Business Succession Planning: For the Family Business, For the Closely Held Business

Family business owners need to develop and implement a tax efficient plan to continue the business to the next generation if possible or for an orderly internal or external sale if not.


Foundation for Continuing Education , June 11, 2008

By Robert A. Adelson, J.D., LL.M.

A.      Business Succession Planning:  Overview
1.Why plan – Circumstances giving rise to Necessity
◦Death or Disability of owners
◦Retirement of owner or business owners
◦“Hastened” Retirement – revolt in the ranks
2.  How to plan – Alternative choices for succession

◦Internal Transfer one Generation to the next and Continuation of existing Business
◦External Sale of Business to outside third party
3.  What we seek – Goals to try to accomplish

◦Continuation / survival of the business
◦Retirement and Liquidity for the owner(s)
◦Fairness / Inheritance for non-owner family members
◦Maximization of value & favorable sale terms
◦Efficient tax planning
B.      Internal Transfer and Continuation of Business
1.Case Example – Bonanza Lumber, Inc. (Hypothetical)
2.   Planning for Continuation

◦Identification of able employees
◦Training of family members
◦Recruitment and Utilization of employees outside family
◦Provision of capital / means for success
3.  Transfer to next Generation

◦Employment agreements
◦Buy-sell agreement terms
1)   Functions

2)   Advantages

3)   Triggering Events

4)   Structure – Cross Purchase, Redemption, Hybrid

5)   Valuation

◦Life-time Stock Transfers
1)      Intrafamily Installment Sales

2)      Private Annuities

3)      Self-Canceling Installment Notes

◦Gift Transfers
1)      Gift Tax and Annual Exclusion

2)      Estate Freezes

3)      FLPs / LLCs for Discounts

4)      GRAT, CRTS, Grantor trusts

◦Non Family key employees
1)   Phantom Stock &  Employee Incentives

3)   LBO – Zenz “bootstrap” sale

4)   Sale to ESOP

4.   Providing for non-operating family members

◦Separation of real estate / non-operating assets
◦Corporate separations
◦Life insurance to equal out interests
◦Buy-sell agreement / to provide buyout terms
◦Voting and non-voting shares
◦Springing interests
5.   Further Planning for Estate Taxes

◦IRC §303 redemption to pay taxes
◦IRC §6166 to defer taxes
◦IRC §2057 Family Business deduction
C.      Desiring Internal Transfer vs. Facing External Sale
1.80% of Family Businesses do not succeed to next generation
2.  Recognition that continuation not possible

◦Inability or disinterest of next generation
◦Sale at peak price rather than fire sale
◦Owner liquidity & preservation of estate
3.  Preparing business for sale

◦Maximize value of business
◦Maintain good business records
◦Engage key consultants
◦Develop contracting process
◦Confidential information memorandum
◦Auction atmosphere
D.      External Sale of Business to Outsiders
1.Case Example – El Tiante Sports Shoe Co. (Hypothetical)
2.   Purchase and Sale of Corporation – Key Business Issues

◦Tax Issues  – Basis, Character of income, Deferral
◦Purchase Price / Earn Out
3.   Structure of sale

◦Sale of assets
◦Sale of stock
◦Nontaxable sale
◦Bootstrap sale / Redemption
◦Corporate separation
4.   Implementation and Documentation of Sale

◦Letter of intent
◦Due Diligence
◦Sale Agreement
◦Post closing obligations
5.   Estate & Family issues

◦Tax Planning for Year of Sale
◦Calibrate income and loses
◦Acceleration of deductions
E.      Conclusions – Implementing a plan
◦Beginning and continuing succession plan
◦Determining a direction / hedging bets
◦Engaging the parties concerned
◦Communication, involvement, ownership
◦Committing the plan to writing
◦Perils, pitfalls and dispute resolution
◦Updating over time
◦Working with consultants
**  This outline was for the presentation by Attorney Robert Adelson,  a 4-hour seminar course he offered for attorneys, accountants and other professionals, for continuing professional education credit, sponsored by Foundation for Continuing Education.
Questions on this presentation or the subjects covered, including any questions by

Owners or participants in family businesses or closely held businesses on buy-sell agreements, estate freezes, gifting plans, phantom stock, employment and bonus plans, and other issues concerning business succession planning or the sale of a business,

may be directed to the author and speaker at his current law firm, as follows:
Robert A. Adelson, Esq.

Engel & Schultz, LLP

265 Franklin Street, Suite 1801

Boston, MA 02110

Tel:  (617) 951-9980 ext 205


Author: radelson

Robert Adelson has been a corporate and tax attorney since 1977. He began as an associate at nationally prominent New York City “mega” law firms, first at the Wall Street firm Dewey Ballantine Bushby Palmer & Wood and later at the Park Avenue firm Weil Gotshal & Manges. In 1985, Adelson returned home, where he has since established himself as a respected Boston business attorney. He has attained partner at several small and midsize Boston law firms, most recently at Lawson & Weitzen LLP and then Zimble Brettler LLP, where he was a partner from 1994 to 2004 before becoming a partner at Engel & Schultz LLP.

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