Is There A Silver Lining For The Family Owned Business?
by John Leighbody

     It is hard to imagine that the current economic situation can provide opportunities for businesses and business owners. But such opportunities do exist, and especially in the following areas:

· Acquisitions
· Corporate restructuring
· Internal buy out
· Corporate transition planning
· Estate planning

ACQUISITIONS

     Since we have all heard about (or experienced) the "credit crisis," you may ask, "So how can I look at making acquisitions?" Actually, from timing standpoint now may be a perfect time to identify acquisition candidates in your industry or a strategic add on. If your core business is strong, then look outside the traditional lending sources. Mezzanine lenders have the same amount of capital today as they had a year ago, and they are looking for solid 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 they are looking for investment opportunities across all business lines. These situations may provide you with access to capital if you have a strong strategic plan for the future and can communicate it effectively.

CORPORATE RESTRUCTURING

     If your business is publicly traded but you have not realized the capital advantage that being publicly traded was going to provide you, then now would be a good time to evaluate the option of reverting back to a private company. Timing is critical and valuations, in most cases, are at an all time low. 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 a Short- Form Merger), obtaining the approval of shareholders, and lining up the funding.

INTERNAL BUY OUTS

     If one partner in a business wants to get out, why would he/she consider exiting now when values are low? There could be several reasons for exiting, such as health or the need to replace lost value in other investments like real estate or the stock market, or a shareholder may prefer liquidity over ownership. As for the low valuation issue, most internal transactions are not structured strictly on valuation and can creatively benefit the remaining owner[s] and the exiting partner and his/her family over the long run. Creativity, careful management of expectations, and, often the presence of objective advisors, are key ingredients for a successful internal buy out.

CORPORATE TRANSITION PLANNING

     Most business owners don't like to deal with the transition of the business they began or grew over the years. However, at some point the transition is going to occur either voluntarily or involuntarily. The best transition plan is voluntary. Why now? Again, the valuation issue is in the forefront. Today most business values are at an all time low, which, when coupled with minority and marketability discounts, can make it possible to transfer more significant ownership interests to family members or trusts compared to the recent past. Although the tax-free gift tax "exemption" has remained at $1,000,000 per donor, the federal estate tax exclusion has risen from $2,000,000 to $3,500,000 per person. This is a very large increase and potentially can provide up to $7,000,000 of assets being transferred tax free at death. Taking advantages of these changes requires careful planning and maybe even a realignment of assets between husband and wife.

ESTATE TAXES

     Now would be a good time to revisit your estate planning given some of the changes mentioned above, such as change in valuation, low interest rates and the increase in the estate tax exclusion. If you have not looked at 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 areas where you can enhance your planning. While you are doing this you should also evaluate your life insurance to see if any cost savings exist. Over the past several 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 significant dollars.

     The intent of this article was not to make you an expert in all of the above, but to point out that while all the news seems to be bad, there are opportunities out there. Don't look at the above ideas as a "single bullet." There is a cause and an effect, and other aspects of your business need to be considered. We strongly recommend that if you are going to pursue one or two of the ideas presented above, you go through an evaluation process to make sure you are maximizing the opportunities consistent 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.