Succession planning for a business owner involves many decisions and choices including transitioning the business to a younger generation, gifting to a charity, selling to employees or selling to a third party. Each of these choices requires an in-depth review of goals, tax implications, practicality and, of course, whether the business owner will be comfortable financially. The result may be a mixture of these choices.
Considering these choices and decisions well in advance of soliciting offers gives the business owner an opportunity to “test” how a particular path may turn out. For instance, a gift of some shares of stock to the younger generation can shed light on how the management succession (through operations and governance involvement) and ownership succession will progress. It may be that the business owner determines that the gifts of stock should be made into a trust to ensure those benefits will be controlled by a responsible trustee, even though the child or grandchild may receive benefits from the stock value.
The choice of transitioning to a younger generation can also utilize various gift and estate tax-reducing methods including a minority discount valuation, a grantor retained annuity trust and a sale to an intentionally defective income trust. Pursuing these possibilities well before a sale can maximize the tax benefits by freezing and discounting pre-sale transfer values before obtaining sometimes inflated sale values.
These may each seem complicated and admittedly there are complications to each, but they are not insurmountable. However, a meeting with qualified counsel and other tax and financial professionals can assist in explaining how each of these options may be strategically and financially beneficial.
Gifts to charity may occur prior to sale or with after-sale proceeds. A business owner may want to consider creating a private foundation with a goal of providing the next generation with a means of continuing the family’s philanthropic goals, a fund with a local nonprofit organization, or a charitable remainder trust which can benefit the business owner or others for life and provide a distribution to charity at the end of the trust. If philanthropy is part of the business owner’s goals, each of these possibilities should be considered.
Selling to employees through the use of an Employee Stock Ownership Plan may provide business continuity and also have significant tax savings if certain qualifications are met.
Although this strategy has multiple complications and qualifications, it can be particularly beneficial when all employees, and a strong and financially sound management team, are interested in taking over the ownership and operations.
As mentioned above, after all of the choices have been thoughtfully considered and analyzed, the best succession strategy may involve a mixture of techniques. The options are much less limited or no longer available at all if not put in place prior to a sale agreement. If the final decision is a sale to a third party, the pre-planning vehicles discussed above may provide significant tax savings, attain philanthropic goals and allow a greater portion of an eventual estate (whether through stock ownership or sales proceeds) to be most efficiently transferred to the younger generation. Bottom line: before marketing or listing a business for sale (not to mention pulling the trigger on a sale), a business owner is strongly advised to pull together her team of advisors and begin working on goals and strategy.