It was impossible to live in Massachusetts last summer and not hear the business disputes which have impacted the Demoulas family for generations. What people may not realize is that versions of that drama play out in businesses every day because of failure to plan for the inevitable succession of ownership. Here are some mistakes to avoid, so that your business is not the subject of endless commentary by talk show hosts, and your family members are able to enjoy Thanksgiving dinner together without being accompanied by a lawyer.
Waiting too long to create a succession plan.
A business succession plan must address two primary issues: (1) who should manage the business, and (2) who should own the business. Options include (1) family continuing to own and manage their business, (2) family ownership with outside management, (3) selling the business to employees, (4) selling the business to third parties, and (5) liquidating the business. Each option presents distinct advantages and disadvantages.
Failing to identify future management.
Consideration of the future management of the business must commence early in the planning process and should include open, honest discussion of the strengths and weaknesses of each potential leader. As with Demoulas, the impact of this decision on all of the owners, employees, customers and lenders must be considered.
If there is no obvious leadership candidate within the family, a sale to employees or to a third party might be the best alternative. If there is a clear choice within the family who is willing to assume leadership, it is more likely that the family will retain the business.
In a family business, as you might expect, the most difficult part of a business succession plan is the family dynamic. The best business leader is not always the oldest son. Nor need it be the family member with the most forceful personality. Outside consultants can often provide an objective view of the potential leadership of the business.
Having an unrealistic idea of the value of the business.
Business owners placing an unrealistic value on a company may let the “bird in the hand” fly away. I am aware of a family business that received an offer of $7million for their business – in 2007. The owners (then in their late 60’s) balked, complaining that the price was too low. Recently, the business was grudgingly sold for slightly over $3 million.
Owners should engage a qualified business appraiser to provide an estimate of the actual value, not only for tax planning, but also as a starting point for negotiations with potential buyers. In addition, the right appraiser can identify issues that may impact value but might easily be addressed before the business is offered for sale, enhancing the sales price.
Going it alone.
Refusing to consider the tax consequences of a succession.
Estate taxes alone can claim over 50 percent of a taxable estate once the estate tax exemption is exceeded, frequently resulting in a business having to liquidate assets or assume significant debt to pay the estate taxes at an owner’s death. All transfers of ownership have some tax consequences – gift tax, estate tax, income tax or capital gains tax. It takes time to create a plan that minimizes taxes, while accomplishing a business owner’s goals.
John Colucci of Wenham serves as Managing Director of McLane Law Firm’s TradeCenter 128 office in Woburn. He can be reached at [email protected] or at 781-904-2691.