Struggling these last several months with the family dynamics and dilemmas of transitioning his family business to the next generation, Big Daddy Ernest Bux, 65, now turns to ordinary, practical considerations. What are Buxboro Bank and Big Daddy’s other businesses worth, and is it enough to accomplish what he wants?  Does Big Daddy have solid estate planning – both to successfully transfer assets to the correct beneficiaries and to deal with possible taxes – in order to accomplish his goals?

Maximizing Value and Estate Planning

Having spent the last several months addressing the people or non-technical components (family expectations, values, competencies, dynamics and communications), this month Tilting turns to the “technical components” of succession planning – focusing on estate planning and maximizing business value. Many argue that, although important, too much time, money and attention is more-often-than-not devoted to these “technical components.” Yet, they are unquestionably critical because two of the three leading causes of the failure of family owned business are (i) inadequate estate planning and (ii) lack of funds to pay estate taxes. We have been dealing with the third – failure to properly prepare and provide for the family’s generational transition.

Legally[1]

Like many, Big Daddy Bux is very familiar with the Tax Cuts and Jobs Act of 2017 that doubled his estate and lifetime gift tax exemption, which for all 2019 decedents will be $11,400,000. Therefore, he’s not worried about estate taxes – which is fine so long as he dutifully dies before the bill sunsets in 2025. If not, his estate tax problem returns because the exemption reverts to pre-2018 levels. If Big Daddy might live past 2024, solid estate planning continues to be a critical part of his generational business succession plan.

Practically

Estate Planning. Does Big Daddy’s personal will (his estate plans) support his succession plan? Or, to phrase it differently, do Big Daddy’s estate plans reflect and support his current thinking with respect to the future ownership of the family business? For the two to work together, once the estate plan is finalized, Big Daddy needs to closely adhere to his companion succession plan, or intentionally change both. Has he communicated both plans to the next generation? Has Big Daddy actually implemented – funded his estate plan? More frequently than you might imagine, a thoughtfully crafted estate plan that creatively deflects both liability and taxes is never funded and implemented – undoubtedly destroying well-laid plans for both.

Maximizing Business Value. As with estate planning, I have a number of friends who are exit planning experts. Each of them stress the importance of getting a business valuation from an objective, independent expert. More often than not, either the cash value or the cash flow of the principal’s business (or both) is not enough to support the owner’s intended succession plan. If the principal wants to sell rather than transition the business, it’s especially critical to understand how a potential buyer views the business. After completing a current business valuation, an exit planning expert will likely promote and monitor careful consideration of plans to improve/increase one or more of: sales growth trends; customer mix; sales backlog; market niche; products and services brands; highly skilled, efficient and loyal workforce; solid vendor relationships; product differentiation and innovation; solid management team; up-to-date technology and modern work-flow systems and processes; robust management information systems; continuous growth in profitability; and a quality company culture.

If the family business is not attractive enough to provide a value/cash flow that will support Big Daddy Bux’s estate and succession plans, something has to change.

Tilting the Scales – Weighing in for the Family

The nuts and bolts of Big Daddy’s estate and succession plans must work with each other. If they don’t, Big Daddy’s first task will be to increase the value of the family business or adjust his vision for the future. He should start early. Carefully investigate and select competent resources. Take time to implement a solid plan. Even then, Big Daddy should talk to his trusted advisers (especially his family financial planner) for assurances that the business succession plan will work, and that the estate plan works with and supports it. Failing to act early will cause Big Daddy Bux to get no satisfaction.

This Reminds Me of a Song

Do you remember? “(I Can’t Get No) Satisfaction” by The Rolling Stones

Family Business Resources

As I represent families in generational transition and their businesses, I work with Gray Reed’s robust family business/family office team to get a transitioning family business on the path of healthy business and family relationships. Or, when one or more of these business or estates shows signs of distress and cracking, to mend or to pick up the pieces when family tensions erupt into a full-fledged fight.


[1] PLEASE NOTE: The tax, trust and estate experts in my office are my Family Business Resources – detailed below – upon whom I heavily rely. They are truly the experts in these fields, in every sense.