A Brighter Way
A Brighter Way
For quite some time, business owners have been waiting for the other shoe to drop before making long-term plans to transition their closely held companies. Uncertainty about estate tax treatment, concern about a double-dip recession in the U.S. economy and the continuing tight lending environment among banks have all immobilized many business owners from moving forward with their plans.
So what do you do when you don't know what to do? Here are four tactics business owners can take now to be ready for a more settled business environment.
One of the big uncertainties for business owners who are considering a transition is how the federal estate tax will be treated. Between 2009 and 2011, estates have and will be treated for federal estate tax purposes in three different ways. In 2009, estates with values under $3.5 million did not incur federal estate tax, currently in 2010 there is no federal estate tax, and in 2011, estates of more than $1 million will experience federal estate tax responsibility, unless Congress acts to change the limit.
By knowing the current value of a business owner's estate, individuals can plan ahead for a number of scenarios, including how the estate could be handled if the 2011 estate tax limit remains in place. If the plan is to pass the business on to the next generation, there may be opportunities to recapitalize the business to allow for better gifting opportunities. For example, the business structure may be recapitalized to include non-voting interests which may allow the current owners to make discounted gifts without immediately giving up control of the business.
If the plan is to sell the business, the owner must consider the condition of the tangible assets, the value of any intangible assets, and the appearance of the business to potential buyers. It is also important to rate the businesses' performance in key areas such as profitability and growth. Knowing the owner's personal goals and the business strengths and weaknesses are key to a smooth transition.
Performing a business valuation will allow you to know definitively the current value of your business. This information can greatly aid in long-term planning, whether your intention is to grow the value of your business to prepare it for a later sale, sell shares to key employees or gift interest in the business to family members.
The Great Recession has wreaked havoc on business values, making business worth considerably less than it once was. In our recent business valuations, we're finding business values far below what they were two or three years ago. While it may not be the best time to sell, this means you can pass more stock in your company now than you could in a healthier economy.
Once the you know the current value of the business through a valuation process, the next planning step involves making sure your business is prepared for any contingencies. These might include knowing what will happen to the business if something happens to a key person or yourself, and making sure that the buy-sell agreement for the business is up-to-date and that the valuation reflects the true value of the business.
Finally, once you know the current value of the business and you begin to take steps to preserve it, it's time to consider all the exit options. Consider each option carefully and establish what will be required to bring the option to fruition. If the most viable option involves handing the business down to the next generation in the family, hold a family meeting to verify the next generation's desire to continue the business. If your goal is to sell the business, take steps to ensure the marketability and desirability of the business to a potential buyer.
No one would have thought five years ago that real estate would become so hard to sell in today's environment. In the future, the same could hold true when selling a business. As the baby-boomer generation of entrepreneurs ages, more and more of them will begin to sell their businesses. There will be competition to sell these businesses to fewer buyers. Taking proactive steps early toward reaching these goals will allow the business owner to be ready to act when circumstances change.
Business owners don't have to be paralyzed by the uncertainties of today's economic conditions. With proper planning, there are steps to take today that can help prepare current businesses for a smooth, successful transition.
Note: This content is accurate as of the published date above and is subject to change. Please seek professional advice before acting on any matter contained in this article.
