The one maxim that holds true for all
business owners is that eventually
they will be forced to exit their business. For many, the next best thing to perpetual ownership is having a child assume
control.
When preparing to transfer a family business, it is critical to expose children to all
aspects of a business early on, so they will
be aware of the myriad challenges
involved.
“Bring the kids into the business as
they’re growing up, so it becomes part of
them,” says David Rose, executive vice
president of Gumbiner Savett Inc. “Let
them work evenings, weekends and summers in their teens, so they can get to know
the business and learn what the challenges
are.”
Smart Business spoke with Rose about
the challenges that multigenerational businesses face, the importance of delegation
and how to avoid excessive inheritance tax
costs.
What is the most common mistake parents
make when passing along a business to a
younger generation, and how can this mistake be avoided?
One of the most common mistakes parents make is dividing their assets equally
among their children. This can be a problem since not all of the children may be
involved in the business. The active participants will have different business objectives than the inactive owners. Inactive
owners want to receive dividends and cash
from the company while active owners
want to retain cash and use it to grow the
company.
One business owner, whom I served for a
number of years, not only founded his own
company, but he also invested in real
estate. What he did was give the company
to his son, who was co-managing it, and
gave the real estate to his daughter who
was not actively involved with the business. Not only did he take care of each of
his kids, but he also put each of them in
positions where they were not in conflict.
Avoiding this kind of conflict is key to a
business remaining a successful, viable
entity of its own.
How can a founder’s inability to delegate
adversely impact the business?
Founding owners are risk-takers with an
entrepreneurial spirit who are willing to
put in 80 hours a week to make their business successful. Often, not only do they
know every supplier, every employee and
every customer, but they also handle marketing and administrative functions. When
the business takes off, the founder may
become the force that limits the growth of
the business because he or she is used to
doing everything him- or herself.
Ultimately, the founder has to make the
choice to allow other people to assume
responsibility and do the best they can,
knowing that mistakes will be made.
Learning to delegate and trust so the company can continue to grow is one of the
most difficult tasks that founders will eventually face.
What inheritance tax considerations should
be taken into account with multigenerational
businesses?
One way to avoid inheritance tax costs is
to gift ownership to the next generation
during the organization’s growth years and
before mature valuation is achieved. For example, if you have a company currently
worth $1 million and you give away a percentage of the company now, there will be
far less tax to be paid than if they inherit
the business later on when it is worth $10
million. It is important to start the succession phase of the planning early on in your
company’s growth pattern.
What advice would you give to a multigenerational business about establishing a philanthropic commitment?
I believe it is very important for people
who succeed in their business goals to try
and give something back to the community that fostered their success. We don’t
have a caste system here, where if you’re
born poor, you’re going to die poor. The
world we live in, here in America, gives us
the opportunity to be successful. At some
point, it’s important to say thank you, and
there are many ways this can be accomplished. For example, donor-advised funds
allow you to place money with a charity
and make suggestions on how the money
should be used.
Many wealthy families like to start their
own foundation with the goal of ultimately
having their children run it. Not only does
a family foundation serve the community,
but it also serves as a money-management
tool for the younger generation as they
learn how to research and select charities,
as well as manage the foundation’s assets.
How important is it to get outside help with
succession planning?
It’s very important. A family’s accountant
generally knows more about its asset structure than any other outside person. When
the accountant teams up with an estate-planning attorney and a life insurance broker, they can work together to help the
family define a plan, pick a proper trustee
or executor, and work with him or her
when the time arrives to make sure everything is done efficiently.
DAVID ROSE is executive vice president of Gumbiner Savett Inc.
He has worked with many multigenerational family businesses
and has advised them in their transitional phases. Reach him at
(310) 828-9798 or [email protected].
