Only one-third of family owned businesses successfully transition to the second generation of ownership and only about one-tenth of family owned businesses succeed to the third generation of ownership.
While a business owning family must have the objectivity to recognize when the time has come to sell its family business, there are many compelling reasons to maintain family ownership when circumstances permit. These reasons include: family owned businesses are often the primary livelihood for members of succeeding generations; the family business often defines the family and its role in the regions served by the business; the business is a more valuable economic asset for the family if ownership is retained than if the business is sold; and, the tax costs of selling a family business can be confiscatory.
Successful transition of the ownership and management of a family owned business to succeeding generations requires ongoing pro-active planning, clear communication among family members and objectivity with respect to expectations and performance evaluation. There must be agreement and a clear understanding on the part of the family as to the mission and vision of the business and what family members should expect in terms of ongoing economic benefits from the business. There must be agreement as to the qualifications, if any, for next generation family members to be eligible to become shareholders or owners. There must be agreement on the policies concerning eligibility of family members to become employees, their level of compensation and the manner in which their performance will be evaluated. Furthermore, the current owners must have an ongoing plan for the transfer of their ownership to the next generation in a manner that meets the current owners’ economic needs yet accomplishes the transfer of ownership to the next generation in a tax-efficient manner so that the business or significant components of the business will not need to be sold to fund estate taxes.
At Starboard Leadership Consulting we work with the current owners of family businesses to achieve these objectives. We usually begin by working closely with the founders of the business to understand their perspective of the family business and their objectives for family business succession. We then develop a process agreeable to the founders by which we can gain an understanding of the perspectives of each member of the family with respect to generational succession issues. We then expand this work to include other members of the family to develop a durable, transparent and ongoing approach to implementation and ongoing maintenance of the family’s business succession plan.
Family Asset Planning
Maine is vacationland, and thousands of seasonal properties and related assets, such as yachts, are in their second and third generation of ownership. There is often a strong desire by these families to maintain family ownership of these assets while perpetuating family harmony and ensuring recreational opportunities for generations to come. Thoughtful planning and selection of the ideal ownership structure is necessary to achieve these objectives.
Rising property values create estate and gift tax planning challenges. Rising property taxes and maintenance expenses increase the burden on the ability of next-generation family members to continue to own the property.
At Starboard, we guide families through the process of planning for the future of family-owned properties. We assist families in identifying their goals and preferences for ownership and use of the property. We design collaborative processes and facilitate family meetings where the goal is to achieve a fair and equitable outcome. We also have seamless access to Rudman Winchell's extensive experience in handling the legal aspects of these projects, thereby enabling families to benefit from Starboard's planning expertise and Rudman Winchell's proven experience with handling associated legal matters.
Over the years, Rudman Winchell has assisted dozens of property owners and families in designing ownership arrangements including family trusts, family limited liability companies, and joint ownership agreements for multi-generation property ownership situations. Our work with families has included facilitation of family-wide discussions and collaborating with families' regular legal, tax and financial advisors to achieve tax-efficient outcomes with sustainable financial plans using ownership vehicles that minimize the risk of outside interests jeopardizing family ownership. We have also assisted numerous families in designing family decision-making and governance arrangements that fit their particular situation and provide mechanisms for resolving differences of opinion in a fair and equitable manner.
Examples of our Family Business and Asset Work
- In response to a plea for help from one family, we helped three family constellations (originating with three sisters) come to consensus on the equitable division of a substantial bequest of waterfront land and buildings on a Maine island. We designed a preliminary assessment that engaged family members individually and then facilitated two family meetings involving three generations of participants. The sum of this process resulted in mutual agreement on a division of property. Importantly, the families were committed to maintaining goodwill and harmony among members and, as a result of our neutral facilitation and mediation of key points, they were able to achieve this outcome. Rudman Winchell then stepped in and, in collaboration with the family's legal and financial advisors, prepared legal transfer documents and assisted one branch of the family in creating a family limited liability company as their ownership vehicle.
- In another example, Rudman Winchell assisted a family ownership group on the Maine coast to form a family limited liability company, which now owns a large tract of land with substantial shore frontage and undeveloped acreage. A conservation easement was designed to achieve the family's conservation objectives, reduce the value of the land in the owners' estates, provide for a charitable income tax deduction, and reduce the local property tax burden going forward. The parent-owners of the property transferred the land to a family limited liability company and then took advantage of valuation discounts in gifting limited liability company ownership interests to their adult children. The operating agreement contains a management and decision-making framework for the family, as well as transfer restrictions that minimize the likelihood of ownership interests falling into the wrong hands. It also provides a mechanism by which family members who no longer wish to be part of the ownership group can sell their interests to the remaining members of the company without imposing undue financial hardship on the buyers. This is the type of plan that can result from Starboard's up front work with families in planning for the future of their property.
For more information contact us at: 207-992-4400.
