Florida Estate Planning, Probate and Asset Protection

The ESOP Way to Business Succession Win-Win

As more entrepreneurs, like Ms. Cabot, approach retirement—about 30% of the nation's business owners are 55 or older, according to the U.S. Small Business Administration—many are choosing to sell their companies to their employees, rather than outside buyers.

In the alphabet soup of company forms (S-Corp, C-Corp, LLC, LLP, LP, LTD., and so on and so forth) there is a growing turn toward a slightly more obscure acronym: the ESOP.

So, what is an ESOP, what can it do, and is it right for your business?

ESOPs, or Employee Stock Ownership Plans, are a tricky breed. Essentially, an ESOP is a tool recently highlighted by Congress and featured by The Wall Street Journal in an article titled “Founders Cash Out, but Do Workers Gain?” Planning to exit a business is all about doing one of two things; either restructuring the business or selling it outright. With an ESOP you accomplish both goals and build the company around the very employees that compose the company in the first place.

Rather than going out and hunting for a buyer, the employees become vested in the stock ownership of their own company. In turn, the ownership stake simultaneously becomes a retirement asset while the ownership of the founder is bought out.

Now, if you are already familiar with this approach, it may be worth reading the original article since there are certain limitations affecting the employees-turned-owners. The article gives examples of how an ESOP can work a win-win for all concerned under the right circumstances. These examples include Bob’s Red Mill, for example, or, from a different industry, Manson Construction Co.

ESOPS have been a powerful tool in an otherwise soft market for business transfers. Accordingly, ESOPS are worth a good look, and then even a second look, as a unique and proven business succession strategy.

Reference: The Wall Street Journal (April 17, 2013) “Founders Cash Out, but Do Workers Gain?”

Family Feud Threatens Four Generation Family Business

Family businesses can be quite successful, he said, but the managing and intermingling of blood and commerce, insiders and outsiders, requires a deft hand, planning and enormous amounts of trust.

You might say that a family business is more than the sum of its parts. Unfortunately, those “parts” do not always see things the same way, whether it’s the family part or it’s the business part. Family businesses that successfully pass from generation to generation tend to toe the line in more ways than one.

For one of those all-too-possible horror stories of succession and family business gone awry, consider the case of the Luray Caverns and the Graves family. The Washington Post recently recounted the story in an article titled “The rift — a family dynasty fights over the future of Luray Caverns.”

The business of the Graves family was really an empire of various tourist businesses surrounding the Luray Caverns – the largest privately held cave system and tourism hotspot since the late 1800s. The family business apparently had been on a downward slope for some time. To make matters worse, this four generation family business has been in and out of litigation for the last ten years. In the end, not only has this discord threatened the family fortune and the business that built it, but the entire town associated with the family and the business.

More than a sad tale, this case is an object lesson for other family businesses and the original article is worth reading.

Reference: The Washington Post (March 14, 2013) “The rift — a family dynasty fights over the future of Luray Caverns”

Business Transfers – Less Taxing is Less Taxing

Exit planning is neither easy nor quick. But, with some advanced planning, the ultimate outcome can be far more beneficial than a hastily designed buy-out.

Your business is more than a personal asset and the economic engine that provides for your family, your employees and yourself. Passing down the family business is one of the most important and difficult experiences.

The good news is that there are plenty of tools for exiting the family business, with varying degrees of complexity. Sometimes, however, a simple buy-sell arrangement is the right tool for the task.

This was the subject of a recent article in Forbes titled “Exiting The Family Business: Tax Tips And Techniques,” which included some important tax and planning pointers. At its most basic level, the simple efficiency of a buy-sell arrangement is easy to understand and appreciate. Commonly, the owner (and parent, likely) is going to need retirement income to retire. However, the family business was their only source of income and their greatest asset. As a result, selling the business within the family allows the successor generation to assume control in a way that guarantees the financial well-being of the retiring parent and the entire family.

This transfer can be accomplished with an outright sale-purchase. On the other hand, a buy-sell agreement can work the sale-purchase over time in installments. Consequently, the founder may even gift some portions away and sell others. A key point, whether gifting or selling, is having an accurate valuation of the business. If the value is too low, then the “sale” price looks more like a “gift.” Problem: if the value is deemed too low, then this catches the interest of the IRS. This never is a good thing.

A sale of anything carries with it tax implications. When it comes to selling (or gifting) a business, you will want to connect all of the dots. The original Forbes article discusses many of those dots and offers practical tax moves to stay out of trouble.

While there are significant limitations to the buy-sell and there are other alternatives to evaluate, it is one means to kill two birds with one stone by providing retirement income to the seller.

Reference: Forbes (March 6, 2013) “Exiting The Family Business: Tax Tips And Techniques”

Business Succession Rejections by Heirs

A more common example of how business founders suffer when a child defies them is hearing from an heir apparent, “Sorry, Dad; I want nothing to do with the business.”

When it comes to the succession plans of a family business, there are many things to ponder when selecting an heir. Important attributes like responsibility, work ethic, and leadership are taken into consideration when deciding who choose for the business.  One thing that you may have left out is what to do if your heir turns down the offer to take over the family business.  Then what?

If you are a family business owner, are you intending to keep the business in the family even as you step down from control? Have you considered the possibility of designating an heir who does not want the family business and do you have a “Plan B” to adjust your succession plans accordingly? The reasons why an heir may resist taking up the reins to the family business are many facetted, but that doesn’t necessarily mean they are making a final, informed decision. No, it may take time, talk, and some understanding, and there are lessons to be gleaned from a recent Forbes article on the subject titled “5 Ways Family Business Founders Can Change A "Made Up" Mind.”

Deciding on a successor for your business can take patience, time and understanding. This aspect of estate planning isn’t just about your own wishes, but also about the hopes and dreams of your family members and heirs involved.

Reference: Forbes (September 10, 2012) “5 Ways Family Business Founders Can Change A "Made Up" Mind”

Careful Consideration for Naming Your Orlando Business

The entrepreneur using his or her name as a brand to grow customer recognition should consider what that name will be worth, not just to customers, but also to prospective partners, investors, and buyers.

When it comes to naming your Orlando business after yourself, sometimes thinking about where you will end is lost in the mix. Should your business bear your name, or should the family business bear the family name? How will these choices affect your heirs in the future?

While some may consider the decision a matter of personal or family pride, or even a matter of vanity, that doesn’t mean there aren’t important issues in play. The consequences of naming your business was tackled recently by Forbes in an article titled “How Having Your Name On Your Business Limits Your Options.”

The essential point, however, is that putting your name on the company forges an inextricable link. On the plus side, this can be a boon if your business and brand do well, especially if your heirs carry on the business. On the down side, doing so may not be in the best interests of the business, or even your heirs.

The Forbes article offers a review of some practical considerations and problems when choosing your business name. Remember, although it is a tough decision, you should begin your business with the end in mind.

Reference: Forbes (August 17, 2012) “How Having Your Name On Your Business Limits Your Options”

Family Farmers Should Keep a Weather Eye on the Estate Tax Exemption

Without congressional action, in 2013, the estate tax exemption will shrink to $1 million per person with no spousal transfer, and the top rate will increase to 55%, striking a blow to farmers and ranchers trying to transition from one generation to the next.

The Joint Economic Committee recently released a report on the devastating power unleashed upon family farms when an estate tax is triggered. Simply titled “Estate Tax Report Released,” the committee also considered the broader impact on the economy.

The report, approved by the American Farm Bureau Federation and examined in Farm Futures, notes that, while farm owners may have a great potential wealth … such wealth is tied up in land (an illiquid asset) and is not necessarily cash-in-hand.

However, the IRS will hold you accountable for the estate taxes due on your land, even if you have to sell the land to pay for it.

"When estate taxes on an agricultural business exceed cash and other liquid assets, surviving family partners are forced to sell illiquid assets, such as land, buildings, or equipment to keep their businesses operating," said AFBF President Bob Stallman. "With 88% of farm and ranch assets illiquid, producers have few options when it comes to generating cash to pay the estate tax."

If you (or a loved one) own a family farm, then there is no time like the present to make proper estate plans to protect and preserve the farm and the family wealth it represents. You have worked hard to make a living from your farm. Isn’t it common sense to spend some time and money protecting and preserving it?

Reference: Farm Futures (July 26, 2012) “Estate Tax Report Released”

Rules Can Keep Your Family Business and Family Together

Can you imagine spending half of your working life in a family business, beside your mother, father, and brother, and all getting along? And then spending the next half of your work life with your brother, your spouse, your four sons and three nephews, and still all getting along?  I pinch myself. We have been able to create an environment of mutual respect and trust, one where we can function as a team that shares the emotional and intellectual challenges of business along with its financial rewards.

How do you successfully transfer your family business within your family? It can be a tricky situation. One successful trick that CNNMoney recently highlighted is the power of rules.

The article, titled “Family business: How to pass the baton,” is a story about the Mitchell family and the rules they developed to keep their family, as well as their business, intact. As the article illustrates, rules are a way of promising to yourself and future generations that you’ll maintain a strong shareholder’s agreement, operating agreement, or other founding document of the business itself.

So, what guidelines will help keep your family together and in business at the same time? For some practical ideas, consult the original article for the “Mitchell” rules and consider how they might work for you family business.

Reference: CNNMoney (July 9, 2012) “Family business: How to pass the baton”

Family Limited Partnerships – Worth Another Look (Especially This Year)?

A family limited partnership was once a rather esoteric way for wealthy Orlando families to centralize the management of real estate and various pots of money. But this is not a normal tax year.

Sometimes managing family assets is like, well, running a business. Then again, some families actually do run their families like businesses and have enjoyed significant tax advantages by doing so through the use of the Family Limited Partnership.

A recent article in The New York Times titled “In an Unusual Tax Year, the Wealthy Turn to Partnerships” explores the power of the Family Limited Partnership (FLP). Properly structured, the FLP binds the family into a business arrangement (which is not always a good thing for a family) and, in doing so, allows for the longevity of a business entity, the decreased valuation allowable to private companies, and the simple ability to pool resources for higher investments.

When used correctly, there is much to be said about the FLP structure. On the other hand, there also are limitations and even outright warnings. For one, no business can safely exist without a purpose, and to form your FLP without a discernible purpose beyond avoiding estate taxes will certainly raise the ire of the IRS. Furthermore, as already intimated, it means the family must act with the swiftness and assurance of a business in their investments. Unfortunately, not all families are capable of acting like a “business.”

In the end, we face an uncertain and unpromising future in estate and gift laws (and a veritable “fiscal cliff” as a nation for related reasons). Nevertheless, at present we have extremely favorable lifetime gift tax exemptions ($5.12 million) for the remainder of 2012.

This may be the perfect storm to consider harnessing this powerful tool to generate some security for your family and family investments.

Reference: The New York Times (July 6, 2012) “In an Unusual Tax Year, the Wealthy Turn to Partnerships”

Family Meetings = Family Succession Success

Succession plans are not one size fits all. Entrepreneurship is always about personal freedom and personal choices, and every Orlando entrepreneur has a different mix of goals, values, skills and circumstances. The succession plan might in fact be the grand finale of these choices.

Are you the head of a family business and perhaps the head of your family, too? Consider including your family when deciding the fate of your business. In short, a family meeting may be in order.

Whether a family meeting is an emotional conversation or a very business-like exchange will vary from family to family and business to business. A New York Times article titled “Is My Family Business Going to Be an Orphan?” provides some firsthand wisdom and a practical template to follow.

Reference: The New York Times – You’re The Boss (April 25, 2012) “Is My Family Business Going to Be an Orphan?”

“Family” Is Key To Family Business Success

The findings, the investigators pointed out, indicate that the key wealth creation vehicle is not the firm but the family 

Legacy companies – those incredible companies that have lasted for generations within a family, some 100 to 150 years, and continue to grow – occupy a special place in the American imagination and even more so in the hearts of entrepreneurs. In fact, for most thinking people, there is a special appreciation for the care and planning necessary to start a company and keep it going for a short time, never mind for entire generations.

Indeed, Legacy companies are a rare breed. Many family companies will simply never get there. Fortunately, there is heartening news in a recent study that suggests that the duration of a family company is not quite so important, for all its branding glory, as the duration of the family itself.

As related in Family Business Magazine, the Family Firm Institute – a global association of researchers and advisers – has conducted a three year study: the “FFI/Goodman Longevity Study,” completed in 2010. By surveying some 500 senior family-firm executives they discovered that just 10.6 percent of family enterprises owned just one business. The average is actually closer to 3.4 businesses, with 21.3 percent controlling five or more businesses, and an average of 6.1 companies over a family history. What does all of this mean? Simply put, single companies are not the measure of enterprise, especially not in a family. The family itself is the asset and the drive that moves matters forward across time, generations, and changing markets.

As you plan for your business - and for your family - this may be an essential thought to bear in mind, and one to foster in others. As noted in the original article:

Families with a trans-generational orientation view the legacy company broadly rather than narrowly. Though they lovingly tell their children tales of the original business model and the town where it first took root, those aspects are just part of the family story. They place their emphasis on the founder’s entrepreneurial spirit, attention to the marketplace, flexibility and sense of stewardship. This perspective raises the odds that the family will prosper as an economic unit over many generations, no matter what form its wealth-creating entities take.

 Reference: Family Business (November 2011) “Family Business Longevity Examined in a New Light”

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