Family Succession Planning
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intend to name a family member to succeed you in running your company, you have
some advantages. The person you'll name (probably your son or daughter, son- or
daughter-in-law) is someone you can identify easily, without an extensive
search. You know that person's capabilities and shortcomings; he or she likely
works for the company now, so you have a good idea of how well the future owner
will do. That said, passing on your company to a family member can pose problems.
Intra-family dynamics should be considered, which may not be the case if your
successor is an outsider. Moreover, there are several methods of relinquishing
ownership, all of which may be closely scrutinized by the IRS.
Making the Right Designation
Designating a family member as your successor can raise emotional issues. Does your son really want to run your business, working the long hours you've always put in? Is your daughter truly eager to jump off the partner track at her law firm to take charge of your company? Be honest with yourself, even if it leads to painful conclusions.
If you have more than one child, it's often the case that one will be the obvious successor. Passing on ownership to all the children and leaving one to run the company can lead to strife: The operator may feel like he or she is working to enrich siblings, and the outside owners might second-guess business decisions.
Naming the child who will manage the company as the sole owner may make sense, from a business perspective, but it also can deprive the others of a valuable asset. In such cases, it may be desirable to equalize the inheritances. (If you're married, your estate plan also should provide for a surviving spouse.) Situations differ, but life insurance might offer a way to compensate family members who won't wind up with your valuable business.
Your plan also should focus on the method you'll use to keep
your company in the family. Broadly, here are your options:
it. This mode has the obvious benefit of providing you with income
in retirement, enabling you to enjoy the fruits of building the business.
Coming up with enough cash for the buyout may be difficult for your younger
successor, so it might be necessary to arrange financing or an installment sale
so payments will come from future company earnings, in some manner.
it. Another option is to transfer some shares to your
successor during his or her lifetime. Gift tax may be avoided or minimized by
using discounts for fractional interests in the company while ownership might
be motivational. On the downside, such gifts can reduce the income you'll get
from the business and you should have a strategy for dealing with other
·Leave it. You can simply hold onto the company until you die and bequeath it to your successor. This approach allows you to remain in control and perhaps receive income from dividends once you stop working. A lack of ownership, though, might discourage your chosen successor and lead to that person's leaving for another opportunity.
No matter which of these methods you choose, the IRS may challenge the valuation involved. A below-market sale, for example, could be recast as part sale and part taxable gift. Thus, having a reliable valuation of the company should be part of your all-in-the-family succession plan. A sophisticated approach might involve a mix of selling, giving, and leaving your business to a younger relative. Tactics such as retaining income-producing shares while transferring operational control may be appropriate.
Whether you decide a family successor is right for you, or another exit strategy, HLB Gross Collins, P.C. can help you define a plan that will be most beneficial to you and to your successors.
As a former principal at HLB Gross Collins, I am pleased to continue to be able to work with the firm’s professionals as the Chief Financial Officer of a long-time client of the firm. Serving a complex operation such as Mirasco’s is challenging, and Michael Bohling and Iliana Malinov meet that challenge by constantly thinking about our business and being in regular contact with me. Along with the managers, Adil Amou and Michelle Jenkins, they keep us current on reporting and tax developments. Our international scope requires advisors who are constantly thinking about all the implications of our transactions, and the HLB team does a great job bringing us ideas and responding to our questions.
Rick Hamilton EVP & CFO
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