The toughest stockholders meeting you’ll ever face is over the family dinner table. While all major corporations may look the same, each family business truly bears the stamp of the clan members who make it up. Nowhere it is more evident that all business is personal than when you layer the roles of close relatives in with those of partners in an enterprise.
Can money and family mix amicably and successfully? Fairleigh Dickinson University’s Rothman Institute of Entrepreneurial Studies says yes, and toward that end is hosting its Family Business Forum program series. To explain the many complexities of shifting business ownership within the family, the Institute presents “Reducing the Cost of Succession in Today’s Society,” on Thursday, April 2, at 8:30 a.m. at FDU’s College at Florham in Madison. To register, call 973-443-8880.
Forum panelists include Andrew Bluestone, CEO of Selective Benefits Group in Morristown; Jeff Jaskol, CEO of the Voorhees-based Jaskol Group; and Edward Ahart, business law attorney with Schenk, Price, Smith & King in Morristown. The program is designed for owners, partners, and senior stakeholders considering a plan for bequeathing or simply selling their portion of the company at a future date.
Financial planner Bluestone claims his career was a fortunate happenstance, but to anyone else’s eye, he seems as a man who always knew what he wanted and went after it. A native of Edison, Bluestone attended Hofstra University, graduating in 1980 with a bachelor’s in finance and economics. Within two years he stepped into the entrepreneurial realm and founded Selective Benefits Group. For nearly three decades Bluestone and his firm have been successfully handling other people’s money. Today, with offices in Morristown and Allendale, Selective Benefits Group guides more than 15,000 policy holders on problems ranging from tax management and estate conservation to insurance and annuity products.
“Family businesses are truly unique, yet they are the most common kind of business in the country,” says Bluestone. “They also have unique tax laws that the government has established for them.” Wrap this individual complexity in several layers of bristly emotion, and you have set the stage for transferring ownership of the family firm.
Order your house. Before considering transfer values or participatory stakes — before even thinking about the company — Bluestone advises owners to step back and get their personal assets in order. “This is a frequent problem,” says Bluestone. “Dad and mom have sweated their lives away building this company and there is a tendency to let personal finances slide.” Owners should renew their wills and insist all partners and stakeholders do the same. Review any insurance policies or instruments held by stakeholders that are tied to the business.
“The number of potential heirs can run deeper than you think,” says Bluestone. “If brothers start a business, they have not only children, but grandchildren from separate families, plus fringe in-laws, et cetera.” It takes thought and partner discussions to define your own heirs, avoid overlaps, and decide on fixed-fee or share bequests for each. Additionally, owners should total up all fiscal liabilities that come due with their demise or departure from the company helm.
Delicately dealing shares. A man with three children labors 30 years and wants to pass on his company, dividing it among all three. Fine. A three-way split sounds simple. But now suppose one son came in to work at the firm, while the elder son became a teacher and the daughter a lawyer. Or suppose two children worked with the firm for varying lengths of time. While the second child came to work with dad, the firm grew from $10 million to $30 million during his shorter tenure. “It’s going to be an emotionally charged situation,” says Bluestone. “Count on it. Figuring who gets recompensed what percent is a knotty problem — but one you must face.”
Ironically, it is in family held businesses that principals tend to know least about what everybody is doing. Dad may say “Julia does a real bang up job in our sales and my son Tom also helps out around here.” The actual truth may be that it has been Tom’s innovative “helping out” that has transformed production and made Julia’s sales skyrocket.
The reason for a potential unjust weighting of relative contributions is that Julia was given an actual position — director of sales, whereas Tom came onboard with no clear title or direction. For an owner to value his people’s share in the company’s success, he has got to see their contribution, based on specific job titles and descriptions.
Evaluating for transfer. Every company has a book value and the less tangible, but fiscally equal, value of good will. The former is more than the sum total of assets and invoices. Hiring a top notch business evaluator is the best investment any company principal considering a transfer of ownership can make. Using an income, asset, market, or a combination of approaches, the evaluator will get a sense of the business and provide you with documented evidence of what the company owners seek to pass on.
One irregularity that frequently raises an evaluator’s eyebrow is the family business credit card, given to every member of the family, who invariably end up using it for nonbusiness purchases. Such little faux pas as these can lead to serious jail time.
“The good will becomes a tricky issue,” notes Bluestone. “If the original owner has built up 30 years of good relations with suppliers, clients, and bankers, it’s unlikely that anybody in the family will be able to pick up where he left off. The business’s worth will unavoidably drop drastically. The heirs might inherit only a small fraction of what their parents actually created. One solution is to bring the heirs into the business and introduce them around to all important contacts. Let people see that good will reflecting off the future owner.
Pre-estate planning. Businesses are like babies — worth a lot more if undivided. So the trick in estate managing is to keep the company whole, and in the heirs’ hands. The choice, however, might not always be the heirs’ alone.
The proprietor of a $10 million company dies and even after the 2009 estate tax exclusion limit of $3.5 million, the heirs could find themselves hit with a $1.5 million tax bill. Liquidation might be the only viable option. The good will has vanished, the staff and experience are gone, and bricks and mortar go at bargain rates. It is an avoidable, but all too familiar picture. Bluestone suggests buying an inexpensive annuity or life insurance on partners to handle taxes upon the owner’s death.
Between spouses transfers of cash or business shares may be made with typically an unlimited deduction. Also, the bypass trust has become recently popular, because it allows the spouse use of money or property placed in it during their lifetime, but upon the spouse’s death, the business ownership reverts to and remains with the intended heirs. The spouse gets the benefit, but the actual business is not suddenly taken from the son to be split with mom’s heirs.
Bluestone suggests that the easiest way to avoid federal and state death taxes is to donate the funds or shares while alive. Individuals may make annual gifts of up to $12,000 annually with no gift tax. If the donor is married, even if only one gives the gift, this amount can go up to $24,000, with a lifetime tax exclusion of $1.1 million. There is also unlimited charitable deduction for estate and gift tax purposes.
The government recognizes the necessity of keeping the nation’s family businesses up and running from generation to generation. There is even a separate formula established by accountants in figuring tax and business valuations for these companies. Now it is time for the families to step up and plan for their own survival, and not let mom’s and dad’s dream die with them.