Guest contributor Jeramie J. Fortenberry breaks down the recent sale of LucasFilm to Disney as a business succession strategy. Your small business can learn a few thing about preparing your business for the future.
George Lucas’s recent sale of LucasFilm to Disney has been all over the news. The deal, which came together very quickly, netted Lucas more than $4 billion in cash and Disney stock. To the delight of Star Wars fans, it also left LucasFilm in the hands of a strong company with a proven track record, guaranteeing continued success.
In some ways, George Lucas is no different from many entrepreneurs nearing retirement. Take away the celebrity status, and you’re left with a man who was ready to exit the company that he had spent his life building. He had reached a stage – like every business owner will – when it was time to leave his business in other hands.
Not every business owner can sell to a Fortune 500 company for billions of dollars. But even the smallest of small business owners can learn from the strategies behind Lucas’s decision to sell his company.
The Transition of a Business Requires Planning
No one can run a business forever. Whether due to death, advanced age, or illness, the time will come for every business owner to let go of the company.
Although this seems obvious, many entrepreneurs appear to be blissfully unaware that their tenure with the business will end. They continue business as usual until they either die or are forced into retirement by illness, usually without having planned for the future of the company.
Failure to plan for the succession of a business can devastate the value of the business. Less than 30 percent of small businesses continue to the next generation after the business owner’s death. Less than 15 percent make it to the third generation. This dismal success rate is often a direct result of failure to plan.
Business succession planning is the process of strategically transitioning a small business from one generation to the next. Specifically, business owners must identify who will fill key roles with the company and how the business owner and his or her family will cash out on the enterprise. Smart business succession planning can help ensure that the business survives and that the owner’s family is adequately compensated.
George Lucas’s wealth – and the financial future of his family – was closely tied to the film company he had built. But, as he neared retirement, his three adopted children were not interested in taking the reins at LucasFilm. This left him with two options:
- Lucas could identify senior management to take over key positions and start transitioning control to them, hoping they would make wise decisions after his exit; or
- He could make a clean break by selling the company to a buyer that he felt was capable of running the company, converting his equity to cash while the company was still in good shape.
In Lucas’s case, sale of the company to Disney was a smart move. It minimized the risk of poor management after his departure and saved his heirs from the hassle of dealing with the control of LucasFilm after his death. For other business owners, it may make more sense to transition control to key employees or family members. It all depends on the circumstances. Either way, a well-considered businesses succession plan can help ensure viability of the company and pass the most benefit to the next generation.
The Structure and Timing of the Business Succession Can Have Tax Consequences
Tax laws are in a constant state of flux. The timing of a decision to sell or otherwise transfer a business can have significant tax consequences.
As we near the end of 2012, both the income and estate tax situation is particularly volatile. In this environment:
- Capital gains rates for individuals in the 25 percent income tax bracket or above are set to rise from 15 percent to 20 percent in 2013.
- A new 3.8 percent Medicare tax on individuals earning more than $200,000 ($250,000 for couples) is also set to kick in for 2013.
- The estate tax is set to drop from the current $5.12 million exemption (with 35 percent tax rates) to a $1 million exemption (with up to 55 percent tax rates) in 2013 unless Congress acts by the end of 2012.
Lucas’s quick decision to sell quickly, before year end, was at least partly driven by tax considerations. Assuming a $2 billion long-term capital gain, Lucas would have paid around $175 million in additional taxes under 2013 law. By timing the sale in 2012, Lucas was able to drastically decrease the tax costs of the sale.
When developing a business succession plan, tax considerations are crucial. A lifetime gift of the business can have drastically different results from a transfer at death, and a sale of stock may be treated differently than a sale of assets. And in an era of changing tax laws, a transfer in this year can cost more or less taxes than a transfer in next year. A tax analysis can result in big savings and leave more value to the next generation.
It’s Not Always About the Money
Many small business owners have invested most of their waking hours in making a business successful. They don’t want to see their life’s work crumble, even if they are otherwise compensated. As much as they want to profit financially from the transition of the business, they want the business to continue to do well.
Given Lucas’s concern about the ongoing success of LucasFilms, he couldn’t have picked a better buyer. Disney is already planning to release a 7th Star Wars episode in 2015 and plans to release more episodes after that. Given Disney’s proven track record, Lucas can go into his retirement years knowing that his company will continue to thrive under Disney’s control.
Smart business owners can also take steps to ensure that their businesses survive after they leave the company. By leaving their companies in good hands, owners are left with the personal satisfaction of knowing that the companies they have worked so hard to build will not go up in smoke once they step aside.
About the Author
Jeramie J. Fortenberry is the founder of Fortenberry Legal. He helps his clients with estate planning and small business law. He also handles Florida probate matters on a flat fee basis in all counties. To connect with Jeramie, visit the Probate Lawyer blog.
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