Family-owned business succession planning is a deep passion for me. Unfortunately, like starting a diet or an exercise routine, preparing for changes in business ownership or control is often hard to start and implement. However, intentional planning and implementation of business succession also typically results in disproportionately positive results.
In advising stakeholders on business succession planning, I typically start with three questions. The answers to the questions will dictate the individualized plan that must be workable both technically (legally) and in practice (appropriate to the necessarily strong feelings of the people involved).
First, what are the goals of the senior generation?
The senior generation (not always senior in age), which is transitioning out of a business, has the biggest influence on whether and how succession planning can occur. I regularly joke that, “Mom and dad are always right.” The truth is that nothing is going to happen if the senior generation (that presently has control/ownership of the business) does not want it to happen.
Second, what are the goals of the junior generation?
Sometimes, the senior generation has dreams of a successful transition of a small business, but the junior generation, which is transitioning into ownership/control of the business, simply does not have the passion to satisfy those dreams.
Thus, in my practice, near the beginning of any business succession planning, I insist on a separate meeting with the junior generation to get an honest assessment of their commitment to wanting the disproportionately higher risks and rewards associated with control and ownership of a business.
Because owning a business in any field is almost never a 9 a.m. to 5 p.m. proposition, I typically also conference with spouses of the junior generation, even if those spouses are not expected to be a direct part of the ownership/control, because of the strain that business ownership and control necessarily puts on the families of owners/managers.
Third, what can be done to protect assets from long-term care expenses and decrease or eliminate taxes?
Family businesses may already have been in existence for multiple generations. However, the way that mom and dad bought the business from grandparents 30 years ago is almost certainly not the way succession would be best undertaken now.
Particularly in the last 20 years, the quantity and quality of tools and resources available to accommodate succession planning continues to grow. Those tools are especially crucial due to the additional complexities of Medicaid and other long-term care eligibility. The tools can help to decrease and avoid capital gains taxes for the senior generation and any family members of the senior generation who are not involved in the business.
When properly undertaken, family succession planning can result in significant tax and nursing home expense savings while maintaining family harmony. Like any change, beginning succession planning is hard. However, the satisfaction and magic of small business success can be magnified in win-win ways when the three questions above are asked at or near the beginning of any business (family or non-family) succession planning process.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.