Building your wealth
Family Business Owners' Three Biggest Practical Personal Wealth Questions
You have a dream. Call it “The American Dream.” It’s a business. It’s driven by your keen insight. You launch it. The market responds. You find yourself with a sustaining business.
But is that enough?
It turns out running a business requires you to answer practical questions nearly every day. When it’s a family business, those questions become more personal.
As your business becomes more successful, you’ll find you’re accumulating more than time on the job. What may have started as a small family business has evolved into a thriving commercial enterprise. Along the way, you will likely discover you’ve amassed more plant, equipment and possibly even real estate than you initially imagined.
“For those of us that have a significant amount of wealth tied into both our houses and our businesses, but without as much liquid cash, how can we transfer some of that wealth without an epic tax hit?” asks Mark Aselstine, founder of Uncorked Ventures in El Cerrito, California. “How can I begin to plan ahead?”
Liquidating hard business assets and taking those now liquid assets out of your business can cause disruptions on both the business and personal side. Fortunately, within your specific circumstances, there are no doubt strategies you can employ. Your safest strategy, though, might be to talk to an expert.
“Usually liquidity events (which is how we are typically involved from an entrepreneur’s viewpoint) are taxable events,” says Robin Lee Allen, managing partner in Esperance Private Equity in the greater New York City Area. “With recent changes in the tax code we often find ourselves recommending various accountants and estate planners to entrepreneurs.”
Chances are, your family was a lot smaller (and a lot younger) when you first opened the doors to your business. A growing family presents its own issues, and those include how the business responds to that growth.
“Can the family business continue to sustain current financial needs of the family as the family grows exponentially?” says Kevin Heaton, principal at i3, LLC in Lexington, South Carolina. “Families define their specific needs to include allocating capital for growing the overall family wealth, including an objective plan for the core business. Efforts through this approach focus on the identification and acquisition of assets that meet both the family’s current and long-term needs, establish a healthy balance for their risk/reward appetite, meet the goals of an investment time-line and support the continued growth of the family business and the family wealth.”
As you bring more family members into the business, you’ll need to immediately address compensation schedules. “The biggest family wealth related question in a family business is if the ‘profit pie’ is split fairly,” says Marina Vaamonde, a real estate investment specialist at Property Cashin in Houston. “There are always family members that feel they have invested more time and energy into the business. And as so, they expect to be compensated more for their efforts. However, in a family business it doesn’t always work out that way. The business split might be dictated by the parents who want to leave an even split to all the siblings regardless of how much work they put in.”
Of course, the easiest way to answer this question is to not view your family members as family members. “We pay family members as if they were employees,” says Mike Falahee, owner and CEO at Marygrove Awning Co. in Livonia, Michigan. “Everyone who puts time into the business should have a fair living wage. It makes me feel good that my once small business can now sustain my family.”
This may be the most equitable and meritorious of choices. “In my opinion every one of my family members has a different skill set that they bring to the table,” says Vaamonde. “In return I have a great appreciation for everyone’s contribution and always feel comfortable enough to bring up any topic during our family meetings.”
There comes a time when it will be necessary for you to change your relationship with your business. You can’t work forever. If you try, you may leave the once formidable business assets an empty shell. Avoiding this wealth reducing scenario spawns a series of very practical questions.
“How do I ensure that this wealth built up from the business lasts?” says Rochelle Clarke, CEO of Succession Strength in Miami. “I’m not an expert in this area, who would be the best person to help me and my family manage?”
There are far too many possibilities to offer a single one-size-fits-all template. Each family and each business will have its own unique answer.
Another factor that can influence the best answer is timing. It’s really never too early to begin the transfer process. In some ways, the earlier the better.
Anna Salek, partner and private client team leader at Shearman & Sterling LLP, in New York City finds family business owners often ask, “How do I protect the value of my family business from transfer tax?” She says “The best approach is to seek professional advice and seek it as early as when a business is being established and certainly well before it may be sold for a premium, privately or in an IPO. This is because the most efficient wealth transfer planning occurs when the business has a low value and a high potential for appreciation. This way, the use of lifetime gift tax exemption amounts is leveraged and, once transferred, any growth in the value of the business will avoid transfer tax at the founder’s level. There are many estate planning techniques that can facilitate an efficient tax result while allowing the founder to effectively continue to control the family business.”
You may prefer to have the family cash out of the existing business and reinvest the proceeds elsewhere. Now might be an opportune time to do this. “Private equity funds are flush with cash and paying historically high multiples for good businesses, making it a sellers’ market,” says Colin Carter, managing director at Tiedemann Advisors in Dallas.
The challenge then becomes what to do with this new-found cash. In this case, the time may be less than opportune. “For those families contemplating selling their business, the biggest questions they face is what to do with the cash proceeds from a sale,” says Carter. “Many need to replace the income generated from their business with distributions from an investment portfolio. With interest rates at historically low levels and stocks at all-time highs, many worry future portfolio returns may not be enough to sustain their lifestyle.”
On the other hand, if selling your business generates more than enough money to fully meet your family’s needs, you’ll discover you can do more than preserve your wealth, you can preserve your legacy.
“A lot of our discussions revolve around a family wanting a set of values translated into their wealth,” says Aaron M. Bates, senior vice president and senior managing director at Bernstein Private Wealth Management in Boston. “Whether that be through philanthropy or responsible investing, the family is often looking for a way to be mission-forward in their approach to handling wealth today.”
The standard here is to use these assets to meet the family’s needs and wants.
“There is no one right answer here, instead it is about customizing to the family to meet both their needs and their wants,” says Bates. “On the need side it is about the amount of liquidity a family requires to meet their needs post a sale, or alternatively without selling the business. The want is what one wants to accomplish post-sale or the amount of risk one wants to take by continuing the business or pursuing a sale. When need and want meet together, magic does happen for a family.”
A family business can be magical in many ways. All it requires is that you know the right questions to ask.
The contents in this article are being provided for educational and informational purposes only. The information and comments are not the views or opinions of Union Bank, its subsidiaries or affiliates.
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