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Learning The Ropes Of Family Business Succession

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If you market to high-net-worth clients, then you undoubtedly find yourself involved with closely held business owners. I find these the most interesting clients to work with.

Fulfilling the needs of a family-owned business can result in multiple revenue streams for your practice. Alas, at some point, these clients will need to transfer their business interest in order to meet their personal, financial or estate planning goals.

You do not want to lose clients as a result of the business succession, so you should become familiar with the problems and solutions they face. Guiding these clients through the transition allows you to bring greater assets under management and to see increased sales of insurance-based products.

All in the Family

According to the U.S. Small Business Administration, only 30% of all family businesses succeed to the second generation, and of these, only 15% survive into the third generation. The success of the transfer will depend on your ability to get your client to overcome inertia and to state clearly how their family is to be involved.

Clients need to ask themselves:

  • Is the next generation ready to lead?
  • Should the business successor be the person best able to run the business or best able to keep peace in the family?
  • What roles should children adopt prior to and after transition?
  • Should business interests be transferred only to family members involved in the business?
  • If so, are other family members going to get equal value out of the estate?

Once the family dynamics are addressed, your client needs to determine the companys value. An accurately appraised value of the business is vital to the clients estate and succession plan.

There are many factors that go into valuing a business, including the negotiated price between a willing buyer and willing seller, comparable sales, multiple of earnings or other formula standards for the particular industry.

Given the magnitude of the transfer and the IRS scrutiny applied to intra-family transfers, I always recommend working with an experienced third-party appraiser who has knowledge of your clients industry.

More on this topic

One can transfer a business interest through gifts, a sale or through the estate at death. You do not need to be an expert in these techniques, but you should have a working knowledge of the concepts. There are pros and cons to each method, so your client should work closely with a lawyer and tax advisor to determine the best approach.

Gifting techniques include direct gifts using the annual gift exclusion, family limited partnerships for valuation discounts and grantor-retained interest trusts. An owner can sell a business interest to family members using installment sales, self-canceling installment notes or a private annuity.

Of course, every business owner should have a fully funded buy/sell agreement. The buy/sell is a legal contract that prearranges the sale of a business interest.

The agreement allows the present owner to retain control until the occurrence of events specified in the agreement. Common triggering events include retirement, death, permanent disability, bankruptcy or divorce.

An improperly designed estate plan can wreak havoc on a family business. A client who desires to pass a business interest at death needs to consult an estate-planning attorney and get the family onboard as soon as possible.

Although financial advisors cannot and should not act as accountants, appraisers or lawyers, we can still play a vital role in seeing that our clients are able to pass on their business legacy to the next generation. With a little understanding of the emotional and financial issues they face, we can help our clients make the tough decisions, create the best plans and see the right experts.

If we do that, then insurance sales, annuities and asset management fees will follow. If we do not, then we may end up just like the statistics above. We wont continue to have those ideal family clients into the next generation.

, CFP, is a vice president of the Wealth Management Strategies Group at Advest, Inc. He can be reached via e-mail at [email protected].


Reproduced from National Underwriter Edition, September 9, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.