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Ownership succession planning: 3 approaches


In RSM’s recent webcast, Ownership succession planning: 3 approaches, presenters explored the sale of a business to a private equity entity, through an employee stock ownership plan (ESOP) and via a family transfer. While there are a variety of benefits related to each method, our speakers broke down the pros, considerations and attributes for each. Note the following.

Private equity

Significant elements of a private equity transaction include:

  • This deal method could mean the buyer wants an asset sale
  • Potentially, the transition could be more corporate
  • The sale is taxable, and there are a variety of tax considerations, including unclaimed property, payroll, deferred liabilities, post transaction taxes and more
  • Selling owner may be dealing with a strategic buyer
  • There may be limited buyers
  • Buyer may likely want 100 percent of the company
  • Due diligence is an essential part of the deal process

If you are considering a private equity transaction, your team of advisors may include an investment banker, attorney, accountant, tax advisor, estate planner, human resources consultant, business valuation professional and other transaction advisory professionals.

Employee stock ownership plan

Noteworthy attributes or considerations of an ESOP involve:

  • Buyer (retirement plan on behalf of company employees) wants company stock and can buy any percentage of the business
  • Installment payment likely for a portion of the sale if large percentage sold
  • Less change to the business
  • Potential for the seller to defer tax on the sale
  • Selling owner cannot get more than fair market value of the business set by independent appraiser
  • Ready market to sell business
  • Requires trustee negotiation and diligence

If this method is chosen for your business sale, your advisor team could include the ESOP trustee, transaction consultants, lenders, attorneys, an appraiser, tax and accounting professionals, and a plan administrator.

Family transfer

Finally, for a family transfer of the business, considerations include:

  • Determining whether family members are capable and ready, and do in fact actually desire, to run the business; deciding whether the business should instead be sold and the proceeds invested
  • Considering how to reward or plan for the other family members not participating in the business
  • Weighing income and estate tax planning needs after first determining the desired “core capital” needed to meet the needs of the senior generation
  • Considering philanthropic wishes of the family and possibly implementing charitable planning techniques
  • Gifting of interests in the business to take advantage of lifetime transfer and annual gift tax exemptions
  • Possibly leveraging a grantor retained annuity trust to avoid gift tax consequences
  • Possibly selling business interests to defective grantor trusts for the benefit of family members and their heirs

Your advisor team for a family transfer should include: legal, tax and accounting professionals; business valuation advisors; and financial and wealth management professionals. The process will require a coordinated effort of all team members.

Selling your business is a significant undertaking. A minimum of two to three years is not uncommon to successfully transition a company through the sale to new owners, and sometimes the process may or should take longer. Aside from the planning, there are also emotional issues to address related to transitioning the company, and failure to deal with these concerns can derail even the best of transition plans. Seek out professionals now to work through your objectives, and decide the best succession approach for your business. Careful planning today can help you avoid many pitfalls in the future.


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