NORTH BAY -- While orchestrating a graceful transfer of a company’s assets to its new owner is only one part of a comprehensive succession strategy, business succession experts in the North Bay said that their clients are finding ways to do so smoothly and profitably despite the turmoil of the recession.
Those perks include taking advantage of a temporary reprieve in estate tax rates, the ease of transferring assets when values are low and the appeal of companies that show a continued promise of growth.
Though comparatively complicated versus succession strategies before the recession, the unique environment could present opportunities, particularly to business owners who give themselves time to plan.
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“When the economy was good, a lot of people thought that they could hit the ‘easy’ button on their desk, sell their company for 15 times what they bought it for, and ride off into the proverbial sunset,” said Steve Jannicelli, a partner in the business consulting group of the North Bay office of Burr Pilger Mayer.
After the pricing descent, those who plan to pass their business to a family member or employee can now gift a larger amount of ownership with less taxation to their estate, said Nick Donovan, a partner at the Napa-based law firm Gaw Van Male.
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Several methods exist to pass even a majority financial stake in a company to a future owner while still retaining control of the business, he said. When the time ultimately comes to pass off the ownership, any growth of stocks or other assets that had occurred in the meantime would not count towards taxes on the original owner’s estate.
“Transferring when values are low is a perfect time to do it,” Mr. Donovan said.
Assuming that the slow growth that many have forecasted for the U.S. economy continues, those who plan early for their succession stand to benefit from passing those assets off when it was cheaper to do so, meaning long-term savings to those who pay taxes on their estate.
Furthermore, Mr. Donovan said, Congress increased the gift tax exemption in late 2010. Individuals can now gift $5 million of their estate before taxation, and married couples can gift $10 million-up from $1 million for individuals and $2 million for couples. The rate itself was also lowered to 35 percent, from 45 percent. Those changes are expected to last through 2012.
White estate and succession planning are always interrelated for business owners, the tie is especially close if the successor is a family member. Selling the business might be the only way for the surviving family to afford estate taxes that were unanticipated and steep, Mr. Donovan said.
Yet planners caution that business owners not devote their focus entirely to their post-succession estate and ignore options that might be better for the health of the business. Despite the tax advantages and personal feelings associated with the choice, children or a trusted employee may well lack the qualities that would make them an effective leader.
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“Ultimately, we don’t want to get into a situation where we do something that is good from an estate planning perspective, but run into problems down the road,” said Jay Silverstein, a principal of the Santa Rosa office of Moss Adams.
After working on succession plans for 20 years, Mr. Silverstein said that he has seen more owners seek to sell their business to a third party in recent years despite the slow economy. Those owners weathered the worst of the recession, unwilling to burden their family or close employees with the same turmoil.
“Over the past 10 years, people just bumped along. Things were improving, and there was no downside at all,” he said, “I think the recession did a lot to open people’s eyes to the fact that there’s risk involved in this.”
With enough time to plan, those seeking a third-party sale can still maximize the appeal of their company during the recession, Mr. Donovan said.
The partner suggested a three-pronged approach: update all legal documents and ownership issues, update the company’s financials and show that a buyer could expect the company to grow.
“If you’re saying, ‘I need to sell now,’ you’re going to get a bad price,” he said, “The longer you have, the better."
