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The New EBITDA: Emotions Before Interest Taxes and Depreciation by Tom Deans, Ph.D.
Sitting in the departure lounge at LAX, I couldn’t help but overhear a conversation between an investment banker and his younger associate. I learned two things. First (and most business travelers can relate), it is amazing how cavalier people are about discussing confidential details in public places. The second confirmed something I had been thinking about family businesses for some time.
The older of the two bankers was whining about how he thought the slam-dunk deal they had just presented was now probably never going to happen. On and on he grumbled about the time he had spent running the numbers, lining up partners and generally bringing the deal to a crescendo, only to have the business owner change his mind about selling.
The investment banker was completely perplexed about why the offer, the numbers, the multiples that looked so good weren’t enough to entice the owner to do the deal of a lifetime.
It took everything I had to stop myself from leaping into the conversation and selling him a copy of Every Family’s Business (it wouldn’t have been the first time). But I exercised extraordinary restraint and settled back and listened to him talk about the clever structure of the deal, the tax that could have been saved and the instant wealth the owner would have secured if only he had been smart enough to take the deal.
Emotions are Squishy – Not the Stuff of Deal-Makers in Suits
The funny thing about listening in on a conversation is that the longer you listen the harder it is enter the conversation. So I bit my tongue and instead simply wondered how many other business brokers, M&A professionals and investment bankers expend such effort trying to bring deals to fruition only to have sellers back out. I wondered how an entire industry of intermediaries could so badly underestimate the emotional connection that owners have to their businesses, and also fail to understand how these emotions can scupper so much good work and extraordinary planning and lead the owner to ultimately destroy the business’s value.
When really bright finance experts hear the word “emotions” you can so often see their eyes roll back and the calculators shut off. Yet students of the greatest financiers of all time – deal-makers like Warren Buffett – know that these people get deals done by running the numbers and then engaging business owners in the one corner of their life where most number crunchers don’t go – their family. It is the rare rainmaker who has both the left and right brain firing on all cylinders.
Buffett and other great deal-makers know that the sale of a business will typically result in a “liquidity event” that will leave owners with more wealth than they feel comfortable consuming. Most business owners accumulate wealth precisely by denying themselves consumption. Sellers will often kill deals, blaming a low bid price, but there’s almost always much more at play.
Reducing An Owner’s Life Work to a Number is Depressing
Most deal-makers underestimate the guilt and remorse sellers feel when they reduce their life’s work to a single number. It feels so crass and empty and hollow to imagine that decades of risk-taking, relationships and earned status in their community will end the day a check is cut and control is relinquished.
That’s why so many business owners don’t do their last deal. That’s why so many let their death be the event that triggers the transfer of controlling interest of their business to family – typically ill-prepared family members uninterested in continuing the business.
With universities, associations and institutes granting so many awards dedicated to perpetuating family businesses at any cost, it’s the duty of intermediaries to serve family business owners with a counterbalancing narrative that places the preservation of capital at the center of more intelligent estate plans.
Preserved capital from the sale of a family business – capital a former owner can then deploy for philanthropic endeavors and for funding the next generation’s own businesses – and not an operating business that’s well past its shelf life is what pays homage to the most enduring legacy: family and community.
Buffet is Both Psychotherapist and Financier
I really wanted to tell the two guys in the airport that Buffett’s best deals had come after he cemented his own family business succession plan. Buffett can easily look into the eyes of any family business owner and talk with authenticity. He can empathize with a business owner’s struggle and can explain why selling the business is the key to securing their greatest and most enduring legacy – their family and their philanthropy.
I didn’t have the guts to chime in and say, “Fellas, I’ve really been enjoying your conversation but there’s way more to doing deals than running the numbers.” Deals get done based on trust and respect earned by intermediaries paying homage to the things in a business that transcend money. Intermediaries who approach this emotional subject like one more thing to check off on their due diligence list will be outed before the coffee is poured. Business owners can feel the disingenuous long before they actually hear it.
For most owners, the sale of their business represents the end of their professional careers and a major overhaul of who they are and where they fit in. Anticipation of the disappearance of their status as business owner, employer and boss often means the sale never gets completed.
Intermediaries who can honor the risk-taking that has gone into creating a business and connect that risk to something more enduring, like family and philanthropy, will themselves be participating in something that transcends money. A guy like Buffett, who is still driving hard deals while giving away half the wealth earned from those deals, tells you precisely what motivates him and his family.
Wealth with purpose: scoff at this soft, simple idea, diminish its importance in closing deals, and you’ll be the one sitting in an airport lamenting the one that got away.
PS: Most people wearing earphones in airports are only pretending to be listening to music.
Changing Conversations About Estate Planning
Introducing the concept of a Collaborative Will
by Tom Deans
At a farm convention in Chicago, I was approached by an audience member who explained that gifting a working farm to her children was preferable to selling and leaving them each $5 million. When I pressed her for more details – such as – “what do your children think of your plan?” She snapped her head back and proclaimed, “why would I tell them?”
I have to confess it wasn’t the first time that I had heard someone say that silence was going to be the key ingredient of their estate plan. It got me thinking how many beneficiaries – children especially — truly know the contents of their parent’s wills?
When I put the question to my audiences, “how many people hold a copy of their parents’ wills?” Only 10% on average acknowledge they do. The more interesting question is: “how many in the audience will play a lead or significant role in providing care for an aging parent?” The response — an average of 75% — agreed they would. I find the disparity between these two pieces of data, striking.
The relationship between inheriting money and the provision of health care is an issue moving into the media and cultural spotlight for two major reasons – we’re living longer (a lot longer) and the cost of health care and assisted living are rising faster than inflation and saving rates.
For some who live much longer than the average age of 76 for men and 81 for woman, many will turn to family for financial support and care when their savings are fully depleted – the same family from whom secrets were kept when a surplus seemed assured.
Why do so many people keep secrets from those who will likely be providing them with late in life care? How do secrets serve beneficiaries or add to relationships before we become old and dependant? Talk to enough estate planning professionals and they’ll tell you it almost always comes down to a lack of trust and a debilitating fear of death.
For those who view their money as an absolute source of power and control you can see how the aging process and the concomitant relinquishing of power and control makes dying and death such a wretched, fearful experience. Compare that to individuals who seriously prepare family, friends and charitable organizations to receive not just their wealth but their wisdom and you’ll find some extraordinary relationships built purposefully over a lifetime – even when years outstrip savings.
Sharing the contents of a will requires judgment – some might call it wisdom nurtured over time. A wisdom both taught and harvested through conversations with intended beneficiaries not in the last year of life, when death seems imminent, but precisely the opposite, when death is a distant abstraction.
A will doesn’t need to be seen as a solo “end of life document” but rather a collaborative work of art monumentally improved by living in relationship with our intended beneficiaries.
It is the act of collaboration, supported through frequent and deliberate conversation about the future that we leave something more valuable than just our money. This is, in part, how our fear of death recedes when we know with confidence that our beneficiaries—our emissaries — will take our ideas and perhaps our surplus assets at death and live purposeful lives themselves.
Have you shared the contents of your will with your intended beneficiaries – the ones likely to be providing late in life care for you?
“Succession Planning for a Family Business” Part 1 of 3
Michael Gray interviews attorney John Hopkins for Financial Insider Weekly about how to determine which child gets what proportion of your family business and some unique issues that come up when planning for the future of your family business. Part 1 of 3.
Part 2 of 3
Part 3 of 3
Life Insurance and Estate Planning
Salo Grabinsky on “Incapacity Planning: Preparing for the Possibility of Owner Dementia”
When alzheimer’s disease or related illnesses affect the owner of a family business, the individual, their family, their business, and their estate planning are all powerfully impacted. In this video, Salo Grabinsky describes the impact of these illnesses, and encourages families-in-business and their professional advisors to take specific steps to prepare for this potential challenge.
Estate Planning 2013: Now What? A Must Read For Everyone by STEVEN J. FROMM, ATTORNEY, LL.M. (TAXATION)
Estate Planning 2013: Now What? A Must Read For Everyone by STEVEN J. FROMM, ATTORNEY, LL.M. (TAXATION)
We now know what the federal estate tax laws will be this year and in the future. Our federal government has stated that these estate tax rules are now permanent after a decade of uncertainty. (A cynic may say that these federal tax laws are permanent until our federal government says they are not!). Anyway, here are some of the more important federal estate tax law changes made on December 31, 2012 along with some related estate planning strategies: click here to read more…..
The transfer of family wealth to the next generation: What’s the money for?
Michael Gray interviews Judy Barber of Family Money Consultants, LLC, about the transfer of family wealth to the next generation. She shares talking with your kids about how to manage money. She also shares about motivate kids in families of wealth to have healthy moral financial values and establish independence.
Family Office Expert Reveals Three Imperative Principles of Business Succession Planning
Public speaker and accountant Richard Muscio discusses “soft skills” (human factors) that wealth managers and CPAs miss when planning business succession strategies in this 5-minute presentation to a CEU class of financial planners in San Diego.