A 68-year-old man owned an auto-repair franchise with his wife. They planned to retire within five years and needed a succession plan that would transfer the business to their son and provide for their two adult daughters.
The man sought the help of Jim McCarthy, a certified financial planner with Directional Wealth Management LLC in Rockaway, N.J., who recommended a multistep approach that would help meet their objectives over time. “Transferring a business within the family is a process, not an event,” says Mr. McCarthy, who manages about $35 million for 50 families.
Jim McCarthy of Directional Wealth Management PHOTO: DIRECTIONAL WEALTH MANAGEMENT
To begin with, Mr. McCarthy suggested the couple create a family limited partnership to enable the business to have both general and limited partners. The strategy, which is often used to move wealth from one generation to the next, set the stage for the eventual transfer of the business to the children. The husband and wife were named the general partners of the new entity and retained operational control of the business.
Then, for the next five years, the husband and wife each gave their three children an equity interest in the business up to the annual gift-tax exclusion amount. This gave each of the children a limited-partnership interest in the business, providing them with an equity stake but not operational control. This helped lessen the value of the parents’ stake in the business, reducing the size of their future estate.
Mr. McCarthy also recommended the couple sign a buy/sell agreement with their son. According to the agreement, the son would purchase the parents’ general-partnership interest when his father decided to retire. The daughters were to remain limited partners.
However, the adviser anticipated that the son, who was in his 40s, wouldn’t be able to afford the roughly $4.5 million it would take to immediately buy out the parents, so he recommended the family use a self-canceling installment note instead. This would allow the son to use the cash flow from the business to pay the purchase amount over a period of years, providing income to the parents.
If both parents were to die before he finished paying off the note, any remaining payments would be canceled.
Fast forward several years: The father retired at age 73 and occasionally still volunteers in the business. The son’s monthly payments are $21,000, based on the $4.5 million stake in the business, the life expectancy of his parents and a 4.25% interest rate, which was determined when his father retired.
The sisters remain nonvoting limited partners in the business and each owns 10%. To put the sisters’ inheritance on par with the brother’s, the parents purchased a $2 million second-to-die, life-insurance policy, which will pay off when both parents have died and made them equal beneficiaries.
Thanks to these arrangements, the couple has enough income to live comfortably in retirement, and the children have been provided for financially.
When dealing with family-business situations, advisers need to make sure their clients understand that it’s often a long process, Mr. McCarthy says. Advisers also have to understand the family dynamics because sometimes egos get in the way, which makes reaching a resolution more complicated.
In this situation, there was no bickering and fighting, he says. “The kids were all collectively more concerned that the parents were going to be OK and the parents were more concerned that the kids were going to be OK,” says Mr. McCarthy.
Article LINK
For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at Eric@EdisonAvenue.com or 239.738.6227. Also, visit our Edison Avenue website at www.EdisonAvenue.com or my personal website at www.BuySellFLbiz.com.
No comments:
Post a Comment