Family businesses urged to plan for succession, exit

The basics:

• Panelists discuss multigenerational leadership, succession planning
• Early tax, estate, family governance planning can preserve wealth
• Businesses should establish policies to use AI while protecting sensitive data
• Owners should prepare for both planned and unexpected exits

As part of NJBIZ’s latest virtual discussion, participants discussed how family-run businesses can survive and thrive across multiple generations.

Moderated by NJBIZ Editor Jeffrey Kanige, the July 15 panel featured:

• Mariel Giletto, a shareholder and business and M&A practice lead at Flaster Greenberg PC in Cherry Hill
• Rozleen Giwani, a partner at Woodbridge-based accounting firm Forvis Mazars
• Ed Leach, a partner and wealth advisor for Highland Financial Advisors LLC in Wayne

Topics covered during the 90-minute roundtable discussion include how to prepare for leadership transitions, how family dynamics can affect business decisions and strategies for exit planning.

Opportunities

Leach said he believes the current environment presents significant opportunities for family-owned businesses, particularly around estate and tax planning.

With elevated business valuations and a historically high estate tax exemption, Leach said now is an opportune time to transfer assets to the next generation through gifting strategies, trusts and other planning tools, while ensuring the right business and tax structures are in place early to support future growth and succession.

Giletto said, “I think one of the unique challenges for family-owned businesses these days is baked into the fact that society and business is moving at such a quick pace now that family-owned businesses are, I wouldn’t say struggling to keep up, but are feeling the pressures of such quick changes.”

At the same time, she feels family-run ventures may be an advantage given the current climate.

“In this AI technology fast-paced environment where we’re losing those relationships and we have this feeling among the country and our citizens that there’s this loneliness. I think that family-owned businesses are uniquely positioned to build trust because of the relationships that they have built throughout the longevity of the family-owned business. And I think there’s a longing for customers to get back to that feeling of a family that they can trust,” she said.

Family-owned businesses can blend traditional customer relationships with new technologies, giving them a competitive advantage. Unlike publicly traded companies, they can focus on long-term growth rather than quarterly results, helping them navigate economic downturns and build multigenerational success, Giletto feels.

Greatest challenge?

She noted that one of the biggest succession planning challenges is navigating differing perspectives between generations. Rapid changes in technology and business practices can create communication gaps, while older generations are staying involved in family businesses longer, sometimes leading to tensions as younger family members seek greater influence over the company’s future direction, she said.

“I’m seeing that constant push and pull from both directions and I see both sides of it. That is something that is unique to family-owned businesses in this constantly changing and evolving business environment at such a quick pace,” she said.

Leach agreed, saying, “I think what might be one of the biggest, greatest challenges for family businesses is dealing with those multi-generational dynamics, but it’s also the greatest opportunity for potential valuation growth in the future as well.”

If you have a really well-trained next generation … you are actually building a more valuable business …
– Ed Leach, partner and wealth advisor, Highland Financial Advisors LLC

That’s because technology and business management tools are creating new opportunities for family-owned companies to scale and remain family-controlled. A key strategy is involving the next generation early, gradually delegating responsibilities and including future leaders in decision-making, he said.

“If you have a really well-trained next generation, and maybe they’re not in a leadership position yet, but you are delegating those responsibilities to them, communicating them, involving them in the decision process, you are actually building a more valuable business because someone or somewhere that valuation is going to go up because it’s just a really well-run business,” Leach said.

‘Why does this business matter?’

When it comes to the most frequently asked questions that owners of family-run businesses have, Leach said the inquires he’s fielded tend to be symptomatic of “a larger issue centered around either business alignment, personal alignment, or financial alignment.”

“And it really comes down to aligning a lot of what’s going on personally with different opportunities and different things that are thrown at them in terms of managing human capital and different innovations,” he said. “But really when it comes down to it is we always ask our business owners, ‘What are you trying to achieve?’

“And, we use this analogy of three legs of a stool is business, personal and financial. If you don’t have that alignment, if you take one of those legs of the stool away, things fall apart,” he said.

Replay: Family Business Panel Discussion

Click through to watch the full panel discussion!

From her perspective, Giwani said some family-owned businesses aren’t as prepared as they should be, and that many wait too long to begin tax, estate and succession planning.

Starting early, especially when business valuations are lower, can create significant tax savings, preserve more wealth for future generations and provide greater flexibility for growth, ownership transfers or a potential sale, according to Giwani.

“The family governance becomes very important as well. We do that with a lot of our clients. We sit with their next generation, even when they’re in college, to kind of understand what their thought process is and see if they are interested,” she said.

Leach explained, “For us, regardless of whatever stage, we always start out and ask the question, ‘Why? Why are you doing this? Why is this important to you? Why does this business matter? How does it impact you both personally and financially?’”

“Two of our most precious resources are time and money. Every decision we make in life is a trade-off between one of those two things. So, starting a family business, specifically one with your spouse, and especially if it’s new, is going to come under a lot of stress. It’s going to be a trade-off of time but also might be a trade-off of money,” he said.

“Dealing with the personal side, we call it the balance sheet and getting all of that in order and creating alignment will often allow and create a de-stressor when it comes to them actually running their business,” he said.

Circle of trust

Leach urged family-owned businesses to have trusted advisors. “It’s important to have the right team in place to give you guidance in all the different areas of tax, legal, someone quarterbacking the entire situation; so valuable to have that sounding board because you’re also getting the collective experience of all the different multigenerational families that have come before you in those family businesses,” Leach said.

Giletto said, “I think one of the issues that family-owned businesses and businesses in general struggle with is that as you grow, your problems become different and sometimes those can seem overwhelming.”

“And I think one of the questions that we had asked in this preparation is when do you start fielding out into advisors? When do you start looking to people for these types of solutions? I think that’s a unique question for each family-owned business to evaluate on their own time,” she said.

[O]utsourcing some of these decisions … means that you’re focused on growing that business so that you can have a successful exit or succession plan.
– Mariel Giletto, shareholder and business and M&A practice lead, Flaster Greenberg PC

Giletto went on to say, “Having a trusted advisor is one of your most valuable assets and outsourcing some of these decisions and outsourcing some of these analyses to your third-party advisors doesn’t mean that you don’t know how to run your business. It actually means that you’re focused on growing that business so that you can have a successful exit or succession plan.”

Artificial intelligence

While artificial intelligence can help businesses improve efficiency, advisors warn that using public tools with confidential information, trade secrets or customer data can create legal risks, panelists said.

They went on to stress the need of using AI carefully and consider secure, enterprise-level systems to protect sensitive information, intellectual property and compliance obligations.

Besides evaluating the risk of using open-source platforms compared to paying for a closed source tool, participants encouraged companies to develop AI policies to ensure the technology is used responsibly while protecting sensitive information.

Leach noted that his firm recently established clear guidelines for AI tools that’s now being rolled out to employees. “It says, ‘If you need to use AI, here are our use cases. Here’s why you use it and here’s our compliance backup of how we’re monitoring it and creating some just compliance around it to make sure it’s not used irresponsibly,’” he said.

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Leach continued, “We work with a lot of professionals that also run their own businesses and we’re always talking about AI and how to create efficiencies. And again, security is the most important thing. But, I think, again, this goes back to a little bit of that multigenerational planning. Oftentimes maybe the owner is not the best person to be evaluating AI, so it’s about finding a champion within your business who is the most maybe technologically sound, who maybe does have the time in their day while the owner’s running the business to step aside, do due diligence and evaluate exactly what are their needs? What are they trying to accomplish? Is AI even appropriate for our business? Because that cost benefit analysis can’t be done until you figure out why we’re even using AI or what specific task is it going to manage.”

Giwani added, “Some clients have been ahead in the game, and some clients are not as ahead. And both have some kind of concern. Our industry itself has really invested heavily in AI now. Security has been taken care of. Data privacy is taken care of. And everything that we’ve shared so far is a big concern at the same time as an opportunity. So, you really have to work this towards your benefit and how to use it. You can say I’m not going to use it because I have issues with data privacy – you have to find the right avenue to use it.”

Future-proofing

Looking ahead, panelists said family-owned businesses can increase value by reducing dependence on a single owner or founder. That includes establishing documented processes, delegating responsibilities, and building leadership systems that support continuity, succession and long-term growth.

“By creating and planning in advance and delegating responsibilities and elevating those around you without doing much legwork other than giving up a little bit of control is adding so much value to their business. And it’s going to create a more well-run business and hopefully create a lot more time for the owner as well,” Leach said.

The question is, ‘What’s the plan? What’s the plan five years, 10 years down the road?’
– Rozleen Giwani, partner, Forvis Mazars

Giwani added that businesses and individuals should carefully structure ownership, management and tax strategies to avoid unintended consequences. “The question is, ‘What’s the plan? What’s the plan five years, 10 years down the road?’ I think that’s the main question you start with,” she said.

She also encouraged ongoing conversations with tax professionals to help identify opportunities, plan ahead and make decisions that align with long-term financial goals. “Make sure you have the right team in place and start planning way ahead than you think you are going to plan,” Giwani said.

Exit ahead

Before selling or stepping away from a family business, panelists recommended owners assess their personal finances, not just the company’s value. Understanding how much income and assets are needed can help determine the right time to exit and minimum value needed from a sale, they said.

Leach said, “We always encourage clients to write down these two questions: ‘If you didn’t own your business today, would you buy it? If yes, why? If not, why?’ And two, ‘If the right opportunity, the right deal came to you tomorrow, would you, your family and your business actually be ready to execute on it?’ And if the answer’s no, odds are you really need to start planning. If the answer is yes, that would be awesome.”

With regard to planning for succession or an exit, Leach said the first question to ask a business owner is “are you personally ready?”

“Oftentimes the greatest conflict in that transition, succession, exit, whatever it might be is the owner or founder or that generation actually ready to give up that control,” he said.

Leach explained that those types of transitions fail to happen usually because “the owner or founder of that controlling generation getting cold feet right before they have to sign on the dotted line and give up control.”

“So, we actually start with, why are you doing this? What are you going to be doing with your time? What is motivating this at this point in time for you? And that’s where exit or succession planning for us starts with owners before they’re even thinking about it,” he said.

“Because again, if you are already always in a constant state of readiness to exit, you’ve run a really good business. You’ve got documented processes, you’ve thought about customer concentration, revenue streams, cashflow. You have your operating agreements in order. You probably have a really good legal and tax team. If your business is in great shape, you’re prepared to exit because sometimes exit or succession doesn’t actually come by choice. It could be death, it could be disability,” Leach explained. “And planning for those unwanted or untimely exits or forced exits is one of the most important things you could do from a personal and financial readiness standpoint.”

Being prepared

Giletto said, “More and more often business owners are staying in the business longer. And I think for them, it’s a really hard decision to make.”

“From a legal perspective, after we get through all the emotional stuff, I want to talk about tax planning. I want to talk about who the next owner is. I want to talk about how we’re going to pay for this transition. And what is the value of the asset that you’re transferring to the person that’s buying it? Can they pay for it?  Are they getting financing to buy you out? Are you gifting it?” she said.

“And talk about your estate plan in connection with your business succession plan,” Giletto said, adding, “There’s a lot of legal questions that come into play that we sit down with the business owners. And again, the estate, the tax and the business are all intertwined into one discussion.”

“I think that discussion is more than some of the exiting generation anticipated sometimes. So that type of approach, while thorough, sometimes shocks people because they think, ‘Oh, I’m just going to give it to my daughter or I’m just going to give it to my son,’” she said.

Rather than assuming the next generation wants to take over, panelists advised owners to have an open discussion with their children about their goals and interests. “Having those conversations around family governance, again, it’s just part of that personal readiness and is the family aligned,” Leach said.