Ownership Transition Planning — Secure the Livelihood of Your Business

Ownership Transition Planning — Secure the Livelihood of Your Business 

By Paul Bernhard and Dave Cheesebro
Universal Advisor, 2006 Issue No. 1

Whether yoiu plan for the eventual transition of your business or are thrust, kicking and screaming from your office into some form of retirement, the fact remains: At some point, you’re going to have to hand over the business you spent the better part of your life building to someone else. We know it’s difficult; we realize it’s your livelihood. But at some point, you’re going to have to leave.

However, that doesn’t mean you can’t maintain some semblance of control. When it comes to business transition, there are seven phases: financial planning, estate planning, ownership transition planning, leadership and management training, strategic planning, family dynamics, and personal growth and fulfillment. It’s not particularly easy to transfer the business ownership to your family or key employees, and there’s a significant amount of risk — both to you and to the business itself. This article will focus on how to structure the plan so you lessen the risk while transferring the day-to-day activities to the next generation. Talk about the best of both worlds.

To begin, the value of the company must be determined. What’s the business really worth? Values can be wide ranging depending upon the capacity of the business to generate cash over and above fixed costs. For tax purposes, as well as family negotiations and to help manage the emotions inherent in the transition process, we recommend that owners consult with an independent third party to determine the value of the business.

Once the value of the business has been determined, it’s important to develop realistic models to determine if the business has the cash flow for the next generation to pay for it. Since the ultimate goal is the health of the business, we often allow 15-year notes even though the intent is to pay the debt much more quickly (typically over 5 years). The forecasting stage also allows incumbents to determine how much of the business they want to sell to the next generation over a fixed period of time. To assure that the next generation has the time to become acclimated to business ownership, we recommend that this process occur gradually.

Balancing Taxes Against Good Business Judgment
This stage determines the best income, gift, and estate tax opportunities for both parties balanced against the need for the incumbent to get the money necessary to live after retirement. Within family businesses, the tendency is to want to gift the business to the next generation, but this often isn’t wise. In fact, more often than not, gifting a business creates problems — particularly in terms of family dynamics. The son or daughter who is simply given a business will be perceived as fortunate, not capable; privileged, not accomplished. Further success will be diminished — particularly in the eyes of jealous family members who have no stake in the business.

More often than not, we recommend that the company be restructured with voting and non-voting shares, allowing the incumbent generation to maintain control of the more difficult issues (bonuses, dividends, titles and roles, compensation, strategic planning, etc.). We’ve found that this creates a two-generation team that allows the transfer process to occur gradually over time. It affords the incumbent generation the security knowing they’ll be paid; it also affords next generation the luxury of time to learn how to run the business effectively before being charged with making top decisions. As the saying goes, it can be lonely at the top.

Creating a Market for the Stock Among the Next Generation
If a business is transferred to more than one person within the next generation, a buy/sell agreement must be established. The agreement must take into account not only the cash already committed to the first generation but also a price that fairly represents value for the person exiting the business. Our experience has found that this is not a boilerplate agreement; rather, it must be negotiated through significant discussion among the next generation of owners.

It’s important that the new owners are educated regarding their roles as such. Most incumbent owners have traditionally held three roles within their company: owner, director, and manager. However, when it comes to the next generation, some owners may not be managers, some owners may not be directors, and some managers may not be directors. There must be significant discussion regarding what’s involved in these various roles — particularly if some family members will own shares but decline to participate in the active management of the business. This is a good time to begin to formalize the board of directors. Appointing outside directors is optional, but it’s a good idea to have structured board meetings where family members can participate and grow together as a team.

Plan Ahead
The most common reason for the premature demise of a family business is failure to plan for the transfer of ownership. Given time, a well-managed company and well-thought-out plan will increase the odds of a successful transfer. It’s always the right time to ensure the survival and prosperity of your business — whether you exit gracefully or not.

For Your Consideration
Ownership transition planning is just one of seven steps within the business transition process. Other steps include:

  • Financial planning
  • Estate planning
  • Leadership and management training
  • Strategic planning
  • Family dynamics
  • Personal growth and fulfillment

Plante & Moran is the nation’s 12th largest certified public accounting and business advisory firm, providing clients with financial, human capital, operations, strategy, technology, and family wealth management services. Plante & Moran has a staff of more than 1,500 professionals in 16 offices throughout Michigan, Ohio, Illinois, and Shanghai, China. Plante & Moran has been recognized by a number of organizations, including FORTUNE magazine, as one of the country’s best places to work.


Grimes, McGovern & Associates provides expert advice during all phases of a transaction. Contact us today for a confidential consultation: John McGovern, CEO, [email protected], (917) 881-6563.

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