Succession planning for the family-owned hospitality business: protecting your family and your business

The hospitality industry has been kind to families over the centuries, providing a good living for many, and significant wealth for others.

Whether your family owns a hotel management company or hotels — involved with one or two small properties or a large chain of hotels — the responsibilities of your family-owned business are as profound as the advantages.

Ensuring that the business continues to operate and provide for the family and others whose livelihood depends on it after one’s retirement or death is important. It is one of the critical responsibilities of the founders and senior management of the family-owned hotel business. Will family members want to keep running the business, and be prepared to do so? Will they want to sell the business? Keep the business and hire outside management?

Providing for continuity and certainty

Business detests uncertainty. It has a bad effect on all concerned, including business partners, employees, customers, vendors and other stakeholders. Succession planning helps eliminate unnecessary disruptions and uncertainties.

Recently, I was interviewed  by Brendan Manley, a contributor to STR’s Hotel News Now, about this issue.  In his article, Brendan made the point that “The timeline for a change in succession also is critical, because hotels are a 24/7 concern that require constant care and attention. Operators might hope for a quick, clean change in ownership in the event of an owner’s death, while grieving family members might desire a gradual change. Striking a balance between those two attitudes is yet another delicate tightrope one must walk.”

Addressing these kinds of difficult issues in advance, in a succession plan, is difficult to do. But many closely-held business owners embrace the responsibility and get help from experts who can walk them through various scenarios and outcomes.

Succession planning for a family-owned businesses is usually very involved with estate planning to simultaneously provide a viable succession plan and a tax-efficient approach to protect your family’s assets.

Experience is the key to good planning

Fortunately for our clients, JMBM’s Global Hospitality Group® lawyers work closely with the tax, trust and estates lawyers at JMBM. Our law firm has one of the leading taxation, trusts and estates practices in California. The Group’s attorneys serve families and closely-held businesses of all sizes. Our tax lawyers understand business concerns, and work closely with colleagues in the firm’s hospitality, real estate and corporate groups to ensure the tax efficiency of organizational decisions.

On this topic, my partner, Burton Mitchell, Chair of JMBM’s Taxation, Trusts & Estates Group told me:

“In order to accomplish any successful succession plan, you must plan and provide for estate taxes. Otherwise, the valuable family asset may need to be sold to pay estate taxes. Various estate tax planning techniques are available, but they only provide a benefit if you plan far enough in advance. Life insurance could be a piece of the puzzle.”

Burton also reminds family business owners that the federal estate tax rate is 40% over an exemption. “A number of states (although not California) also impose a state estate or inheritance tax,” he said. “The federal government allows for the installment payment of estate taxes under certain circumstances with a family business.