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Wealth Control Advisors
Rosenheim Financial Services
60 William Street, Suite 200
Wellesley, MA 02481
781-263-4568 MA telephone
781-235-8890 private fax
8451 Egret Lakes Lane
West Palm Beach, FL 33412
561-691-1380 FL telephone
info@wealthcontrol.com
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Case Study 2: Legacy Planning and Privately Held Business
We performed a Business Impact On Personal & Family Wealth project with the owner of a privately held business which had been in operation for over 70 years. The owner (in his 70’s) was transitioning the company to his son (in his late 40’s) was the head of sales, marketing, and his “heir apparent” to run the business upon his retirement or death.
We recommended that a Business Valuation Audit be done to bring the information up to date. The owner was sure of the value of the company was accurate and based his estate plan on the belief that the company would have plenty of cash flow to take care of his wife, and children as well as grow. As part of our Buy/Sell Funding & Succession Planning analysis, we discussed a design flaw in the distribution and succession plan for the company. The existing plan specified that when the owner died, that the ownership would be equally divided between his wife, his son and daughter, leaving each with one-third ownership of the company. The flaw in this plan was that neither the mother nor daughter worked in the company and were not active in any aspect of the company business.
The owner chose not to adjust his plan. Shortly after our analysis, the father died. The son then took over the management of the company, only to discover that the company was not as profitable as he believed and that funds were needed in order to expand its markets. Unfortunately, neither his mother nor sister had any interest in the management of the company and needed revenue. Their objectives and needs were counterproductive to the needs of the business. As a result, the son was forced to sell the business he “inherited” when he was out voted by his mother and sister who needed income. Without the additional marketing, the company valuation suffered, reducing the sale price.
The new owners of the company purchased the company to eliminate a competitor and closed the business, keeping only the inventory. In spite of working beside his father for 25 years, what his father had built and envisioned for the future was destroyed, the son was now unemployed, creating animosity between the family members.
A current business valuation could have aided the succession planning and family discussions in advance of the founder's retirement and death, there by facilitating careful estate planning. An updated business valuation and recognition that equal shares may not provide equal benefit could have averted this disaster.
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