Volume 7 • Issue 6 • June 2017
The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business succession planning and charitable planning issues. This month’s issue will be a discussion of step five of the exit planning process – transferring ownership to insiders. If you are interested in learning more about the ideas and processes discussed in this newsletter, please contact us for an initial consultation.
This newsletter is the sixth in a continuing series of newsletters discussing the seven step exit and succession planning process used by Hallock & Hallock. In this month’s issue, we will take a closer look at step five – transferring ownership to insiders. In step one, we determined what your goals and objectives are; in step two, we addressed valuing the business; in step three, we determined how to build and preserve the business value; and in step four, we addressed selling your company to a third-party . As with step four, in step five we are assessing the potential buyers of your business.
Insiders are normally defined as a co-owner, family member, or key employee. The transfer of ownership to an insider can be a difficult, but it can be done. A transfer to an insider can be risky as they often have limited financial resources. Additionally, their skills and commitment to ownership may be untested. However, with proper planning, a well-managed company, and sufficient time, this type of transfer can succeed.
Some of the advantages of transferring to insiders is that the departing owner can:
- Achieve values-based goals as opposed to just financial ones;
- Gradually exit the business;
- Share in future growth;
- Motivate employees; and
- Have flexibility.
Some of the disadvantages include:
- Higher risk due to the lack of financial resources of the buyer;
- Insufficient skills of the buyer;
- Intra-family contention.
Time is Your Friend
The biggest question that must be answered is: “How can my child/employee/co-owner pay me?” Because the incoming owners often lack resources, your number one ally is time. The more time you have before your departure date, the more likely this issue can be overcome. Bank financing in these transactions can be difficult to obtain, therefore, the departing owner often finances the transfer. Because the company’s cash flow supports the purchase price, the departing owners should focus their energy on supporting business value and cash flow.
Because of the ongoing risk involved in financing the transaction, we recommend that the owner should start at least five years in advance to transition management duties to the incoming owner. The incoming owner also needs to be sufficiently trained so that a drop off in value and/or cash flow does not occur.
Fortunately, there are a variety of tools including sales, leases, and gifts that can allow the departing owner to meet his or her goals while minimizing the risks. Often a combination of these tools is used to minimize the tax consequences of the transfer. The most important thing to do next is to get started with qualified advisors who can help you assess the qualifications of the incoming owner and create a tax efficient plan for meeting your goals. Remember, time is your ally, until there isn’t sufficient time left.
This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.