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When it’s time to think about handing over management of the family business to the next generation, proper planning can salvage a lot of Thanksgiving dinners, says St. Pete corporate, tax and estate planning attorney Rusty Spoor. He recommends starting with these steps.
• Take care of key employees. Some resentment could be natural among veteran employees when less experienced management takes over. Make sure long-term, critical personnel know they’re valued and indispensable to the future of the business. And put your money where your mouth is: make sure they’re properly compensated and incentivized to stay on. You’ll need them.
• Transition external teams, too. Make sure the successor generation is involved in accounting, legal, financial planning and other discussions with outside professionals you’ve depended on to save time, money and taxes while you handle business matters. Ideally, these relationships will support the next generation as well — so make sure external teams have their own succession plans in place.
• Craft a tax-efficient plan to transfer the business. In selling a business to an outsider, the goal is generally to obtain the highest net after-tax sales price. But when transitioning a business to a family member, the goal is different: to maximize global family tax savings. That could involve gifting the business, selling it, or a combination. And there are further complexities; for example: Is the owner’s eventual estate likely to be taxable? If so, it may make sense to create non-voting interests and begin to transfer ownership through gifting. If not, transferring a majority of ownership after death may be the best tax solution. Every situation is different, so it’s best to consult a professional.
• Think through estate planning considerations. Speaking of complexities, this one can be tricky: equalizing the estate with family members not involved in the business. It’s not advisable to transfer ownership in the business to people who aren’t involved. But, many individuals want to divide their eventual estates equally. How do you find assets to equalize distributions? How do you appropriately weigh those assets, knowing that inheriting a business — which takes a lot of work to maintain — is different than inheriting, say, a brokerage account that offers passive income? This is an area in which the outside team of advisors can be particularly helpful.
In 15 years of helping companies large and small through leadership transitions — whether through merger, acquisition or succession — it’s clear that family businesses have their own intricacies. The key to success is to start early, be thorough, consult professionals…and keep your sense of humor. Family trumps everything else.
Rusty Spoor left a large, international law firm in 2011 to open Spoor Law, PA, focusing on corporate and tax law, trust and estate planning, mergers and acquisitions, real estate and other transactional law. He’s helped a number of family businesses through succession and estate planning process.
Click the links below to hear best practices from other families working through business succession and experts who have helped others.
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