation blows it.

Family wealth created through a family business can be a wonderful blessing for a family. The trick is keeping it through the generations. Far too few families make proper plans to keep the family business going between generations. That is where the real work needs to be done.

Only the big family names (think “Rockefeller”) lead us to believe that family wealth is perpetual. In reality, family wealth left unchecked has a tendency to follow the laws of entropy as it devolves into chaos and greater and greater breakdown or division. This phenomenon, along with some constructive advice, is featured in a two-part Forbes article titled “How The Wealthiest Families Make And Lose Their Money.

The article offers a solid point about the power of solidarity. The family that sticks together stays together, and so it is with the family business and the family wealth. As a whole, the family assets get a single voice, a larger capacity, and even attracts the attention of professional management.  Absent that solidarity, the basic estate laws can effectively and efficiently work to pull apart the assets, the business, and potentially the family’s financial health.

As you read the original article, think about your own family assets. How do you want to pass along your family wealth, whether you have a little or a lot?

For more information about Family Wealth and Financial Entropy, please visit my estate planning website.

Reference: Forbes (February 5, 2014) “How The Wealthiest Families Make And Lose Their Money

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