Chart the Best Course

Deciding To Keep or Sell a Family Business

After 20 years at the helm of the family business, Maite is considering selling the company next year. After all, her company has satisfactorily matured, and she believes the time may be right to put it on the market. But questions plague her. How can she be sure it’s the right thing to do – for her, for family members active and inactive in the business, and for loyal non-family employees?

The answer, of course, depends on numerous factors, including the company’s value and current market conditions. Maite has wisely chosen to take her time before divesting. That way, our fictional business owner can properly plan and – in conjunction with M&A experts – assess the most expeditious approach to her goal.

Keeping It in the Family

First she considers keeping the business in the family. Her experienced team of M&A professionals analyzes her company’s financial situation and market position, among other factors. Here are a few highlights:

Valuation. First, Maite obtains a business valuation. The value may well determine Maite’s final decision and certainly drives the plan if she intends to keep the business. Then she must determine whether to transfer the business during her lifetime, on her death or on her husband’s death. Of course, the company’s value and Maite’s plans interest numerous parties, including tax authorities and her family.

Let’s say Maite decides to will the company helm to her spouse. No estate tax will be due then because of the marital deduction, but it will be due on her husband’s death. But Maite and her spouse might want the value minimized for the future estate tax payment on his death. Federal estate tax begins at an effective rate of 41% (on assets greater than the estate tax exemption of $1 million) and moves quickly to 49% (on a taxable estate greater than $2.5 million). Conversely, as you might imagine, the IRS is vigilant in looking for businesses that may have been undervalued in an effort to minimize taxes. This is particularly true for businesses whose fair market value is disputable.

Active and inactive heirs also may have different views of the business’s proper value, especially if they don’t hold interests in the business or if their inheritance is to be “equalized” from other assets (that is, compensated for their share of the business through assets other than the business itself). So make sure your valuator clearly understands the valuation’s purpose.

Transition. Maite will turn 64 next year. Therefore, retirement is another option she must consider. If she chooses to keep the company, she must decide whether everyone now involved in the business should stay involved. That means assessing personnel’s aptitude, ability and temperament. Then she must determine if only those children who are active in the business retain current, or have future, ownership of it. Finally, she must decide what inactive heirs should receive.

Without considering these issues, Maite would be less inclined to make an ownership transition during her lifetime. And that might not be in her (or her family’s) best interests.

Decision-making authority. Presume at this point that Maite has decided to leave the business to her heirs. She must then determine who will take the helm when she leaves. If she’s not done so already, she should empower those running daily operations to make important decisions. She should consider whether the decision-makers should report to a formal or informal board of directors, or an institutional executor or trustee. With her M&A team of experts, Maite should examine whether her company can meet its capital and borrowing needs and how it can maximize its intellectual capital. If a solid management team already exists, it should have an incentive to stay on when the next generation of Maite’s family assumes ownership and control.

Full benefits. Many business owners don’t take into account the value and extent to which they are receiving benefits from the company in addition to salary. In our example, Maite must recognize medical benefits, perquisites, pensions and employment opportunities for herself, family members and others before deciding to retain or divest the business.

Estate plan. Contrary to popular belief, having the correct legal documents doesn’t constitute a business continuity plan, nor should that plan remain static. Changing tax law and values require a periodic estate plan review, as do changing children’s (and grandchildren’s) ages, maturity and marital status. Health concerns also affect planning. If Maite wants to keep the business in the family, an estate plan is a key component.

Letting It Go
Let’s say Maite decides to sell the business to outsiders. Here’s a look at the salient issues from the seller’s side.

Value. A buyer bases a business’s value on strategic benefit and fit with other businesses, earnings and cash flow, and the management team. For the seller (Maite in our example), the gross value most often determines whether to sell. Note that consideration paid can take several forms and should be carefully structured and negotiated.

Getting at net value. The extent, timing and payment of taxes (be they capital gains tax, income tax or estate tax) on the proceeds can and should be planned. Total purchase price should not be as important as the net value to the seller and his or her family. The buyer can be convinced to deliver more to the seller if it is more tax efficient for him or her.

Presale planning. A great deal of planning should take place before any sale transaction. The more time that elapses between the implementation of a strategy and the sale transaction, the better the potential to preserve wealth and structure a deal that is beneficial to all parties.

Transaction strategy. Before a business goes on the market, have your expert examine its financial status and state it in the best possible light. In other words, balance sheets and income statements may need to be re-evaluated. Fortunately, Maite’s M&A experts helped her identify an appropriate buyer (from a field of strategic, financial, institutional and management candidates) and communicated with that company’s representatives throughout the process.

Implementation and positioning. Before negotiations began, Maite and her M&A team defined her role and others. By doing so, the sale process moved smoothly and she was on track to the best possible results. Experienced advisors helped her determine the most effective offer process.

Post-sale planning. Coordinating a change in the assets’ makeup (for example, from stock in a closely held business to liquid assets) requires an income and security analysis and a review of any existing estate plan.

Smooth Sailing

Chances are, you wouldn’t drive to an unfamiliar destination without a map. Neither should an owner even contemplate selling a business without a plan. That plan will reveal the best course of action and chart how to get you there. Please call us to help you navigate your way to the successful sale of your business or with any other M&A issues you may have.

Sidebar: Pertinent Considerations

There’s no one-size-fits-all answer to a businessperson’s keep-or-sell conundrum. Fortunately, there are several constants. The decision to retain or sell a company includes considerations such as:

  • The owner’s desire to work or retire,
  • Family dynamics,
  • Financial security for working family members and shareholders,
  • The current business environment as it relates to the business’s market value,
  • What will and should happen to loyal executive and employee groups,
  • The extent of the owner’s assets, and
  • The tax impact.

These are a just a few of the many items to review before making a decision. Call us for more detailed information.