Magazine article The CPA Journal

After the Sale of a Family Business

Magazine article The CPA Journal

After the Sale of a Family Business

Article excerpt

For many entrepreneurs, their company is their life's work, and the sale of their business has dramatic implications for both their financial and personal lives. By the time the sale is finalized, big decisions have already been made. Advisors may have been involved in analyzing different strategies, such as a cash sale, an installment sale, or a combination of the two with an employment contract attached. But after the sale, new issues emerge and another planning process begins.

Planning must be flexible enough to allow for tax laws that can change annually; even the best-laid plans must be updated frequently. It's also an opportunity to establish a new approach to financial life that will not only help the former business owners manage their assets effectively and productively, but also ease the transition through what can be a difficult and emotional time. In addition to myriad financial concerns, subtle but important intangibles lurk beneath the surface. Entrepreneurs may be superb at running their companies but lack the skills and experience to manage a large estate. When multiple generations of family members are involved, there can be surprises, unfulfilled expectations, and strong emotions. Family members' financial needs or personal goals may have been different from what the business owner envisioned. Communication and education are critical issues.

Financial and personal issues must be carefully balanced. Advisors involved in the sale may be unable to deal with the seller's long-term financial needs or how the sale will affect the client's retirement plan or estate plan.

The following steps will help an advisor guide clients after the sale:

Define key objectives and issues. Discuss in detail key issues that the sellers must consider as they plan their financial lives after the sale. These may include the need to develop strategies for future income and expenses, and the implications of any options or equity they may have retained with their company, as well as the need to revisit their investment, tax, trust, retirement, and estate planning strategies.

Communicate with all parties. Establish a system for communicating with everyone involved. When working with a large, extended family, it is especially important to make sure information is communicated in a consistent, evenhanded way, and that no one is unintentionally left out. An effective flow of communication is vitally important.

Gather information. Soon after the sale of the business, take stock of all of the client's assets and liabilities. Drill down into issues such as the client's liquidity needs, and document financial as well as personal details about family members involved in the estate. This information is needed in order to facilitate the client's investment and tax strategies and other financial matters in the future, and to facilitate communications with family members.

Key information to gather includes the following:

* Background on family members. Family needs and goals drive the investment and estate planning process. Identify each family member's role in the business, assess his business and financial knowledge, and learn about his aspirations and objectives. Gather information on any family member working in the business as well as those not actively involved in daily business; she may have relied on special dividends from the company, used company stock as collateral for loans, or had some other interest in the company.

* Income needs. The family's income needs will change after the sale. His income may drop when he no longer receives a salary from the company, and the value of his assets may not generate enough cash to match his prior income.

* Expenses. Any attractive benefits and perks previously offered by the company will disappear, implying a change in lifestyle. Autos, health and life insurance, retirement plans, club dues, and other business benefits may or may not continue, depending on how the sale was structured. …

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