Preserving a family legacy

 In October 2021

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With a confluence of factors elevating succession planning as a key priority for family businesses, PNC Private Bank’s wealth and private business strategists are working alongside N.C. business owners and their families to plan for the future.

PNC Private BankSM senior wealth strategist and private business strategist Michael Moyer remembers a time when N.C. was not the vibrant destination for businesses that it is today. Decades ago, he saw how the dissolution and departure of the manufacturing industry’s presence in his grandparents’ rural county translated to significant job losses and a fractured community. The landscape has since changed for the better in many N.C. regions, including the county Moyer once associated with a depressed local economy, which today is seeing success in several sectors. Moyer attributes this shift – and the enterprising business environment for which N.C. is now known – in large part to the vision and hard work of family businesses.

The success stories that have become synonymous with so many N.C. family businesses inspire Moyer as he helps clients navigate the business succession planning process. What motivates him, however, is the reality that much work remains to be done to help family businesses prepare for future generations.

While Moyer is sympathetic to the reasons why business owners often delay conversations regarding succession with family members, he has seen firsthand just how crucial business succession planning is. With Baby Boomers retiring with increasing frequency, a major demographic shift is playing out, making business succession planning even more critical. What follows are four of the most consequential hurdles Moyer sees in business succession planning today – and how families can surmount these obstacles.

Hurdle #1: The next generation may not be able to fund a business transition

When transitioning a business within the family, business owners generally want to harvest enough value from the company to fund their retirement and achieve personal financial and philanthropic goals – but not at the expense of burdening the next generation with debilitating debt or substantial risk, says Moyer.

In instances when funding challenges present a barrier to the transition of a business, a variety of solutions exist. These can include such strategies as installment sales, intrafamily lending, self-cancelling installment notes, non-qualified deferred compensation, charitable and philanthropic planning, leveraged buyouts, and/or sales to intentionally defective grantor trusts. Family business stakeholders should discuss these and other options with their planning team to determine the most appropriate vehicle for effecting a business transition.

Hurdle #2: Family dynamics may pose a barrier to a smooth transition

Just as complex as the operations of a family business are the dynamics of family relationships, so it should come as no surprise that family discord is among the primary contributing factors in failed transitions – and a reason why many family businesses delay planning in the first place.

“It is important to acknowledge that members of the next generation may have different skill sets than the owner, which may necessitate a different approach to managing the business,” says Moyer. Depending on the nature of the business and the specific skill sets of the children, it may make sense to reorganize the business, with different children running separate operations and thereby acting as their own profit centers.

Other unique challenges arise in scenarios where some children are involved in the business but others are not. While a parent may be inclined to provide equal ownership to each of their children, regardless of their roles in the business, the potential for conflict is substantial given differing values and priorities.

“In our experience, it is generally better to avoid granting ownership interests to children who are not actively participating in the business,” says Moyer. “One best
practice is to equalize the other children with other assets.”

Hurdle #3: Continued technology adoption – and the funding thereof – is essential for the future of the business

The pace at which technology continues to accelerate is steep, and a business’ ability to adapt to new technologies will continue to be crucial to future success. Many businesses have experienced this reality during the pandemic, which dramatically changed the environment in which many businesses operate – and the technology that enabled process changes, says Moyer.

Technology adoption is often dependent on inexpensive access to cash. Prior to transitioning a business to the next generation, it is crucial for a company to have a strong cash position – or strong financial ratios to allow for access to cash. For business owners who intend to transition their business to family members at the time of death, life insurance and buy-sell agreements can allow the business to receive a timely inflow of cash when the transfer of ownership occurs.

Hurdle #4: Federal tax legislation and uncertainty loom

Impending tax legislation will likely introduce changes to certain tax rates and exemptions, which could ultimately impact the manner in which business owners transition their family businesses to the next generation. However, Moyer stresses that the tax environment should never be the determining factor for the timing of an exit – and that flexibility in planning is key. “Just because a sale or transition may accomplish a tax objective doesn’t mean it is in the best interest of the business or the family,” he says. “Business owners should consult their trusted advisors to understand the nuances of any new legislation and determine the best path forward to preserve the legacy of a family business.”

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