Business Succession Planning
All your working life you have strived to develop a successful business. The investment you make in your business is much more than just money or capital. It includes a substantial amount of your time and hard work.
All during your life, you have strived to minimize income taxes, trying to limit Uncle Sam's interest.
You would think that Uncle Sam's interest in your business would end at your death. Surprise...that's not true!
Business Succession Planning in Albany is complex.
Following your death the value of the business will be included in your estate and may be subject to estate taxes. So, Uncle Sam will share in the value of your business.
At your death, the business will have to be valued and that value will be added to your estate to compute the estate taxes due. The real question at this point is how to convert this illiquid business interest into cash to pay the estate taxes and other estate administration costs.
The general solution appears to be to simply sell the business or liquidate.
Liquidation is not an attractive alternative because it is unlikely the liquidation value is equivalent to the business's full fair market value. The better alternative is for the estate is to sell the business - but to whom?
Who will buy a closely held business interest?
Logically, your partner/co–shareholder will be the most likely candidate. In other cases, the business itself or a key employee could purchase your business interest. Or, a third party such as a competitor could buy the business.
Selling after death is difficult.
Two notable public cases where this occurred are:
- The Phil Wrigley estate, where Wrigley was forced to sell the Chicago Cubs to The Tribune, and
- The Joe Robbie estate, where a controlling interest in the Miami Dolphins was sold to Blockbuster Entertainment.
In both cases, distress sales resulted in 3rd party ownership with
less than fair market value received.
A formal Buy–Sell plan with proper funding could have avoided these results.
In addition, there are a myriad of alternatives that will preserve and maintain the value of the business but all of which require advanced planning.
Contact us today for a free initial business succession planning consultation.
Buy-Sell Agreements
Generally, a Buy–Sell agreement is a legal contract entered into by business owners. It provides the forms, conditions, and procedures to be followed when one business owner is to transfer his or her interest.
The terms usually provide the procedure to transfer an owner's interest upon death, retirement or disability, which is sometimes referred to as a "triggering event." Remember, as a legal contract the agreement should be prepared by an attorney. It may later be amended by the consent of all parties.
The advantages of implementing a Buy–Sell plan are somewhat obvious.
Without a set plan, the death or disability of a co–shareholder or partner can wreck management practices. Unexpected business associates with unknown work ethics may arrive at your door step. This could devastate a small business.
Another important advantage of implementing a Buy–Sell plan is to create a ready market for the business interest so that the illiquid business interest is easily converted into cash. An interest in a closely held business is not easily disposed of for a fair value. Why is that? There are very few buyers who would be willing to purchase a partial interest in a closely held business, particularly if it's not a controlling interest. There are two parties at interest… the surviving owners and the decedent's family. The family will usually want to receive the cash equivalent of the business's value as soon as possible, at the highest possible value. Meanwhile, the surviving shareholders want to run and manage the business and purchase the shares without impairing their cash flow, at the lowest possible value.
Questions, Questions...
Why not simply keep the family on and pay them off with the business profit? Will they be employees? Can they be employees? What services could they provide? Will the remaining owners want to hire them? If they aren't employees and they receive cash income, is that a dividend, or a distribution? And if the payments are dividends, aren't all shareholders entitled to them? Do you want other family members participating in the management of the business?
You can probably think of dozens of other questions. The answers aren't easy. And, the repercussions of not answering them in a timely fashion is definitely not easy. If you own a business - you absolutely need to sit down with an attorney who concentrates in Business Succession Planning.
Over the past 20 years, Brian Bronsther has represented numerous companies with respect to the implementation of their business succession plan. Whether it has been at the company's inception or at a time the company is thriving, Brian Bronsther has assisted the owner's of various business through the myriad of alternative and pitfalls of implementing a successful Business Succession Plan.
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