Recently one owner of a business died, the father. He and his wife had started and operated the business together. He became ill and after a long health crises, one with ebbs and flows, he died. His role with the business also ebbed and flowed as his health demanded. The wife was increasingly responsible.
Knowing he was ill, they took steps to put a will in place. His share of the business was to go to the children. However, no specific plan was in place as to how to do this. Would the children be involved? Would they receive some fixed annual amount? What if some wanted to own and others wanted to have a buyout?
Thus is the saga of so many family owned businesses.
This specific case is that of a family friend. The wife asked what I knew. And while this is not my area of expertise, it is a subject others specialize in and I do have a few observations and skills that can contribute. I could help my friend through an Internet search. Here is the content of my response:
I spent some time finding articles, Internet sites, and resources that might help your family. Obviously I am not an expert in this and so only provide my insights here from my brief review of each of these sources:
- Every family has their own needs and makes different arrangements. Doing this in advance of death or disability is very important.
- It might be helpful to get the monkey off of (decedant’s named family member) back by suggesting to him (and the balance of the family) that he become the resource finder (of experts) for the family, rather than the decision maker. What a horrible position for him to be in.
- I was always impressed at how, though with issues certainly, one family of many siblings and the remaining parent brought experts to the table to help them through the conversion after the patriarch’s death. There was a board set up that made ultimate decisions about leadership, dividends, sell as ESOP to employees, etc. Family members continued to be paid for the job they had in the business and a replacement person came in to take the patriarch’s place. There was no split of the patriarch’s wage between family members to the best of my recollection.
- Many of the articles and Internet sites herein are talking about planning. This reminded me that the other (descedant) family members will be in a worse predicament if the remaining parent and business manager gets hit by a Mack truck. Perhaps this exercise of getting help because of the father’s death can also begin the planning for the potential death of any family member involved in the business. These ‘experts’ speak to having a plan for the potential, having buy-sell agreements in place, choosing successors if that makes sense (or not,) purchasing key-man insurance that will give inheritance if at the death of the leader the business can not be sold or loses value. Apparently some large number, like 65% fail after the death of the owner.
- What I have seen in my work with businesses:
- The IRS might have something to say about all of this if not for the current situation, when you die (no I am not predicting you early death-you better not),
- Valuing the business at the date of death, not after or based on decisions made after death, is often the practice and demanded by IRS in some situations
- Having at-arms-length counsel and valuators works best
- Usually the family members who work in the business take a reasonable payment for their services in operating the business, and then, after decisions about putting money back into development of the business, all owners may or may not take a ‘dividend.’ Who makes these decisions has to be declared.
- In addition to the valuation services I provide, there are experts across the nation in business valuation. (In the case of larger businesses, find an expert in 59-60 rule valuations. This is an IRS demanded protocol for business valuations in the case of death-though not applying to all businesses.)
- There are people who are experts in providing counsel to families for planning and execution.
Note Blog Readers: In gathering materials for my friend, there were some articles that spoke to the planning process. They came as pdfs. If any reader would like to have copies of these, please contact me.