Lack of planning may bring leadership challenges
How can small business owners best streamline the succession of company leadership? The answer might lie in stronger employee ownership, a U.S. Senate committee was recently told during a hearing that also touched on taxation and featured a few New Hampshire figures.
The Senate’s Committee on Small Business and Entrepreneurship, chaired by U.S. Sen. Jeanne Shaheen (D-NH), heard from three entrepreneurs around the nation — including Tabitha Croscut, an attorney and shareholder of Manchester law firm Devine Millimet & Branch — as they convened in Washington on Jan. 24.
“As a result of a lack of planning each year, many companies in New Hampshire and across the U.S. are bought up by third parties,” Croscut shared with Shaheen and Sen. Joni Ernst (R-Iowa), ranking member of the committee.
“Some even close their doors when they are unable to find a buyer. This is a challenge not only for the business owners, but also for the many families and communities that rely on their businesses.”
Roughly 61% of family-run businesses didn’t have a written, formal succession plan in effect in advance of going to market, according to the 2023 North America Family Business Report, conducted by Brightstar Capital Partners and Campden Wealth. The figures were released around May 2023, but about the same share of family businesses said they believe economic conditions would pose the most significant systemic risk to their operations over the next year.
“Our aging populations outpaces the rest of the country,” Shaheen said of the Granite State’s growing number of residents turning 65, the historical standard retirement age. “We are in a phenomenon that’s referred to as the ‘silver tsunami’ that’s going to affect our country, small business ecosystem and local economies.”
To that end, Croscut presented employee stock ownership plans (ESOPs) as an alternate exit strategy. Companies with these plans give their staff stake in the business through shares of stock that are either bought by the individuals or through vesting, where stock is given out by the ESOP managers, according to Investopedia. For some businesses, stock is vested immediately upon hire, others choose to distribute stock gradually over time and some offer stake in increments after a certain number of years.
Croscut highlighted that about 30 businesses in New Hampshire use this strategy today, many of which are concentrated in the Monadnock Region or White Mountains.
“Those 30 New Hampshire ESOP-owned companies cover over 4,600 participants,” Croscut said. “Most are smaller businesses, and in fact, more than two-thirds have under 100 employees.”
Businesses like Yankee Publishing, which initiated an ESOP strategy in 2019 and became 100% employee-owned in 2022, have found success in such moves after a lack of interest from within the former family who owned the company, Croscut said.
(New Hampshire Business Review is produced by YPI New Hampshire Group, a division of Yankee Publishing.)
“While Yankee Publishing is a great example of a successful ownership transition utilizing an ESOP, we continue to struggle with the challenges of access to capital for ESOP transactions and a greater awareness of the ESOP succession strategy.”
In the case of ESOPs like Yankee, a succession plan may occur over a short period of time, but other businesses moving through different types of plans may take longer, as in the case of Martin Hildreth Company, an underground utility contractor based in Rock well City, Iowa.
The committee heard from Hildreth Company spokesperson Theresa Hildreth that the contractor was pushed to extend its succession plan from five years to three years contingent on future economic health.
“As we compare today’s challenges to the previous generation’s (ownership) transition in 2009, we find a much harsher economic landscape,” she said. “Concern on today’s inflation, company valuation and long-term success adds to that complexity.”
Hildreth pointed to moves to repeal Iowa’s inheritance tax, led by the Senate Small Business Committee’s Ernst, as supportive of the business’s outgoing retirees and the viability of succession.
Palmer Schoening, chair of the Family Business Coalition, also voiced input at the hearing. The coalition is a group of industry groups and organizations that state a goal of providing for the safety and security of family businesses across the country.
Schoening says if taxation exists, it should at least remain consistent to support successful family transitions.
“If you look at policies such as the estate tax over the past 25 years, the exemption and rate has changed 20 times, making it incredibly difficult to plan,” he said to senators. “Family business owners can’t project forward at least 10 years with respect to tax policy.”
Relevant tax policy cuts were the basis of the Tax Cuts and Jobs Act, passed by Congress in 2017. Ernst, who voted in favor of the act with 51 other Republicans in a party-line vote, posed Schoening the question of what businesses the TCJA’s expiration of estate tax reform in the coming year may affect. The act increased standard deduction and family tax credits and eliminated the alternative minimum tax for corporations, among other provisions. Its exemption amounts expire on Dec. 31, 2025.
“It’s not only the estate tax exemption that expires, it’s the 199a small business deduction, it’s marginal tax rates across the board,” Schoening responded, citing a provision in the act.
Known as the “199a Deduction,” the provision allows noncorporate taxpayers to deduct as much as 20% of qualified business income, plus as much as 20% of qualified real estate investment trust dividends and publicly traded partnership income.
“We can count on more family farms and businesses being in the crosshairs of the estate tax. … This is overwhelming to think about for business owners. That’s why we’re pushing for permanent extension of the current policy.”
