Does anybody know of a business succession planner? We are at the early stages of passing/selling a 3rd generation business on to the 4th generation. We have a large legal firm involved, that has always helped us with these matters, but it really feels like they are trying to reinvent the wheel… and are starting this from scratch… when we feel this has had to have been done before by some family-business and that there has to be more of a template. We are looking for a planner that has experience in this and can tell us how this should be done. Any suggestions would be appreciated.
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Small Business Succession Planning
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Last: 3 hrs ago by Ag-electric
I assume you already have a solid CPA? If not I highly recommend. If they're not in lockstep with whatever the attorneys draw up it can wreak havoc.
Also ask your banker as that may have a wealth management group that has people that can help guide the attorneys. Which bank do you have the business with? Same as personal? I might know if they have a group that could help you.
And when you say small business are you talking:
Small - sub $50 million in annual revenue or
Middle market - $50-500 million in annual revenue
Sounds like attorneys wanting to rack up the hours.
And when you say small business are you talking:
Small - sub $50 million in annual revenue or
Middle market - $50-500 million in annual revenue
Sounds like attorneys wanting to rack up the hours.
I bought the family business several years ago. This is roughly how I'd do it if I was doing it again.
1. Everyone decide what you want - DO THIS INDEPENDENTLY
Everyone take a homework assignment to write down everything that you want to get out of this deal. What would be a great deal for YOU? Be selfish. Especially in generational transitions people probably want very different things. Usually the older generation is looking at estate planning concerns, taxes, security for retirement. The younger generation probably wants cash now to fund their lifestyle, control and autonomy over the future of the business, freedom to take risks.
You can also be emotional here. Maybe the older generation wants to make sure the younger generation is getting a good deal. To me it was important that I was paying a fair price for the company and not getting a handout (I was the only one doing the deal and I didn't want to be unfair to my brothers).
Here are some things that might get your thoughts going:
- Taxes
- Liquidity
- Ongoing income
- Legal protection
- Influence and control
- Ongoing participation from older generation
- Ability to pursue future opportunities
- Estate planning
- Fairness to family not involved in the deal
Someone in this process (probably whoever is currently running the business) needs to do this on behalf of the company. What does the business need? What does a great deal look like from the perspective of the employees and the customers? In this realm probably think about continuity, working capital, clarity about who's in charge, etc.
2. Compare notes and sketch out a good deal
Assuming everyone is friendly you can probably do this on your own. If you're not all friendly then you could find someone to mediate. If you see any objectives that clearly conflict you can talk it out. This wasn't an issue for me but some of my friends have suffered from differing ideas about how involved the older generation would be and on what timeline.
Your goal here is to put together a sketch of what a great deal looks like. Get on the same page. Is it more important to be tax efficient or transition at fair market value? Does Grandma need to have some kind of ongoing income after the deal is over? What timeline is acceptable, both for control and ownership?
3. NOW you're ready to find someone to help
I think there's a big difference between saying "we want someone to help us transition" and presenting someone with a sketch of your ideal outcome and asking for help with that. Also, I think you'll find that your version of a great deal will give you an idea of who should be leading the charge. If your plan is very heavy on tax strategy, maybe a good CPA tax advisor is the right person to turn your rough draft into something. If there are a lot of legal constraints around your business transition (contracts, lots of risk the new owners would potentially inherit, complex leadership transition that requires an ironclad operating agreement) then maybe the lawyers need to take the first look.
At a minimum you'll probably need a CPA tax advisor to weigh in and a business lawyer. Who goes first probably just depends on what you're looking for. Personally I say if you have a lawyer who wants to weigh in on tax strategy or a CPA who wants to weigh in on legal stuff, they aren't the right partner.
1. Everyone decide what you want - DO THIS INDEPENDENTLY
Everyone take a homework assignment to write down everything that you want to get out of this deal. What would be a great deal for YOU? Be selfish. Especially in generational transitions people probably want very different things. Usually the older generation is looking at estate planning concerns, taxes, security for retirement. The younger generation probably wants cash now to fund their lifestyle, control and autonomy over the future of the business, freedom to take risks.
You can also be emotional here. Maybe the older generation wants to make sure the younger generation is getting a good deal. To me it was important that I was paying a fair price for the company and not getting a handout (I was the only one doing the deal and I didn't want to be unfair to my brothers).
Here are some things that might get your thoughts going:
- Taxes
- Liquidity
- Ongoing income
- Legal protection
- Influence and control
- Ongoing participation from older generation
- Ability to pursue future opportunities
- Estate planning
- Fairness to family not involved in the deal
Someone in this process (probably whoever is currently running the business) needs to do this on behalf of the company. What does the business need? What does a great deal look like from the perspective of the employees and the customers? In this realm probably think about continuity, working capital, clarity about who's in charge, etc.
2. Compare notes and sketch out a good deal
Assuming everyone is friendly you can probably do this on your own. If you're not all friendly then you could find someone to mediate. If you see any objectives that clearly conflict you can talk it out. This wasn't an issue for me but some of my friends have suffered from differing ideas about how involved the older generation would be and on what timeline.
Your goal here is to put together a sketch of what a great deal looks like. Get on the same page. Is it more important to be tax efficient or transition at fair market value? Does Grandma need to have some kind of ongoing income after the deal is over? What timeline is acceptable, both for control and ownership?
3. NOW you're ready to find someone to help
I think there's a big difference between saying "we want someone to help us transition" and presenting someone with a sketch of your ideal outcome and asking for help with that. Also, I think you'll find that your version of a great deal will give you an idea of who should be leading the charge. If your plan is very heavy on tax strategy, maybe a good CPA tax advisor is the right person to turn your rough draft into something. If there are a lot of legal constraints around your business transition (contracts, lots of risk the new owners would potentially inherit, complex leadership transition that requires an ironclad operating agreement) then maybe the lawyers need to take the first look.
At a minimum you'll probably need a CPA tax advisor to weigh in and a business lawyer. Who goes first probably just depends on what you're looking for. Personally I say if you have a lawyer who wants to weigh in on tax strategy or a CPA who wants to weigh in on legal stuff, they aren't the right partner.
Many years ago, I was down on Padre Island at a CPE seminar and one day the class dealt with succession planning. Back then the exemption amount was $600,000 or so and the top rate was higher, thus it was a huge deal.
I mentioned something we had done that I called "dying on the vine." This client owned a construction company, homes, commercial buildings, schools, and churches. Structures. He had been in business for over 30 years, did good work, well known, great reputation, and he had grown children involved in the business. The old man had a lot of money and his children were fairly well off for their ages, both from what they earned working for him and real estate they had bought and sold. Over time, one son really preferred bigger projects like schools and commercial stuff, another son preferred home building.
Dad wanted to retire, but didn't want to sell the business to them because he didn't want to pay a boatload of tax, he did not need the income, and if he gifted them his business there would be a lot of gift tax due. Rather than sell or gift the business, each of the boys set up their own company, and if someone came in wanting to build a commercial property, the old man would tell the client that he no longer was doing any construction, but son #1 was doing commercial construction now and had been doing it for him for 15 or 20 years anyway. He was just now out on his own. Office was right down the hall. If someone came in wanting to build a house, same scenario, son #2 was now doing the home building just as he had been for 15 or 20 years, office was right down the hall.
No transfer of the old business was done, no sale of the old business was done. The old man basically went out of business, it died on the vine, and his sons began to do what the dad used to do, in their own businesses rather than as employees of dad.
There was an IRS agent attending the class and he objected to that strategy, said we couldn't do that. But he could produce nothing to support his contention of course, lol.
I mentioned something we had done that I called "dying on the vine." This client owned a construction company, homes, commercial buildings, schools, and churches. Structures. He had been in business for over 30 years, did good work, well known, great reputation, and he had grown children involved in the business. The old man had a lot of money and his children were fairly well off for their ages, both from what they earned working for him and real estate they had bought and sold. Over time, one son really preferred bigger projects like schools and commercial stuff, another son preferred home building.
Dad wanted to retire, but didn't want to sell the business to them because he didn't want to pay a boatload of tax, he did not need the income, and if he gifted them his business there would be a lot of gift tax due. Rather than sell or gift the business, each of the boys set up their own company, and if someone came in wanting to build a commercial property, the old man would tell the client that he no longer was doing any construction, but son #1 was doing commercial construction now and had been doing it for him for 15 or 20 years anyway. He was just now out on his own. Office was right down the hall. If someone came in wanting to build a house, same scenario, son #2 was now doing the home building just as he had been for 15 or 20 years, office was right down the hall.
No transfer of the old business was done, no sale of the old business was done. The old man basically went out of business, it died on the vine, and his sons began to do what the dad used to do, in their own businesses rather than as employees of dad.
There was an IRS agent attending the class and he objected to that strategy, said we couldn't do that. But he could produce nothing to support his contention of course, lol.
bagger05 said:
I bought the family business several years ago. This is roughly how I'd do it if I was doing it again.
1. Everyone decide what you want - DO THIS INDEPENDENTLY
Everyone take a homework assignment to write down everything that you want to get out of this deal. What would be a great deal for YOU? Be selfish. Especially in generational transitions people probably want very different things. Usually the older generation is looking at estate planning concerns, taxes, security for retirement. The younger generation probably wants cash now to fund their lifestyle, control and autonomy over the future of the business, freedom to take risks.
You can also be emotional here. Maybe the older generation wants to make sure the younger generation is getting a good deal. To me it was important that I was paying a fair price for the company and not getting a handout (I was the only one doing the deal and I didn't want to be unfair to my brothers).
Here are some things that might get your thoughts going:
- Taxes
- Liquidity
- Ongoing income
- Legal protection
- Influence and control
- Ongoing participation from older generation
- Ability to pursue future opportunities
- Estate planning
- Fairness to family not involved in the deal
Someone in this process (probably whoever is currently running the business) needs to do this on behalf of the company. What does the business need? What does a great deal look like from the perspective of the employees and the customers? In this realm probably think about continuity, working capital, clarity about who's in charge, etc.
2. Compare notes and sketch out a good deal
Assuming everyone is friendly you can probably do this on your own. If you're not all friendly then you could find someone to mediate. If you see any objectives that clearly conflict you can talk it out. This wasn't an issue for me but some of my friends have suffered from differing ideas about how involved the older generation would be and on what timeline.
Your goal here is to put together a sketch of what a great deal looks like. Get on the same page. Is it more important to be tax efficient or transition at fair market value? Does Grandma need to have some kind of ongoing income after the deal is over? What timeline is acceptable, both for control and ownership?
3. NOW you're ready to find someone to help
I think there's a big difference between saying "we want someone to help us transition" and presenting someone with a sketch of your ideal outcome and asking for help with that. Also, I think you'll find that your version of a great deal will give you an idea of who should be leading the charge. If your plan is very heavy on tax strategy, maybe a good CPA tax advisor is the right person to turn your rough draft into something. If there are a lot of legal constraints around your business transition (contracts, lots of risk the new owners would potentially inherit, complex leadership transition that requires an ironclad operating agreement) then maybe the lawyers need to take the first look.
At a minimum you'll probably need a CPA tax advisor to weigh in and a business lawyer. Who goes first probably just depends on what you're looking for. Personally I say if you have a lawyer who wants to weigh in on tax strategy or a CPA who wants to weigh in on legal stuff, they aren't the right partner.
This is excellent. As an attorney, i wish many came for help with this already mapped out. This will save you a ton in professional fees and ensure the Parties' interests are accounted for.
bagger05 said:
I bought the family business several years ago. This is roughly how I'd do it if I was doing it again.
1. Everyone decide what you want - DO THIS INDEPENDENTLY
Everyone take a homework assignment to write down everything that you want to get out of this deal. What would be a great deal for YOU? Be selfish. Especially in generational transitions people probably want very different things. Usually the older generation is looking at estate planning concerns, taxes, security for retirement. The younger generation probably wants cash now to fund their lifestyle, control and autonomy over the future of the business, freedom to take risks.
You can also be emotional here. Maybe the older generation wants to make sure the younger generation is getting a good deal. To me it was important that I was paying a fair price for the company and not getting a handout (I was the only one doing the deal and I didn't want to be unfair to my brothers).
Here are some things that might get your thoughts going:
- Taxes
- Liquidity
- Ongoing income
- Legal protection
- Influence and control
- Ongoing participation from older generation
- Ability to pursue future opportunities
- Estate planning
- Fairness to family not involved in the deal
Someone in this process (probably whoever is currently running the business) needs to do this on behalf of the company. What does the business need? What does a great deal look like from the perspective of the employees and the customers? In this realm probably think about continuity, working capital, clarity about who's in charge, etc.
2. Compare notes and sketch out a good deal
Assuming everyone is friendly you can probably do this on your own. If you're not all friendly then you could find someone to mediate. If you see any objectives that clearly conflict you can talk it out. This wasn't an issue for me but some of my friends have suffered from differing ideas about how involved the older generation would be and on what timeline.
Your goal here is to put together a sketch of what a great deal looks like. Get on the same page. Is it more important to be tax efficient or transition at fair market value? Does Grandma need to have some kind of ongoing income after the deal is over? What timeline is acceptable, both for control and ownership?
3. NOW you're ready to find someone to help
I think there's a big difference between saying "we want someone to help us transition" and presenting someone with a sketch of your ideal outcome and asking for help with that. Also, I think you'll find that your version of a great deal will give you an idea of who should be leading the charge. If your plan is very heavy on tax strategy, maybe a good CPA tax advisor is the right person to turn your rough draft into something. If there are a lot of legal constraints around your business transition (contracts, lots of risk the new owners would potentially inherit, complex leadership transition that requires an ironclad operating agreement) then maybe the lawyers need to take the first look.
At a minimum you'll probably need a CPA tax advisor to weigh in and a business lawyer. Who goes first probably just depends on what you're looking for. Personally I say if you have a lawyer who wants to weigh in on tax strategy or a CPA who wants to weigh in on legal stuff, they aren't the right partner.
This is by far the most important step and I'd add that bringing in an independent facilitator for that step is highly advisable, especially in a family situation. Happens in family ag operations all the time, and there is a good set of folks who have stepped into that facilitation role.
Often, the pursuit of tax avoidance costs everyone happiness and satisfaction in the long term. Sometimes it's best to just pay them.
This is exactly what we are planning on doing.
It also creates a break in liabilities... keeps the next generation from having the burden of any liabilities that we may unknowingly have hanging out there.
My partners and I all still have 10-20 years left before we would all be ready to completely leave/sell the company.
The next generation consists of 11 kids with age ranges from 25 to 6 years old.
Our biggest issue is 25 year old is active in the business and will want to start earning/buying equity in the business within the next 5 years... the 6 year is way to young to know what she wants to do... and in between those two, we have a handful that plan on working here and a handful that have no desire... but most of them are really too young to make that decision.
We are trying figure out how to offer ownership to the older kids (only the ones that are active in the business) and preserve the opportunity for the younger kids until they are old enough to decide.
And, then trying to figure out how to best fund the potential buyers, from the next generation, so the can afford to buy a portion of the business.
We are starting on this really early, but I feel time is our friend with these kinds of matters.
It also creates a break in liabilities... keeps the next generation from having the burden of any liabilities that we may unknowingly have hanging out there.
My partners and I all still have 10-20 years left before we would all be ready to completely leave/sell the company.
The next generation consists of 11 kids with age ranges from 25 to 6 years old.
Our biggest issue is 25 year old is active in the business and will want to start earning/buying equity in the business within the next 5 years... the 6 year is way to young to know what she wants to do... and in between those two, we have a handful that plan on working here and a handful that have no desire... but most of them are really too young to make that decision.
We are trying figure out how to offer ownership to the older kids (only the ones that are active in the business) and preserve the opportunity for the younger kids until they are old enough to decide.
And, then trying to figure out how to best fund the potential buyers, from the next generation, so the can afford to buy a portion of the business.
We are starting on this really early, but I feel time is our friend with these kinds of matters.
I agree with your comment about tax avoidance and long term consequences. We currently have a lot of complicated ownership pieces (i.e. trusts, LLC, etc.) that were all established in the name of tax avoidance (and creditor/divorce protection). We definitely want to consider tax avoidance, but I am really getting to the point of being okay with paying taxes, to some extent, if if helps simplify things for the next generation.
Our primary goals are to preserve the health and stability of the company for our employees and setting up the next generation so they can benefit from their own hard work.
Our primary goals are to preserve the health and stability of the company for our employees and setting up the next generation so they can benefit from their own hard work.
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