Popular Articles

Sweet marketing music

Tanner Montague came to town from Seattle having never owned his own music venue before. He’s a musician himself, so he has a pretty good sense of good music, but he also wandered into a crowded music scene filled with concert venues large and small.But the owner of Green Room thinks he found a void in the market. It’s lacking, he says, in places serving between 200 and 500 people, a sweet spot he thinks could be a draw for both some national acts not quite big enough yet for arena gigs and local acts looking for a launching pad.“I felt that size would do well in the city to offer more options,” he says. “My goal was to A, bring another option for national acts but then, B, have a great spot for local bands to start.”Right or wrong, something seems to be working, he says. He’s got a full calendar of concerts booked out several months. How did he, as a newcomer to the market in an industry filled with competition, get the attention of the local concertgoer?

read more
by Bob Stewart
April - May 2013

Related Article

Ways to move along your family business to generation next

“Junior” may be 40 years old but “Senior” remembers the dopey thing he did at age 14; he’s been working in the family business for years with little passion for taking it over. Meanwhile, “Junior’s” sister is holding down a responsible financial analyst position in a Fortune 500 company and wants to own a business — but not the one her dad and uncle started 50 years ago.

In a way, business succession decisions and family ties should be unrelated in order to increase the chances of a successful leadership transition. Thriving businesses have many resources available to deal with family issues. The key is getting the owner (or owners) to address these business issues early enough for meaningful action. Then there must be a dispassionate assessment of talent, whether from inside or outside the family.

Confiding to a third party

Dispassionate may seem like a strange word to use with family matters. Yet owners need to ensure the right talent is in place to take over at retirement, disability or death. The parent/child relationship can get in the way of a true evaluation of skills, talent, passion and business acumen.

Sometimes it is easier for “Junior” to confide to a third party. Maybe he or she simply is more interested in going to medical school or working with animals than running the family business.  Or maybe it would be better to bring in a professional manager to run day-to-day operations and allow “Junior” to be a shareholder and sit on the board. “Senior” may be set on passing down the business but an adviser or mentor with more objectivity may be able to help determine whether that course is optimal for the company.

Objectivity and planning are needed for smooth transitions. There are no cookie-cutter succession plans. To complicate things further, the tax ramifications of various paths to succession can vary substantially. A good tax adviser can help implement tax strategies that minimize adverse tax implications of transitions.

Selling the business, whether to next-generation family members, third parties or even to an Employee Stock Ownerships Plan (ESOP) may be a good alternative, but often results in a taxable event. If the “Senior” generation has always reinvested profits from the business back into the company, then it may need resources from the sale of the business in order to be able to retire.

It would seem ill advised to transfer the management of the business to someone from the next generation if that person does not have either the talent or passion for the business or the leadership role. Sale to a third party may actually do “Junior” and other heirs a favor by providing money to pursue their genuine passions, rather than the unwanted responsibility for the family legacy through the business. And it may provide the immediate capital that will enable the senior generation to retire without financial worry.

Watch for taxes

Another option is passing down the business through inheritance. This can be the most heavily taxed form of intergenerational transfer. According to Bill Brody, an estate planning attorney with Fredrikson & Byron law firm in Minneapolis, when a business transition within the family is intended at the death of a business owner, the key challenge is to ensure the federal and state estate taxes (potentially as high as 49.6 percent of the value of the business owner’s estate) which may be payable at the business owner’s death are eliminated, or at least moderated. 

This is necessary in order to keep the effective debt-equity ratio of the business at a level that is manageable, taking into account the impact of the loss of the business owner. Brody says overcoming this challenge is “virtually always possible,” if given enough lead time, through some combination of tax planning, life insurance and reliance on estate tax deferrals permitted by the taxing authorities.

Gifting shares should be considered. Long lead times can provide substantial tax advantages if a gifting strategy is employed. Gifts of non-voting equity may be used if business control is a concern. Annual gifts of equity having value that is below statutory limits will be tax-free transfers.

Owners should give themselves plenty of runway (preferably at least three to five years) for properly planning for and transition out of a business.  It is vitally important to have the right talent in place to ensure a successful succession. 

Most business owners only go through a business transition once in their lives. Therefore, it is prudent to have a team of professionals assist in the process to handle the details and complexity. Lawyers, accountants and other advisers who have experience with transitions can help a family to anticipate and take steps to mitigate the difficult elements of the transition.

Key participants must also be reassured that the business will have continuity in the case of a sudden, traumatic event. Businesses having multiple owners should have a buy-sell agreement in place; preferably one that funds a buyout through the use of “key-person” insurance coverage. 

Time for a meeting

In every kind of transition, proactive, regular communication is essential.  It will greatly improve the chances of a successful transition by developing good communications with all critical parties — family members, their spouses, key employees, and business advisers.

Regular family meetings are strongly recommended. Family members and key employees all need to know what the owners’ intentions are. Some level of transparency will both reassure the family that their interests are being addressed and give the next generation the hope of not being divided by misunderstandings among themselves. Straightforward communications will also establish reasonable expectations  and a sense of fairness among non-family employees, too.

Never too early to plan

It is never too early to start planning for one’s transition away from the business. A small amount of attention to this issue each year early on can smooth the change tremendously.

Since none of us is immortal, transition will happen. Family business owners should plan for their transition both for the benefit of their business and the future of their heirs.

 

Contact: Bob Stewart is a partner of Platinum Group, an Eden Prairie-based turnaround, advisory and transition firm: 952.829.5700; bob.stewart@thePlatinumGrp.com; www.thePlatinumGrp.com