Joe was pressured to meet with us by his son. Joe started his industrial supply business nearly forty years before. While his son had been running the business for the last ten years, Joe still owned all the stock. Without sound planning, the son worried how the business would continue after Joe’s death. Joe welcomed us into his home one morning, and quickly told us that he did not enjoy discussing this topic.
We asked Joe what his goals were for his business. He crossed his arms on his chest and replied, “I don’t know why this is so hard for everybody. I want my son to get the business and my other kids to be treated fairly. Is that so hard?”
I replied, “OK, I got it. That is clear. But could you tell me, what does “fair” mean to you?”
Joe said nothing for about ten seconds. He uncrossed his arms, leaned forward and said with a grin, “Well, that’s a good question, isn’t it?”
We spent the next two hours chewing on what fair meant to him. Joe soon opened up and from that point on actually enjoyed designing and implementing his exit plan.
Lesson Learned: Fair is in the Eye of the Business Owner
A major issue that many Passers (business owners whose exit strategy is to pass the company along to someone else) face is how to be fair to all heirs. If you have more than one heir (we will assume your children) then your principles may require that you balance how you pass the business to some heirs while still being fair to the others. The more concentrated the wealth inside your closely-held business, the more difficult things can get.
Every owner that we have worked with wanted to treat all his children “fairly.” What does “fair” mean? “Fair” probably does not mean “equal” and “equal” probably does not mean “fair” in these situations.
Start with resolving what “fair” means to you. People who do not own a closely-held business often define “fair” as splitting up their assets into equal proportions to be shared with each heir. This straightforward approach rarely works for a Passer. Typically your business is the largest part of your net worth. Splitting up a business among children working in the business and those who don’t can create more problems than it solves.
Furthermore, the tax code encourages Passers to transfer the business now in order to minimize future potential gift or estate taxes. But transferring some or all of the business to one child now, without distributing other assets to other children until after your death, can cause family tension.
Finally, how is the value of the closely-held business calculated when determining “fair”? Do you use its fair market value? If so, who determines this? How do you take into account any valuation discounts on the business value applied to reduce transfer taxes?
