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Estate Planning

estate planning

This is the second article in our six-part series: Buying and Selling During a Pandemic. As the country begins to emerge from the COVID-19 pandemic, the LaPorte Transaction Advisory Services team members will share a series of educational blogs designed to inform you of key elements of the transaction life cycle.

Estate planning plays a crucial role in driving key decisions for family business owners who are looking to make an exit from their businesses. The estate plan will establish elements for the future success of the family business, provide assurance of cash flow to meet future needs in retirement, and may help to mitigate anticipated taxes. The need for a robust estate plan is even more important as the U.S. economy begins to emerge from the pandemic — particularly for those who plan to sell the family business.

Family business owners historically face daunting statistics concerning the success rate of transitioning a business from one generation to the next. Only about 25% of family businesses transition from the first to the second generation, and roughly 10% will survive the third generation. The ownership of the family business will most likely be transferred to: family members, key employees, or an independent third party (such as a private equity group). Most family business owners look to family members of the next generation as their first choice of transition.

Family Legacy or Estate Asset?

Most family business owners look to family members of the next generation as their first choice of transition. Formalizing a business succession plan will help keep the family business “in the family” as well as increasing the success rate for the life of the business. Some family members view the business as their family legacy and want to be an integral part of growing it. Other family members look to the family business as an asset that will one day be sold and do not want to partake in the management of the business. Determining how the next generation feels and the skill level needed for the continuance of the business are crucial to determining the business owner’s “exit date” and best chance for “financial freedom.”

So, how does this generational conversation get started? Most of the time, it begins with the discussion of estate planning for the family business owner. Typically, there is a concern about an unwanted estate tax burden, but the conversation inevitably takes a turn toward business succession planning. Are family members interested in continuing the business and what is the timeframe in which the next generation can step into the shoes of the business owner? Most owners take for granted that their children want to be a part of running the family business, but this is not always the case. Honesty among all family members is paramount during these crucial conversations to decipher who is willing and who is capable.

Crafting the Exit Plan

Once the family’s interests are established, a new set of questions arise. What is the magical date to retire? What is the magical date to sell or transfer the family business? Which family members are really interested in continuing the operations of the business? What is the magical number needed, so the business owner can maintain their cash flow needs to live the rest of their life as they see fit? These are crucial questions that need to be addressed. And, of course, the sooner the conversation begins and these questions are answered, the higher the probability of success.

If there is family interest in assuming ownership, structuring the transfer by sale, donation, or a combination of the two methods will take a bit of analysis. Depending on the nature of the business, cash flow needs of the business and business owner, health related issues, current estate, gift, and income tax laws, etc. will all govern how the transfer should be structured. There is not a “one size fits all” approach. The key to enhancing the possibility of a successful transition is to form a highly experienced team to review all aspects of the transfer.

Aligning the family business owner, family members, key employees, and a strong team of advisors is a roadmap for success, and beginning the conversation with the end in mind is always the best place to start. LaPorte’s Transaction Advisory Services (TAS) Group is ready to help you get that conversation started. With the right team, the right estate plan, and the right succession plan, the company’s future success and the family’s harmony can go hand in hand. To learn more about LaPorte’s estate planning services, contact Tax Director Jennifer Bordes.