It’s critical to create a structure for the transfer of a business that maximizes value for the owner, their family and the company. However, not only does this process tend to be overlooked, but the right advisers are also rarely engaged.
“Too often, owners task their general business attorney to structure a buy-sell agreement or stock restructuring,” says Joseph Zahn, an Associate with Buckingham, Doolittle & Burroughs, LLC. “However, a specialist, such as a trust and estate attorney, is better suited to ensure owners and their family accomplish their goals.”
Smart Business spoke with Zahn about the fundamental steps to maximize value in a business transition and why the right advisers are key to that process.
What steps should business owners take to plan for a transition and who should help?
General counsel for business owners tend to focus on the operation of the business and negotiating buy-sell agreements or similar arrangements with the owners. In this context, owners often overlook the integration of these arrangements into their estate plan or fail to consider the importance of the creation of a trust to accomplish their goals in an efficient manner. Trust and estate attorneys provide expertise and experience in navigating these areas. They can craft an integrated estate plan to dovetail with the exit strategy of the business owner and utilize trusts as a vehicle to accomplish this result.
When the business is a family enterprise or solely owned, the use of a trust is particularly important to create a plan for either handing the business to the next generation or providing a team of key employees, advisers or family members to run the enterprise upon the owner’s incapacity or death. Oftentimes the transition of the business will implicate far more than the succession of the business and will reach the entire family — these decisions affect a child’s inheritance, sibling relationships, marital relationships and situations unique to each family.
Engaging a trust and estate attorney to properly craft a trust can provide an enforceable roadmap for the business transition that is highly customizable, flexible and private. For high or ultra-high net worth owners, trusts can also provide tax efficiency. This is especially important when the value of a business or the owner’s personal wealth are near or exceed the estate and gift tax exemption of $15 million per individual and $30 million for married couples.
Ultimately, engaging a trust and estate professional as a first step will provide some control and flexibility for the transition of the business. It helps ensure the owner’s family can avoid the uncertainty around how the proceeds are distributed when no plan or a poor plan is in place.
What can happen if business owners do not establish a transition plan?
Without a transition plan that utilizes a trust, the unexpected death of an owner often results in a fire sale of the business and the need to pass the business interest through probate court. In this process, the fiduciary appointed to administer the estate — often the surviving spouse or next of kin — will be compelled to appraise the company, the value of which will become a public record. The business in this scenario will be sold from a position of weakness, which will negatively impact value. Decisions in connection with preparing the business for sale will be subject to the supervision of the probate court.
Without a clear plan, family members may fight for control of the business or the owner’s general estate, leading to contentious and destructive litigation. This leads to further mismanagement of the business, and significant decline in value, as well as family discord.
By engaging a trust and estate attorney, owners can provide advantageous tax and wealth planning, and communicate now to their family and the next generation how they want the business transfer to be executed. It’s best for business owners to address all of this now. By asserting control over the outcome, there’s a much better chance to maximize value and preserve family harmony. ●
INSIGHTS Legal Affairs is brought to you by Buckingham, Doolittle & Burroughs, LLC.
