Monday , December 17, 2018

FAMILY BUSINESS SUCCESSION Options, Challenges, Opportunities

Family business owners face both emotional and financial challenges when preparing to exit their business—and many do not have a formal succession plan. Key aspects to consider include understanding goals and objectives; analyzing options for gifting, selling and/or donating; and developing a plan that is appropriate for both the family and the business.

Being Succession-Ready

According to the Baker Tilly International Succession Reset: Family Business Succession in the 21st Century (2014) report, four out of five U.S. family business owners are not succession-ready.

Key challenges faced by family business owners include being ready for transition or market sale, and ensuring that the business has the financial capacity to support both retirement and the next generation.

Sandi Thorman
Sandi Thorman

The study points out that succession today is just as much about the transfer of knowledge and skills as it is about the transfer of wealth, because the level of skills required to effectively run a business in today’s environment is far greater than it was in previous generations.

According to the PWC Global Family Business Survey (2014) report, only 16% of family firms have a succession plan that has been discussed and documented.

The terms of the plans were varied: 40% would pass both management and ownership to the next generation; 32% would pass only ownership; 18% would sell to another company including a private equity (PE) firm; 5% would complete an initial public offering (IPO); 4% would sell to their management team; and the remaining 9% didn’t know or had other plans.

Developing a Plan

 The first step in succession planning is identifying your goals and objectives. The next step is developing a plan that achieves your goals and objectives without doing harm to the family or the business. Fundamental considerations include those listed here.

Fundamental Considerations:

  • Retain control?
  • Engage the next generation?
  • Continue the business?
  • Appreciation anticipated?
  • Stability and good cash flow?
  • Type of entity?
  • Children active and non-active?
  • Equal distribution among family members?
  • Concern for employees?
  • Key employees that are non-
    family members?
  • Commitment to the community?
  • Transfer or sell? To whom, when, how much, future appreciation
  • Require income?
  • Healthy?
  • Need liquidity?
  • Charitable intentions?
  • Prefer tax minimization?
  • Simple or complex?
  • Risk averse?

Gifting, Selling and/or Donating

 Options for keeping the business in the family include transfers as outright gifts, gifts in trust, private annuity, Grantor Retained Annuity Trust (GRAT), Intentionally Defective Grantor Trust (IDGT), and Beneficiary Defective Inheritor’s Trust (BDIT).

It may be appropriate to examine a spin-off with each child being given a separate business or division. It may also be appropriate to perform a simple tax-free recapitalization of the business so that voting stock (control) could be retained while nonvoting stock could be transferred.

Keep in mind that valuation discounts may come into play, both minority and marketability discounts. The IRS may soon publish regulations limiting use of these discounts for transfers involving family-controlled entities; therefore, for those transfers currently being planned, it may be advantageous to finalize such transfers sooner rather than later.

Options for selling the business include outright sale, partial sale, installment sale, Self-Cancelling Installment Note (SCIN), redemption, and Employee Stock Ownership Plan (ESOP). A family business owner may prefer a sale for reasons including: no leadership or entrepreneurial talent, irreconcilable conflicts among family and management, some family not in the business, liquidity needs, or lack of confidence in future of the business.

Irrespective of to whom, when, and how it is to be sold, there are steps to get the business ready to sell, including maximizing the value of the business, maintaining good business records, obtaining non-compete and confidentiality agreements from key employees, and designing and implementing incentive structures. Consider including vesting and forfeiture provisions and linking the benefit to “x” years of service, the sale of the company, or some other performance variable.

Options for transfer by charitable contribution include a Donor- Advised Fund (DAF) and split-interest vehicles such as a Charitable Lead Trust (CLT) and a Charitable Remainder Trust (CRT). While CLTs help cut estate and gift taxes, CRTs are primarily income tax planning vehicles.

In summary, the succession process will guide you in gifting, selling and/or donating your business. Based on your goals and objectives, you will be able to develop a robust plan that is appropriate for both your family and your business.

Content contributed by GreerWalker LLP, a Charlotte-based accounting and business advisory firm offering assurance, accounting, tax, and consulting services primarily to privately held middle-market companies, their owners, and their executive management teams, as well as a range of consulting services directed to publicly traded companies. Content written by Sandi Thorman, CPA, Partner and leader of the firm’s Estate, Gift & Trust Planning Services. For more information, contact Sandi at or 704-377-0239 or visit



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