In my last post, I discussed whether it might be a good idea to sell your business before (or after) 2013 — a complex decision that is looking even murkier. What seems crystal clear, on the other hand, is that now is a fantastic time to give shares of a business to family members.
At the end of 2010, Congress increased the lifetime gift tax exemption to $5 million, from $1 million, for individuals and to $10 million, from $2 million, for married couples. These changes, however, are set to expire in 2013, creating a two-year window of opportunity for business owners to keep more of the family business in the family and less of the business from going to Uncle Sam in the form of federal estate and gift taxes. “We are in the prime transfer tax situation,” said Rebecca Hurst, a tax and estate planning lawyer with Friday, Eldredge Clark in Fayetteville, Ark.
But before you rush out and start bequeathing stock to your progeny, it’s worth noting that not everyone in the business community gets warm and fuzzy when it comes to passing shares of a business to subsequent generations. While it may seem like both a loving gesture and a way to ensure the longevity of the enterprise, gifting can be the worst possible option for both the business and the family that owns it.
“How many times do I have to watch this bad movie?” asked Tom Deans, author of “Every Family’s Business” and a critic of what he calls “the longevity myth” that surrounds family-owned businesses. Mr. Deans says that giving away a business is both dangerous and corrosive. In fact, he says, no family business should be given away. He estimates that roughly 30 percent of family businesses make it from the first to the second generation, while only about 3 percent make it to the third. “Family businesses,” he said, “are not built to last.”
Having worked with a number of family-business owners over the years, I wondered how Mr. Deans’s message was received on the speakers circuit, where he currently spends most of his time. “Ten percent of them won’t hear it,” he said. “They believe they are different or special, that they can beat the street.” He added that advisers to business owners frequently assume that the business is not for sale and consider the topic taboo. “It’s a no-fly zone,” he said.
In the case of Mr. Deans’s family — with a history of business ownership going back four generations — the opposite was true. “When I joined the family business,” he said, “my father gave me the same choice that his father gave him. I could either raise the capital to buy the company from him, or I could help him sell the business to an outside buyer, for which I would be well paid.” Being given the business was never an option.
The family has an impressive track record. Mr. Deans’s paternal grandfather started a chemical company in the 1950s that he sold in 1997 for $118 million. Mr. Deans’s father started a plastic sheet manufacturing company in 1973. After almost a decade as president and chief executive, Mr. Deans helped his father sell the company in 2007 to a billion-dollar European competitor. While he can’t divulge the final sales price, he said that it was an all-cash deal for a multiple of 10 times earnings.
“It’s not about denying the next generation anything,” Mr. Deans said. Rather it’s about preserving what he considers to be the family’s true legacy — not the business itself but the two most precious things that the business creates: substantial personal wealth and the values required to nurture the next generation of entrepreneurs.
“The family, the idea at the center of all that is good, is an institution that consistently and predictably pulls itself apart in its attempt to perpetuate its business,” Mr. Deans wrote in a recent blog post. “Building great families is often at odds with building great businesses. Family and business work in equal but opposite directions, with family thriving on fairness, and business thriving on decisive control and leadership.”
Regarding the latter, Mr. Deans suggests that leadership of the family business should be determined by the child or children who express an appetite for risk and hard work, as well as a clear understanding that the family business is something that will require change and innovation. “Those are qualities that are hard to find in most traditional family businesses that end up being gifted,” said Mr. Deans. “It has always been hard to change a gift — and even more difficult to sell one.”
Barbara Taylor is co-owner of a business brokerage, Synergy Business Services, in Bentonville, Ark. Here is her guide to selling a business.
Article source: http://feeds.nytimes.com/click.phdo?i=79df499e5917b74f092334aae5598d96