There will come a time when the founder or founders of a business will step aside. It may be involuntary, in the case of death or disability. It may be voluntary, in the case of retirement or sale of the business. Or it may be the result of a settlement in a contested proceeding. Careful planning can smooth what could otherwise be a bumpy ride, or at least provide some certainty as to the destination.
One recent successful transition involved a long-established construction company. It was founded in the 1930s and was passed on to two sons. The brothers continued their father’s success, and recently became of an age when they wished to slow down and transfer the business to the son of one brother who had long worked in the business. The issue was: how best to do this from both a tax and business standpoint.
We were brought in by an able team of financial planners and advisors to help with the implementation. After considering a number of scenarios, and in collaboration with the financial planners and the company’s accountant, we agreed to the following structure. The company would redeem eighty percent of the shares held by the two brothers, paying for the redemption with secured notes. The son would purchase eighty percent of the remaining stock held by the brothers, again paying with a note. At the end of the day, the son owned 80% of the company, the two brothers are getting capital gains treatment on the redemption and purchase of their stock, and a business is poised to thrive with the third generation of owners.
This was an evolutionary process, one that was years in the making. Successful succession planning is rarely done on the back of a napkin. Whether the path forward is an inter-generational transfer, the sale to a third party, or one partner buying out another, good planning usually leads to positive outcomes. Poor planning, or worse, no planning, often leads to bad tax outcomes, family disputes, litigation and failure.