When you think of family businesses you may picture your local coffee, diner or specialty retail store, but the scope of family businesses is far more expansive.
In fact, more than 24 million family-owned businesses in the United States employ over 60 percent of the workforce and generate almost 65 percent of the GDP.
Interestingly the statistics around success of family businesses paint a picture of the potential impact of family dynamics. Some data show that only 30 percent of family businesses make it to a second generation, 10-15 percent to a third generation, while the numbers continue the downward trend from there.
All in the Family
“For companies to remain successful through an ownership transition it is imperative for planning conversations to happen early and often,” noted Dennis Tygart, senior wealth strategist at Regions. “If everyone involved in a future succession isn’t on board, that can spell disaster.”
Tygart pointed out that having contingencies in place, locking in on valuation and preparing for the event are part of the ongoing discussions he and his team in Atlanta have with business owners even if they are decades away from implementing a succession plan.
“Our team has seen family businesses fall apart when an older generation owner either is ready to retire or passes away because, while it may have been assumed that the next generation was going to take over, it turns out that individual has other plans,” Tygart shared. “There are also times when spousal owners aren’t in agreement over plans for the next generation to take the reins.”
Bryan Koepp, Wealth Planning executive at Regions, concurred and noted in some cases the owners had a plan for the next generation to take over but delayed the conversation because they assumed it is understood. However, once the adult child is brought in, they’ve decided they are simply biding their time until the parent sells the business, so they can go in a different direction.
The latter scenario can occur when one spouse feels too much risk involved in business ownership or that the younger generation is not capable of successfully running the business. This is why strategic planning is imperative when looking at a future for a family-owned company because there may be alternative routes for business succession that would better suit the family members’ unique personal, professional and financial goals.
For companies to remain successful through an ownership transition it is imperative for planning conversations to happen early and often.
You Can’t Time the Market
Koepp recalled a late-night comedy sketch with a character called Future Man, who extolled the practice of buying low and selling high. In other words, timing the market. And most of the time, market timers lose.
“We encourage clients to adopt the same mindset as with investment management,” noted Koepp. “It is a process, and you cannot time the market.”
The COVID-19 pandemic is an example of events that can really upend plans.
“There were businesses on the verge of unbelievable breakthroughs that suddenly needed Payment Protection Plan loans,” said Koepp. “It was a game-changer in terms of the market timing theory.
From the very beginning Tygart and his team look at everything from contingencies to strategies that minimize taxes and protect capital to potential timeframes through modeling and simulation.
“Our role as advisor and manager is to provide guidance and professional knowledge to help our clients create a succession plan experience rather than handing them a checklist to complete,” added Tygart. “It’s an art as much as a science.”
Business Succession: It Starts with a Vision
Koepp suggested that it is key for business owners to define their own objectives and work with their banking team to build the plan and process.
“Our process begins with the relationship with our clients as we work together in building a succession plan that is discovery and goal-based,” Koepp noted. “It starts with: What is your vision and what do you want to do?”
Working with business owners of all sizes often involve a multi-disciplinary approach and holistic relationship teams. That can look like collaboration with bankers from Wealth Management, Commercial Banking, Corporate Banking and even Regions’ Branch Small Business depending on the business size.
More on Sibling Dynamics
There is a unique dynamic that can occur in sibling relationships. From varying temperaments to differing visions and goals, a succession plan can implode pretty quickly if all of the parties involved aren’t in sync. Mitigating the assumptions made by the business owner who may have a vision of the next generation working side-by-side with shared goals and values can be tricky.
“Unraveling this is challenging and often happens when the original owner passes,” said Tygart, who has seen this happen. “There are disruptions and unless it is resolved, ultimately the family may end up with a business sale at less than full value.”
He noted that it can take time for a family to recognize the damage.
“This is why it is so important that have these conversations ahead of time,” said Tygart. “When the older generation looks at the next and attempts to distribute ownership of the business equally among the siblings with understanding the dynamics, a lot can go wrong.”
Equal is not always fair and fair is not always equal, Tygart pointed out.
“It is important for business owners to look at the whole picture and realize that you’re not necessarily honoring anyone by giving it to them equally,” Tygart said. “Part of our planning process involves showing business owners what fair might look like and engaging them in the conversation and process.”
Time is of the Essence
One important note that Koepp and Tygart pointed out is the looming expiration of the Tax Cuts and Jobs Act of 2017. It’s set to sunset at the end of 2025.
“Possibly the largest impact of expiration of this Act is the reduction in the gift and estate tax exemption, the amount that taxpayers may gift or use at death to transfer assets without transfer tax assessed,” Tygart said.
Currently an individual can transfer $13,610,000 of wealth without being subject to gift and estate tax (at a 40 percent tax rate). At the end of 2025, it is estimated the federal estate and gift tax exemption will reset to approximately pre-TCJA levels adjusted for inflation. This value is projected to be in the $7,000,000 range per taxpayer.
Business owners may leverage their federal gift and estate tax exemption to transfer business interests to their next generation without out-of-pocket tax ramifications. Before use, it is highly recommended that a business owner has an accredited valuation and discussion with their legal and tax counsel, in conjunction with the wealth management advisory team, to implement the best strategy possible.
For more information and resources from Private Wealth Management, visit Regions Wealth Insights.
“Planning relates to confidence.”
Koepp along with Art Richey, Regions SBA Lending, and Blake Elliott, Regions Commercial Banking leader, participated in a business succession event hosted by CBIZ in Memphis in May 2024. Regions Private Wealth is hosting additional business succession events, including three in Missouri markets in September.
© 2024 Regions Bank, Member FDIC. This information is general in nature and is not intended to be accounting, legal, tax, investment or financial advice. Although Regions believes this information to be accurate, it cannot ensure that it will remain up to date. Statements of individuals are their own—not Regions’. Consult an appropriate professional concerning your specific situation and irs.gov for current tax rules. The information should not be construed as a recommendation of a specific course of action for any individual or business.