Is there a silver lining for the family business?
It is difficult to imagine that the current economic situation can provide opportunities for companies and entrepreneurs. But such opportunities exist, and especially in the following areas:
acquisitions
corporate restructuring
internal purchase
Corporate transition planning
estate planning
ACQUISITIONS
Since we’ve all heard of (or experienced) the “credit crunch,” you may be wondering, “So how can I consider acquisitions?” Actually, from a timing standpoint, now may be the perfect time to identify acquisition candidates in your industry or a strategic add-on. If your core business is strong, look outside of traditional loan sources. Mezzanine lenders have the same amount of capital today as they did a year ago, and they are looking for strong lending opportunities. [Mezzanine financing is basically debt capital that gives the lender the right to convert to an ownership or equity interest in the company if the loan is not repaid on time or in full.] Private equity firms have raised a record amount of capital and are seeking investment opportunities across all lines of business. These situations can give you access to capital if you have a solid strategic plan for the future and can communicate it effectively.
CORPORATE RESTRUCTURING
If your business is publicly traded but you haven’t realized the capital advantage that going public would provide, now would be a good time to consider going private again. The moment is critical and valuations, in most cases, are at their lowest point. You could also save a significant amount of money that you are now paying for compliance (Sarbanes-Oxley). The process of going from public to private involves valuing the company, determining the best structure for the conversion (Tender Offer or Short Form Merger), obtaining shareholder approval, and aligning financing.
INTERNAL PURCHASES
If a partner in a business wants to get out, why would he consider getting out now when values are low? There may be various reasons for leaving, such as health or the need to replace lost value in other investments such as real estate or the stock market, or a shareholder may prefer liquidity to property. As for the low valuation problem, most internal transactions are not structured strictly on valuation and can creatively benefit the remaining owner.[s] and the outgoing partner and their long-term family. Creativity, careful management of expectations, and often the presence of objective advisors, are key ingredients to successful insider buying.
CORPORATE TRANSITION PLANNING
Most business owners do not like to deal with the transition of the business they started or grew over the years. However, at some point the transition will occur voluntarily or involuntarily. The best transition plan is voluntary. Because right now? Once again, the question of valuation is in the foreground. Today, most business values are at an all-time low, which, along with minority and marketing discounts, can make it possible to transfer more significant ownership interests to family members or trusts compared to with the recent past. Although the tax-free gift tax “exemption” has remained at $1,000,000 per donor, the federal estate tax exclusion has increased from $2,000,000 to $3,500,000 per person. This is a very large increase and can potentially provide up to $7,000,000 of assets that transfer tax-free upon death. Taking advantage of these changes requires careful planning and perhaps even a realignment of assets between husband and wife.
INHERITANCE TAX
Now would be a good time to review your estate planning due to some of the changes mentioned above, such as the change in valuation, low interest rates, and the increase in the estate tax exclusion. If you haven’t reviewed your planning for several years, we strongly suggest you pull out your documents and sit down with your planning team to see if there are any areas where you can improve your planning. While you’re doing this, you should also evaluate your life insurance to see if there are any cost savings. In recent years, the cost of life insurance has dropped dramatically, and depending on the type of coverage you currently have, you may be able to save a lot of money.
The intent of this article was not to make you an expert on all of the above, but rather to point out that while all the news seems to be bad, opportunities do exist. Don’t look at the ideas above as a “single bullet”. There is cause and effect, and other aspects of your business must be considered. We highly recommend that if you are going to pursue one or two of the ideas presented above, that you go through an evaluation process to ensure that you are maximizing the opportunities in accordance with your goals and objectives. .
If you have any questions about the above, please contact John Leighbody at The Beringer Group for a free consultation.
