Transition is a fact of life for all businesses. Chief executives retire or move to other companies, division leaders get promotions and companies get sold or merge with other businesses. But for family businesses, transition can be more complicated and have wider ranging impact.
The implications for the business are obvious: a smooth and successful transition can assure the company will continue to be viable into the future.
When planning a transition, family business leaders must also consider the interests of various family members. A mishandled transition — whether to the next generation or to new owners from outside the family — can cause fractures in a family that could take years to repair and the discord can undermine the deal and cause disastrous problems within the company.
One of the most important elements of any family business transition is putting together the right team of advisers. Any company planning for change needs a team with specialized skills and experience that is able to balance family goals with the business needs.
Building the Team
Certain advisers should be part of any transition, including an experienced corporate attorney and a knowledgeable accountant who is a certified public accountant. Depending on the nature of the transition, a mergers and acquisitions specialist also may also be required. With family businesses, wealth advisers should have a prominent place on the team, since the owner’s life after the transition is an essential consideration in how the process will proceed.
If the company is being sold to an outside group or another business, the attorney should have M&A experience to better protect the family’s interests and provide a wider range of structuring ideas. The CPAs should have M&A experience so they will know how prospective buyers will be evaluating the financial statements and how to build enterprise value.
Many deals fall apart or fail to come together because a family has unrealistic assumptions about the business’s worth. Sellers also often benefit from engaging an investment banking firm to market the business, screen for viable purchasers and provide market knowledge about similar purchases.
Preparing the company for transfer to the next generation requires an experienced trust and estate attorney to recommend deal structures that will help the family achieve its professional objectives while working within the existing gift and estate tax framework.
These are important considerations with intergenerational transfers because of the complexity of estate tax regulations. After all, the impact of taxes affects the value of the company, the owner’s personal wealth and the amount of wealth that can be passed along to the next generation of owners.
The trust and estate attorney’s role is to offer advice on minimizing the impact of estate taxes on company value and the retiring owner’s personal wealth.
Finally, regardless of whether the owner is pursuing a sale or an intergenerational transfer, a wealth adviser can play an important role in helping the family identify and prioritize goals, evaluate the impact of the transition upon those goals and protect the wealth created by the transaction to assure that the owner’s financial independence and family objectives are met.
This adviser can also help develop a charitable giving plan if the owner is interested in pursuing philanthropy through the transition. Building charitable planning into the transition structure can have particularly attractive tax benefits if the transition will create significant excess capital beyond the needs of the owners to meet their personal goals.
The owner’s most trusted adviser normally takes the lead in assembling and managing the team. It is natural that different advisers take a lead role during different phases of the transition, but the group’s efforts should be coordinated by one leader.
Family business transition plans are complex and require many different types of expertise. A well-balanced transition team can significantly improve the chances of a successful transition and help position the family business owner for a rewarding retirement, or second act in life.
James A. Fitts, CFP ([email protected]), is director of wealth counseling; John Weeks ([email protected]) is director of family wealth management; and Marshall G. Rowe ([email protected]) is president and CIO at Harvest Capital in Concord, N.H.