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Archive for the 'Family Business' Category

Congress is about to do something, eventually

Posted by Robert Louis on 18 Jun 2010 | Tagged as: Estate Planning, Family Business

A bill has passed the U.S. House making changes in grantor retained annuity trusts (GRATs). The bill would require that GRATs have a term of at least ten years, and would eliminate the zeroed out GRAT. These changes would make GRAT planning a little less advantageous, although transfers of wealth involving GRATs remain an excellent method of minimizing taxes. They are particularly helpful in transferring closely held business interests. With the right kind of assets, GRATs are a valuable planning technique. The change in the law hasn’t been acted upon yet by the U. S. Senate, and they might delay for some time yet. The changes are to take effect when the bill is signed into law, so there is still time to do some effective planning under the existing rules. And, even if the changes are made, GRATs remain a technique to consider in transferring assets while “holding on to them” for a while.

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Posted by Robert Louis on 15 Apr 2010 | Tagged as: Family Business

“PEOPLE ARE FUNNY”

By Robert H. Louis

Was a classic TV show in which people did humiliating things for money. Sound familiar?

Sometimes, you can suggest to a client a very sensible course of action in deciding on the future of a family business, but find that the client doesn’t want to do it. Often, it’s because lawyers are acting in a logical way to think of a solution to a problem, taking into account tax and corporate law. But the client is thinking in a different way, adding in the cost in personal relationships in doing or not doing something. The client might agree that the proposal makes sense, but know that members of the family will view it from an emotional viewpoint, with the baggage of family relationships that have developed over many years. So the lawyer might find that carefully made plans go nowhere, for reasons that aren’t always clear or clearly explained by the client.

A situation of this type was faced by a client a few years ago. The client had a son and a daughter working in the business. He had hoped that both of them would be successful in the business, but that didn’t happen. One child was a hard worker, in at 6 AM, while the other drifted in at 9:30. The right planning technique would have been that the industrious child be recognized as the business successor, but the parent didn’t want to do that. The client loved and cared for both children and didn’t want to hurt either of them. The problem this created, obviously, was that the more industrious child began to feel that hard work was not paying off. It took several years of talking around the point for the client to understand that two paths were necessary. The children could be treated fairly equally from a financial standpoint, but one would become the business owner, while the other would be guided into another endeavor. Was this entirely fair? Perhaps not, but it reached a resolution that allowed a family-owned business to continue on and to prosper, which surely would not have happened if both children had remained in the business.

The psychological aspects of family business planning were brought home in a recent meeting in Philadelphia. A group of lawyers, bankers, investment advisors, accountants and other professionals is organizing a chapter in this region of the Family Firm Institute, an international organization for family business advisors that sponsors research and study on the issues facing family businesses and how to resolve them. At the meeting, which featured members of a family who described their history of forming a business, growing it and selling it, there were a large number of psychologists, psychiatrists and family business consultants in attendance. In discussions at the meeting, they brought home the value of bringing their expertise into the mix of family advisors, for the express purpose of helping businesses to run more smoothly and their transition to be accomplished successfully.

Lawyers often act as counselors to family businesses, stepping a little beyond the task of telling clients the law. But there are circumstances in which psychological/family issues interfere with carrying out worthwhile planning ideas in ways that go beyond the lawyer’s ability to help. It’s here that the lawyer might consider bringing in, and sharing the stage with, professionals trained in a different discipline who can help clients reach an understanding of personal and family concerns that interfere with the success of a family business. In doing so, the lawyer can increase the likelihood that the clients will adopt the lawyer’s planning suggestions and improve the chances of family business success.

(from the Legal Intelligencer)

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Posted by Robert Louis on 15 Apr 2010 | Tagged as: Family Business

What Philadelphia Has Plenty Of

by Robert H. Louis

It’s family businesses. Actually, it’s a worldwide phenomenon.

Throughout the world, family ownership is the predominant form of business operation. This is true in India, Australia, Germany and, of course, in the U.S. The Philadelphia area, including New Jersey, Delaware and southeastern Pennsylvania, has many thousands of family-owned businesses. They are the primary engine of business and employment growth in this region.

Family-owned businesses offer many advantages. A business school professor told a client’s son who was in one of his classes: “there’s nothing like a family business.” But there are challenges in family-owned businesses. The ability of a family-owned business to continue for succeeding generations is dependent upon finding the right leadership qualities in the next generation and also navigating family relationships to minimize discord.

There are many areas of family business that benefit from the help of lawyers, as well as accountants, financial advisors and business planning consultants. The services that lawyers offer include business counseling, gift and estate planning, buy-sell agreements, retirement planning and other assistance in helping the older generation feel secure in turning over the business and the younger generation feel confident in taking over.

One organization that helps lawyers and others to understand family business issues and to serve the needs of business owners is the Family Firm Institute. This national and international organization provides books, courses and web site information to help business advisors throughout the world understand and guide business owners. A group of lawyers, accountants, financial advisors, psychologists and other consultants has decided to establish a chapter of FFI in the Philadelphia area, and FFI has approved the formation of the Mid-Atlantic Chapter. We plan numerous kinds of programs in Pennsylvania, New Jersey and elsewhere in the coming year. If you would like more information about the new chapter of FFI, contact me at rlouis@saul.com.

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Family Business Planning in High Gear

Posted by Robert Louis on 18 Nov 2009 | Tagged as: Family Business

The combination of continued low interest rates, a struggling economy and uncertainty about taxes makes planning important right now.

IRS interest rates used in valuing various kinds of gifting techniques fell again in November, making the use of Grantor Retained Annuity Trusts, for example, more valuable. And compared to the situation a few years ago, they are far more effective. Many commentators suggest that interest rates will begin to rise, and it’s difficult to see how they could go any lower. Eventually, we’ll return to an interest rate regime that is closer to normal, if we still know what normal is. The hope is that rates don’t fly past normal to the levels seen in the late 1970s. But for now, methods of transferring business interests, which are generally done within family units, are more efficient with the current historic low rates.

Valuations of business interests are also low right now. Few businesses have escaped the economic downturn. A valuation done now will certainly emphasize the most recent past, and that will lead to lower valuations. Lower valuations mean that more business interests can be transferred within the constraints of the limits imposed by the federal gift tax. Lower interest rates also lead to lower valuations. Many believe that the recession has ended, and that there is reason for belief that next year will bring a strong recovery. That is, of course, similar to what President Hoover said in 1930, but perhaps history won’t repeat. But right now, for most businesses, valuations have probably hit lows that won’t be seen again for many years. So healthy businesses suffering a cyclical downturn are ideal candidates for transfers right now.

The bizarre result enacted into the federal estate tax law, repeal for 2010 and then a return of the tax at higher rates and a lower exemption in 2011, is now about six weeks away. No one believed that this taxation scheme made any sense, or that Congress wouldn’t fix it long before now. We now hear discussion of a one-year fix in the statute, continuing the 2009 law into 2010. But that needs to happen soon. And, although there have been some general proposals regarding changes in the federal estate, gift and income tax law, we have yet to see anything really concrete from the administration. It might be that change is coming in 2010, but for now we have the existing law, with many good planning techniques, intact. So, for a third reason, balancing the certainty of current law against the uncertain future, now is the time for family business planning.

Reprinted from the Legal Intelligencer

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MORE REASONS TO CONSIDER PLANNING DURING CHALLENGING TIMES

Posted by Robert Louis on 18 Feb 2009 | Tagged as: Estate Planning, Family Business

Here is a guest article on valuation from Chuck Bertsch, a well-known valuation expert who has helped many of our clients:

RE: VALUATIONS IN HARD TIMES

We often use the capitalized earnings method to arrive at the value of a business. This consists of selecting an earnings level representative of future expectations for a company and, then, capitalizing these earnings with a rate which reflects investor return requirements and long-term growth expectations [A capitalization rate is the same as a price to earnings ratio expressed as a decimal; e.g., a P/E ratio of 6 is equal to a capitalization rate of .167].

The capitalization rate is the company’s weighted average cost of capital (“WACC”). If a business is appropriately capitalized with all equity the capitalization rate, or WACC, is determined by reference to Ibbotson (now Morningstar) long-term equity returns, plus an allowance for specific risk. Alternative approaches exist.

Some companies, of course, can be financed with a mix of debt and equity. In these cases, a judgment is made as to the appropriate mix of capital inputs. A WACC which reflects the returns demanded by suppliers of both types of capital is then computed.

Suppose, for example, we have a company with $15 million of equity capital, no debt, and $3 million of net income. Using the Ibbotson procedure, we might come up with an equity return requirement of 20%. The $3 million of net income, capitalized with a rate of .20, yields $15 million as the value of the company.

If, however, we were to judge the company could be financed 40% with debt yielding 7% the calculation would be different. In this case we would compute a WACC of .148 (60% equity at a rate of .20, plus 40% debt at a rate of .07). The $3 million of net income, capitalized with a rate of .148, yields $20.3 million as the value of the company, a 35% increase from the all equity case.

Two years ago, or perhaps only six months ago, an assumption of 40% debt financing in a company’s capital structure might have been unremarkable. Today this is far less likely to be true. As we read on a daily basis, credit markets are closed to many borrowers or prohibitive in terms of cost (junk bonds have been priced to yield 18% to 20% in recent months). If we conclude that the company in our example can best be financed with only 20% debt (at rates higher than 7%), or no debt, the effect on WACC and value is obvious.

In the second paragraph above, we mentioned “specific risk.” In our view, specific risk premiums have escalated significantly over the last six months. This is partly because historical long-term rates of return do not reflect requirements in today’s exceedingly risk-averse environment; it also is because the vast majority of businesses confront much greater volatility in their earnings prospects (and, hence, more risk) than has been the case in past times.

The impact of these two factors, changes in WACC’s and specific risk premiums, mean that over the last six months most companies have suffered material declines in value even in cases where earnings have resisted the general downtrend.

Frederick C. “Chuck” Bertsch III, MBA, ASA

F.C. Bertsch & Co., Inc.

416 Roundhill

St. Davids, PA 19087

610-964-1800
610-964-1801 (fax)

fcb@fcbertsch.com

*************************************************************************************

F.C. Bertsch & Co.’s valuation practice focuses on ownership interests in closely-held businesses, partnerships, and limited liability companies. Chuck Bertsch has been valuing business interests for 30 years. He belongs to the American Society of Appraisers (where he is an Accredited Senior Appraiser) and the Philadelphia, Delaware County and Chester County Estate Planning Councils. He has served as CFO of two companies (one NYSE listed) and is a graduate of Wharton (MBA in Finance) and Wesleyan University

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Now Is An Excellent Time For Business Succession Planning

Posted by Robert Louis on 18 Jan 2009 | Tagged as: Family Business

In the midst of disturbing news about the economy, there are opportunities now available that make succession planning for businesses work well. There are two reasons: lower values for businesses and historically low IRS interest rates used in planning for wealth transfers.

It’s no secret that the economic downturn has reduced the value of many businesses. For those businesses that are well-run, it’s likely that this will be only a temporary drop, and that as the economy recovers, values should increase again. That means that this is a good time to transfer assets at the lowest gift tax cost.

In addition, the interest rates used by the IRS in determining the value of split-interest and deferred gifts is now at its lowest point ever, 2.0% for gifts made in February 2009. If a gift is made in the form of a grantor retained annuity trust, which allows a business owner to transfer ownership but defer the date when the transfer is completed, more can be transferred when the IRS rates are lower.

Succession planning is a complicated process, but the benefits of doing it correctly and at the right time are great. Now is the time to think about that kind of planning.

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The Wisdom of Dagwood Bumstead

Posted by Robert Louis on 30 Jun 2008 | Tagged as: Family Business

Dagwood Bumstead, featured in the long-running comic strip Blondie, has worked for more than 70 years for J. C. Dithers, the model for many a law firm senior partner. But that was not the way he started out comic strip life. His saga tells an interesting story about family business succession.

Dagwood began as the heir to an industrial empire, the Bumstead Locomotive Works. He fell in love with Blondie Boopadoop, whom his family considered beneath him socially. When he insisted on marrying Blondie anyway, his father disinherited him. Thus ended his future of becoming an executive in a large industrial concern, and he turned instead to more than 70 years of wage slavery, carpools, running into the mailman, etc. He seems to have become stuck as the equivalent of a third year associate. Meanwhile, Blondie started her own business, and the Bumstead Locomotive Works has disappeared. Perhaps Dagwood could have saved the company and redirected its business to defense contracting or microchips.

What’s the lesson for those thinking about family business succession, which is one of the most difficult goals to achieve but one of the most satisfying when it is achieved? It’s a better course of action for the family members to discuss each of their goals and plans. Bumstead Senior should have realized the consequences of leaving no one to follow him in the business. Dagwood could have suggested that he come into the business on a lower level so that he could prove himself. Senior’s lawyer could have explained how disinheriting his son would probably put an end to the plans to have the business remain in the family and successful. But I suppose that wouldn’t make for a good comic strip; better to feature big sandwiches and funny bowties.

Here are two sources of learning on the process of business succession, very different but both helpful. One is a book titled “Estate & Business Succession Planning,” by Russell J. Fishkind and Robert C. Kautz. The second is a series of programs on succession planning that feature a theatrical performance of vignettes in the story of family businesses. These programs have been arranged by a psychologist, Dr. Scott Budge, who has spoken for PBI on business succession planning. They are presented in Philadelphia from time to time.

Republished with permission of The Legal Intelligencer.

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Megatrends in Trusts and Estates

Posted by Robert Louis on 31 Mar 2008 | Tagged as: General, Estate Planning, Retirement Planning, Income Tax, Family Business

Megatrends is a name given to important changes in the economy or in the behavior of many people. People write books and articles about megatrends, hoping to identify them before others do and to benefit in some way (usually by selling more books). There are several megatrends that have a definite impact on trusts and estates work, and that will be discussed in future blogs:

People are becoming wealthier, even with the current stock market setbacks. This is a worldwide phenomenon and contributes to the international flavor of much estate planning.
A large number of people (the always demanding baby boom generation) are getting close to retirement and to a “final” disposition of their assets.
There is a strong interest in business succession planning, particularly in this part of the country, where there are so many family-owned businesses. To deal with these issues, trusts and estates lawyers often have to act like psychologists, or at least hire them.
People want to protect their assets against litigation and divorce, among other threats.
There is and will continue to be a need for increased tax revenues, which leads inevitably to more complex tax laws and the need to plan for them. When Congress talks about tax simplification, tax lawyers go car shopping.

The combination of these megatrends demonstrates the growing importance of the broad practice area of trusts and estates, often referred to by more general names such as personal wealth, private client or wealth transmission, and ensures that this will be an area of growing importance for lawyers, one that focuses not on death but on the enjoyment of life.

In the next blog, we’ll review the campaign to repeal the federal estate tax and the likely future of the tax and the exemption from tax, as well as efforts to repeal the Pa. inheritance tax.

Republished with permission of The Legal Intelligencer.

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Retirement Planning and Business Succession

Posted by Robert Louis on 15 Jul 2007 | Tagged as: Retirement Planning, Family Business

One of the greatest impediments to retirement by an older generation of a family business is concern about maintaining an adequate income stream in retirement. The owner/managers of a business generally rely upon the business to provide a comfortable income and to cover many expenses. There might be a reluctance to give that up, which could lead to a postponement of retirement beyond what would otherwise be an appropriate time.

We have worked with a number of business owners on this problem, and one helpful solution could be the use of a retirement plan. If there is another, assured source of income, the business owner might be more willing to give up the reins of ownership and management a little sooner. This takes some careful planning, and there are different types of plans that might be appropriate in particular cases. One type of plan that permits the buildup of a large retirement benefit in a short period of time is the defined benefit pension plan. In contrast to the standard 401(k) plan, a defined benefit plan often permits large contributions, which can create a substantial retirement benefit in as little as 5-8 years. There are rules you need to comply with in setting up such plans, but when the situation is right, retirement plans can be an important element of a business succession plan.

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Keeping The Family Business In the Family — Avoiding Unwanted Partners

Posted by Ryan Gager on 27 Jun 2007 | Tagged as: Family Business

This post was written by The Beringer Group:

In the US, the family business has, since the end of WWII, been one of the great producers of both jobs and wealth. And yet, if one reads the literature, one knows that most family businesses don’t last beyond two generations. This can be due to many causes, but one of the most prevalent is the lack of planning to tax-effectively pass the business from one generation to another.

As the senior generation business owner ages, and the next generation prepares to enter the business or, having entered, to assume more responsibility, it is typical for all of the equity and control to be and remain in the hands of the senior generation. The owner who really wants to keep the business in the family needs to begin thinking about whether equity is an asset or a liability and about whether all that he/she really needs (or wants) is control until such time as the younger generation is ready to assume company leadership. continue reading

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Archive for the 'Family Business' Category

Congress is about to do something, eventually

Family Business Planning in High Gear

MORE REASONS TO CONSIDER PLANNING DURING CHALLENGING TIMES

Now Is An Excellent Time For Business Succession Planning

The Wisdom of Dagwood Bumstead

Megatrends in Trusts and Estates

Retirement Planning and Business Succession

Keeping The Family Business In the Family — Avoiding Unwanted Partners

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