Process is key to transferring your business

WHEN DAD OR MOM want to transfer the family business to one or more of the kids, some challenging problems arise. But, in practice, the parent-to-kid business transfer is a piece of cake when compared to any other kind of transfer or succession attempts. Let me be specific: Multiple people own your business. For example, it could be owned by two or more brothers or sisters; cousins; two or more unrelated

WHEN DAD OR MOM want to transfer the family business to one or more of the kids, some challenging problems arise. But, in practice, the parent-to-kid business transfer is a piece of cake when compared to any other kind of transfer or succession attempts.

Let me be specific: Multiple people own your business. For example, it could be owned by two or more brothers or sisters; cousins; two or more unrelated owners; or any combination of the above. Assume the business has prospered. So have the owners.

Everyone gets along fine when it comes to growing or running the business.

But mention transfer of ownership or succession planning – silence, uncertainty, fear. Can’t agree on price, terms, when or to whom to make the transfer, or what to do if someone dies, retires or becomes disabled.

Why is the above scenario so true? My 40-plus years of experience in this area pinpoints one top-of-the-pile reason: the lack of a single in-charge and in-control voice. When you have a mom or dad-to-the-kids situation, everyone knows dad or mom is boss, so they listen.

All the other ownership situations listed above have two or more voices of ownership.

Each additional voice adds to and complicates the problems. And, don’t forget, these multiple owners have spouses and often each spouse has a different agenda than his or her spouse and owner.

If one of the owners dies before a comprehensive transfer or succession plan is in place, there are typically two winners: the IRS and the lawyers. Everyone else – the family of the deceased and the surviving business owners – loses.

We recently put in a succession plan for five brothers (each owning 20% of Success Co., which they inherited from their dad). Two of the brothers were not active in the business. Of the three business brothers, two had kids in the business, but the third brother did not. None of the brothers or their advisers could come up with a satisfactory succession plan. The process of how to solve the above problem may be more important than the solution.

Following is the process, which we have been using for 21 years:

We requested, received and reviewed a package (the four items listed at the end of this article) of information from each brother.

We separately interviewed all the brothers by telephone to get their long-range goals for themselves, their family and Success Co.

We arranged an all-day meeting so everyone could be in the same room at the same time.

We drew a tight agenda crafted from what we learned in items 1 and 2 and by asking each brother, the company lawyer and CPA (both attended the meeting) for any items they would like on the agenda.

We opened the meeting by having each of the brothers recite their goals to the group. With minor exceptions the goals were true to the telephone interviews.

We made three lists: A. items to which everyone agreed (the biggest was “want the business to continue in the family”); B. minor disagreements; and C. major disagreements.

Of course, because of our advance interviews and preparation, we knew what would be on the three lists.

Next, we gave a sort of seminar on what strategies to use, mostly how to resolve tax and emotional issues and how each strategy would fit into a comprehensive plan.

The A items were easy; the B items (with one exception that became a C item) were conquered without too much difficulty. The C items took almost half the day. All issues were resolved during the meeting except one (there were three separate viewpoints on this issue).

Finally, we implemented the plan over the next two months while working on the one open issue. That issue, the value of Success Co., was never completely resolved, but we created a strategy to overfund the eventual buyout, using insurance, that satisfied even the brother pushing for the highest business value.

When all was said and done, we had implemented five separate wealth transfer/estate plans for each of the five brothers (and their individual families).

Each of these five plans dovetailed with the transfer/succession plan of Success Co.

Are you one of a large group of multiple owners who has a transfer/succession plan problem? If so, you are invited to join the reader test to solve your problems.

So, if you qualify and want to participate, please send the following information by courier (send copies, not original documents) for each owner:

Personal. Your current personal financial statement for you and your spouse, and your last Form 1040.

A family tree. Your name, age and birthday. Same for your spouse, kids and grandchildren. Indicate which kids are in the business.

Estate documents. Wills and trusts for you and your spouse.

For the business. Your last year-end financial statement, tax return and a list of stockholders.

Send to Irv Blackman, Multiple Owner Test, Blackman Kallick Bartelstein LLP, 300 S. Riverside Plaza, Chicago, Ill. 60606. (If you have a question, call Irv at 847/674-5295).

Irving Blackman is a partner in Blackman Kallick Bartelstein, e-mail at [email protected]