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Valuing Your Company: Knowing Your Worth Makes It Easier to Plan Ahead


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You’ve built a successful family business, accumulated a nice retirement nest egg and put together a comprehensive estate plan. But if you don’t have a workable succession plan, there’s likely to be a big hole in your planning. 

“A lot of people confuse succession planning with estate planning,” says Dr. Edwin Hoover, a family business advisor based in the Chicago area. “They think that if they have an estate plan, they’re all set.”

The two processes, however, are very different. The estate plan is all about an individual deciding who gets what when he or she dies. The succession plan is all about the survival of the business. That makes succession planning a group process since all parties need to be at the table. “Business owners who are used to doing things on their own often find this very frustrating,” Hoover says.

Moreover, family dynamics with the accompanying psychological and emotional issues can make succession planning a complex process. It can also be a treacherous one. According to the Family Firm Institute, only about a third of family businesses successfully navigate the transition to the next generation. The reason: poor planning, unresolved family conflicts or the lack of estate preparation, says Hoover.

Good planning takes time. Hoover, for example, recommends, starting 10 years in advance of any expected change in management. That provides ample time for the family, the business, the new management and the outgoing owner to work together in crafting a successful transition.

Of course, sometimes an owner decides it’s better to sell, particularly if none of the kids are interested in taking over. Before putting the family’s full service car wash on the market, for example, Karen Colcagno and her husband asked all three of their kids if they had any interest in taking over. They didn’t.

“They were bursting with ideas of their own,” says Calcagno. “We ended up finding a great buyer.”

Now a business coach and founder of the Advantage Family Business Center, Calcagno says money from the sale was used to buy a building which family members now manage together. “A lot of people don’t think of that as succession,” she says. “But it conserves the family wealth and creates a more even playing field for the kids.”

Good communication is a critical part of the succession planning process. People need to make sure that family members, business partners and employees all understand the plan. “The person who owns the business is the one who makes the ultimate decision,” says Hoover. But the future success of the company will depend on the people who are taking over. That means the details of the transition need to be clear to all involved.

It is the funding, however, that provides the glue needed to make a succession plan work. Life insurance is commonly used to make sure that kids in the business aren’t favored over those who choose other professions. Insurance can also fund buy-sell agreements in case of death or disability and may supplement retirement income.*

Too often, owners never get around to funding their succession plans. Others don’t pay enough attention to the funding details, while still others put their plans in place and forget to update them as things change. The result: family members and business partners may find they have insufficient financial resources to actually implement the plan.

Succession planning is an ongoing process, as Calcagno has discovered. After the sale of the family car wash, her husband created a business of his hobby restoring vintage Corvettes. Now he has 10 buildings filled with classic car parts, but no one yet in line to take over the business.

“We haven’t come to a conclusion about how that should be managed,” Calcagno says. But it’s definitely on the list.

*Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.

The information provided is not written or intended as specific tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. MassMutual, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.

Provided by Katheigh Degen, a financial representative with Twin Financial, Inc., courtesy of Massachusetts Mutual Life Insurance Company (MassMutual).

CRN#201904-210160

Written by

Katheigh Degen is co-owner of Twin Financial Inc. and specializes in business continuation strategies. 9233 Ward Parkway, Ste. 324, Kansas City, MO 64114. // (816) 333-2334 // kdegen@twinfinancial.com

Categories: Money

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