YOUR FAMILY BUSINESS AND YOUR ESTATEWritten by Dave Kauppi
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After this transaction takes place, let’s look at result of how dad’s estate was fairly divided. Originally brothers were left with 60% of $50 million business, or $30 million and a minor portion of remaining estate. The sisters were left with 40% of business, or $20 million and bulk of remaining estate of $10 million. That appears to be fair. However, buyout of sisters for a combined $8 million results in an effective estate distribution of $42 million to brothers and $18 million to sisters. This is not what dad intended, but it happens all time. This is a very complex and emotional issue and there are no simple answers. Generally, dad had his identity tied up in business and wants it to live on through his sons after he is gone. This is a noble, yet impractical thought if all siblings are not actively involved in business. The children often inherit restrictive buy sell agreements that favor brothers running business and scare off investors that may have been interested in a minority stake in business. Much of value from a privately held business is derived from benefits of working in business. There is very real concern that integrity of gift or estate tax business valuations will be compromised if sisters are bought out at a price approaching a pro-rated division of total enterprise value. Unfortunately, in most cases, nothing is done and as a result there are literally hundreds of billions of dollars of minority interests in privately held business that are providing little return or no return to their owners. We are working with estate planning attorneys, tax accountants and investors to come up with solutions. One of keys to unlocking liquidity in these minority interests is for business owner to recognize this situation prior to building his estate plan. Unfortunately, we are often brought in after fact and a fair outcome then is contingent upon majority owners honoring dad’s original intent of fairness and working toward that end.
Dave Kauppi is a Merger and Acquisition Advisor with Mid Market Capital, Inc. MMC is a business broker firm specializing in middle market corporate clients. We provide M&A and divestiture, succession planning, valuations, corporate growth and turnaround services. Dave is a Certified Business Intermediary (CBI), a licensed business broker, and a member of IBBA and the MBBI. Contact (630) 325-0123, davekauppi@midmarkcap.com or www.midmarkcap.com.
| | PASSING THE FAMILY BUSINESS TO THE NEXT GENERATION - IS IT THE BEST CHOICE?Written by Dave Kauppi
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Are your heirs even capable of running your business? Have you held on to reins so tightly that kids involved in business have not been able to develop their decision-making or leadership skills? Do they command company respect because of their personal strength and skills or are they grudgingly granted respect because they are child of owner? If that is case, odds are not good for them taking over when you retire. Another big challenge is trying to balance fairness in employing many children or even grandchildren in a family business with various skill levels, compensation levels and ownership levels. The jealousy and in fighting can absolutely grind company’s progress to a halt. The business owner must make some difficult decisions when he or she decides it is time for them to retire. Why did I create this business? Was it to keep this business in family for generations or was it to provide for my family for generations? If desire and capability of children are not evident and company is large enough, it may be right decision to first get outside board members actively involved as step one. Step two would be to hire professional management to run business. A second alternative is to sell company while you are still running it and it can command its highest value. If you have children that want to remain in business for immediate future, incorporate that into sale agreement with employment contracts. Another way to think of it is, while I am running business, best ROI is to keep bulk of my net worth invested in this company. If I am no longer running company what is best risk reward profile for my net worth? Would my heirs be better off if business was sold and value converted to financial assets?
Dave Kauppi is a Merger and Acquisition Advisor with Mid Market Capital, Inc. MMC is a business broker firm specializing in middle market corporate clients. We provide M&A and divestiture, succession planning, valuations, corporate growth and turnaround services. Dave is a Certified Business Intermediary (CBI), a licensed business broker, and a member of IBBA and the MBBI. Contact (630) 325-0123, davekauppi@midmarkcap.com or www.midmarkcap.com.
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