Our Firm specializes in advising closely-held businesses (including women-owned and minority-owned businesses). We have consulted for numerous companies, including but not limited to farms and ranches, medical practices (including doctors and dentists), computer software, real estate, manufacturing and medical companies, as well as companies providing services to the Department of Defense. Our attorney and staff, both male and female, have owned (and still own) successful businesses in their own right outside the law. As a result, we understand the cost-benefit analysis and risk assessment which business people face daily. In our legal role as your advocate, we seek to provide the counsel and advice clients need in order to maximize profit potential and still meet the demanding requirements imposed by federal and state laws.
Buckley Law was also licensed by the National Football League Player's Association as an advisor. We do not act as an agent to professional athletes. Rather, we use the exact same legal tools for athletes that we use for doctors, developers, entrepreneurs, and other high net worth individuals. The Firm provides entity structures to enhance asset protection and tax planning for professional athletes.
One of the key elements in business planning is identifying and orchestrating successful exits from companies for business owners. For many businesses, death is the owner's exit strategy. Our Firm works through a seven-step process in order to help business owners successfully negotiate leaving their businesses in style, alive, while meeting their personal long-term goals and objectives. The seven steps are:
Step1 - What Does It Mean to Retire? What Are My Goals for Exiting the Business?
Step2 - Establish the Price You Desire from the Business (Net-Net, taking into account taxes)
Step3 - Increase the Value of the Business in Preparation for Sale in the Future
Step4 - Illiquidity to Liquidity: Turning My Business into Cash
Step5 - Transferring the Business for a promissory note
Step6 - Catastrophe Planning if An Owner Leaves (Death Disability, Voluntarily)
Step7 - Estate Planning with the Business Ownership in Mind
THIRTY-TWO QUESTIONS TO ASK IF YOU OWN A FAMILY BUSINESS
1. What is business succession planning?
Business succession planning refers to the practice of using estate and business planning strategies to increase the chances for the survival of your family business when you retire or die unexpectedly.
2. How do I know if I need business succession planning?
The following questions will help you decide if you need business succession planning.
3. If you die unexpectedly, can your family continue to run your business?
If your family cannot run your business, who can?
4. If you die unexpectedly, will your family have sufficient capital to hire someone to replace you?
What will it cost to replace you in the marketplace, or is there already someone in the business talented enough and experienced enough to succeed you? If there is no money to hire someone to run the business, and there is no experienced natural successor, perhaps you need life insurance for that purpose (and we do not sell life insurance, nor do we get any compensation from anyone if you purchase life insurance).
5. If you die unexpectedly, and have partners, will they pay your family a fair price for your business?
When you are gone, you need a mechanism to ensure that your family is treated fairly by your partners. We have plenty of horror stories of families who relied upon a handshake and the good will of a surviving partner, when that partner chose to violate the previous oral agreements with the deceased. Written agreements trump all, and if written properly leave little room for interpretation by a surviving partner.
6. How do you protect your family in the event of your early death?
The most effective form of protection for your family, or you, if you survive to retirement, is a well prepared buy sell agreement and a measurable succession plan.
7. How do you know if your buy sell agreement is well prepared?
Does your buy sell agreement define events well so that the remaining owners know when they must purchase the interest of the departing shareholder. These should include at least:
i. Death
ii. Disability
iii. Incapacity
iv. Bankruptcy
v. Loss of a professional license
vi. Failure to properly carry out the owner’s expected duties
vii. Retirement
8. What is a “triggering event", and does your buy sell agreement require the remaining owners to purchase the departing owner’s interest when a “triggering” event occurs?
There are two fundamental types of buy sell agreements, voluntary agreements and mandatory agreements. A voluntary agreement means that at your death or retirement, your partners will negotiate the purchase of your interest from your estate or you based upon a standard defined in the agreement. A mandatory agreement mandates that the remaining owners purchase your interest. The problem with a voluntary agreement is that it is merely an agreement to agree and does not adequately protect you or your family.
9. Is your buy sell agreement adequately funded?
Every buy sell agreement should have provisions for the payment of the price of the departing owner’s interest by the remaining owners. The typical methods are:
a. Installment sale based on the current earnings of the business
b. A sinking fund whereby a certain amount of funds from the business are invested to provide for a future purchase
c. Cash from borrowings at the date of purchase
d. Life insurance
By far the safest method is the use of life insurance. The rest depend upon the financial solvency of the business or the other owners at the time that a purchase is mandated.
10. How is the price of the departing owner’s interest determined?
Perhaps the most sensitive, and equally as important as the funding method, is the method to determine the price of the departing owner’s interest. The most frequently used methods are:
a. Appraisal
b. Book value
c. A multiple of annual earnings
d. Replacement cost of hard assets
e. As agreed upon annually by the parties based upon a timetable in the agreement
Defining tersm in an agreemnt is crucial for protecting your family,. Do not rely upon inadequately defined terms, or assuming that everyone will know the definition if the need arises. If terms are not well defined, they are susceptible to manipulation. Remember that when you need the agreement to work, the need may arise when you are no longer around to protect your family. We recommend well-defined appraisal standards that require the American Society of Appraisers or other similar professional organizations. Also, the parties can be required to agree upon a fair market value annually, but if they do not, then tha mandatory appraisal using the standard identified above significantly reduces the potential for conflict when a purchase is mandated.
11. Will you have enough income when you retire?
As every financial professional will tell you, it is never too early to begin accumulating wealth for retirement. Younger family members taking over the reins may resent the senior generation if they take an unreasonable amount of money from the business after the sale if the sellers failed to save enough during their management of the business.
12. Do you have a management succession plan in place?
Family business owners are notorious for neglecting to have a management succession plan in place. A management succession plan means a realistic determination of who is capable of taking over the business when the senior generation retires. That person may, or may not, be a member of the family.
13. Does your succession plan accommodate siblings with different skill levels or interest in the business.
The senior generation musttake into account the differing skill levels, or interest in the business, of family members if a succession plan to be successful. If there is a daughter who is clearly the one to take over, that does not mean the son who is interested in the business is ignored. The senior generation must plan well to avoid family conflict that could destroy the business andrelationships within the family.
14. Have you considered the impact of estate taxes on your family business?
An important goal of business succession planning is to transfer the family business to the junior generation (or a key employee group, or a third party) in a manner that increases the probability of success. Estate taxes are a prime consideration for that calculus to be complete.
15. Do you have an estate planning team familiar with business succession planning?
Business succession planning is a very complex area. It involves accounting, insurance for liquidity, professional investment advice and the aid of an estate and business planning attorney. We have seen examples of divorce attornys being the legal advisor in the sale of a business. Not all attorneys are the same, just as all doctors are not the same (most of us wouldn't hire a foot doctor to do brain surgery). A divorce attorney, or personal injury lawyer, or workmens' compensation attorney, or general practitioner will generally note be the best advisor for a business succession plan. You should consider hiring experts as advisors who have years of experience solving this problem.
16. Are you willing to pay the costs of protecting your business for your family?
As with all things, “you get what you pay for.” It is without a doubt that the current costs of a business succession plan are greater than the costs of not planning. However, the current savings are likely minimal when you consider the costs of not planning. What are the costs of not planning? The costs include:
a. A loss of the family business to estate taxes
b. A loss of the family business due to a lack of liquidity to tide the business through the period following an unexpected death
c. A loss of the family business because there is no formalized arrangement to transfer ownership of a decedent’s interest to the decedent’s heirs
d. A loss of the family business because no one has been trained to replace the senior generation
e. A loss of the family business because the retiring owners demand too much from the business to allow the junior generation to earn a reasonable income for their services
f. A loss of the family business because sibling rivalry was not planned for
17. Have you planned how to transfer your family business to your heirs?
Imagine, you awake at 65 years of age and decide that you would like to turn over the reins to your children. Your business is worth in excess of $1,000,000, and it is 2011 (under current law, $1,000,000 will be all you can transfer to your heirs estate and gift tax free). How do you now transfer it to your children? Transferring a family business is a very time sensitive matter. The earlier one starts, the lower the estate and gift tax risks.
18. Are you willing to make gifts of interests in the family business to your children, or trusts for their benefit, if you can maintain management control?
Unfortunately, many family business owners do not appreciate the fact that they may begin transferring interests in the business when their children are four years old and still maintain absolute control. Estate planning attorneys have devised strategies that enable a parent to give it away, but control it absolutely. Sam Walton did it...so you can you. This is when the question of your willingness to pay the costs of business succession planning comes into play.
19. How does your estate planning attorney allow you to give it away but maintain control?
That is a part of business succession planning that involves the choice of entity in which to operate the family business.
20. Do you know what the entity of choice is?
Actually, there are two that are very similar to one another. They are the family limited partnership and the limited liability company. They are the entities of choice because of their superior asset protection characteristics and their income tax flexibility.
22. Do you know why a master asset-protected entity (also known as a family limited partnership or a limited liability company), formed in the right jurisdiction, has better asset protection than a corporation?
Assume you own stock in a corporation and are the decisionmaker in a family master asset-protected entity. Assume that you are successfully sued and the creditor obtains a judgment. If the creditor desires, he or she can take your stock in your corporation if you own it outright. However, in some states the legislature has ruled that all the creditor can do to your ownership interest is to receive distributions that you would otherwise have received if those distribvutions had come out of the entity. The creditor may not vote, act as a full owner or even look at the entity's business records if the entity is formed in the right jurisdiction. This is a somewhat hollow victory when compared to the loss of your stock - which the creditor will never seize.
23. How would your estate planning attorney use a master asset-protected entity to enable you to give it away but maintain control?
Your estate planning attorney would prepare an agreement, (perhaps a family limited partnership) and have you transfer your financial and investment real estate into the partnership in return for 2% general partner interests and 98% limited partner interests. You would then begin the process of making gifts of the limited partnership units to your children or trusts for their benefit. But because you retain the 2% general partnership interest, you are in control. You can give it away but maintain control.
24. Do you have an overall estate plan in place?
All of your estate planning documents must be carefully designed to fit together to create a business succession plan that works. In fact, it is likely that a revocable trust will be the owner of the general and limited partnership interests that you will own. In that manner, you, or your successor trustee in the event of your incapacity, are able to manage the partnership without the necessity of a conservator or guardian.
25. Do you know how your living trust will be designed to carry out your business succession plan?
Assume your daughter is the one that should run the family business when you are unable to due to an early death or incapacity prior to your retirement. With the general partnership interests owned by your living trust, you daughter can be appointed by the terms of the trust as the successor trustee who is to take over as the general partner. In this method, sibling conflicts are reduced so as to protect the business.
26. Are you willing to give up some control over the business?
It is very important that children who are to succeed to the management of the business be given increasing management authority in proportion to their skill and experience. It not only provides for trained management replacements, it gives them the knowledge that you have respect for them and confidence in their abilities.
27. Are you and your spouse in agreement as to the ultimate disposition of the family business?
All too often, the spouse who performs most of the management of the family business fails to take into consideration the wishes of the inactive, or less visible, spouse. This may cause the business succession planning efforts to take longer, be more costly or perhaps even fail. One example is the management spouse schedules a business succession planning meeting with the estate planning attorney and does not invite the less active spouse. Another example is that the spouse that is active in the business decides to sell the business to a third party, rather than turn it over to the family's heirs. Sometimes, the spouse that is not active in the business does not know about this change. Both spouses in a family-owned business must be a part of any decision to transfer the business, whether that transfer is to family members, a key employee group, or a third party.
28. Are you willing to face the reality that you will die or retire at some time?
First generation family business owners are rare and unique breed of entrepreneur. Typically, both spouses have worked long and hard for the family business. They have sacrificed much to grow the family business in order to leave a legacy to their family. However, when it comes time to begin the planning, the founders are too busy. It seems there is no sense of mortality and many plan “to die in the saddle.” This is a bad exit strategy. Ultimately, such a strategy can brings in the worst partner imaginable - the government - at the worst possible time - a recession. No one knows when he or she will pass. If we do not plan for succession, we could put our family's entire estate at risk.
29. Are you willing to pay the costs of business succession planning?
Business succession planning may entail more professional costs than the typical business owner is used to paying, other than litigation costs. One reason is that there needs to be a team of professionals working to design and implement a plan for you and your family that will be successful. This is not the time to be “penny wise and pound foolish.” A sound business succession plan is an investment that will pay off for you and your heirs for generations to come. |
