Protecting Your Legacy with Succession Planning


Published on

Building a successful business can take years and safe guarding your legacy requires careful succession planning especially if you intend to pass the business to your children. Without proper succession and estate planning, any number of problems can arise - kids may take the reins before they are ready, family members may fight over roles or ownership, and estate and gift tax burdens may force a sale of the business.

This presentation will teach you how operational issues and tax burdens can be managed by properly structuring your business operations and estate plan to transfer ownership and control at the most opportune times.

For more information visit or contact the author, David Levi at 612.376.1208 or

Published in: Economy & Finance, Business
  • Hello my dear
    I am Modester by name good day. i just went to your profile this time true this site ( and i got your detail and your explanation in fact the way you explain your self shows me that you are innocent and maturity and also understand person i decided to have a contact with you so that we can explain to our self each other because God great everyone to make a friend with each other and from that we know that we are from thism planet God great for us ok my dear please try and reach me through my email address ( so that i can send you my picture true your reply we can know each other ok have a nice day and God bless you yours Modester
    Are you sure you want to  Yes  No
    Your message goes here
  • For questions, contact the author David Levi at 612.376.1208 or
    Are you sure you want to  Yes  No
    Your message goes here
  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide
  • Why am I considering a transaction? Do I want/need liquidity?Does the business need more capital?Is the market right?Am I ready to retire or move on to something else?
  • Protecting Your Legacy with Succession Planning

    1. 1. Protecting Your Legacy with Succession Planning Presented by David Levi, CPA, PFS Senior Managing Director, CBIZ MHM, LLC.
    2. 2. Agenda • Why do We Care? • What is the Process? • Income and Estate Tax Issues • Stay in the Family or Transfer out of The Family? • Summary / Key Takeaways • Questions
    3. 3. Why do we care? • Your closely held business is likely your largest asset. • There are many stakeholders relying on the business and what it produces. • The wrong decision, or even the right decision implemented the wrong way could be catastrophic. • Statistics show that less than 10% of family businesses survive past the 2nd generation • What is the right answer for your business?
    4. 4. The Process –Start at the Finish Line – Issues for the Business Long before you think about transition, you should be thinking what it would look like for the business • How does the sale of the business coincide with your continued involvement with it? • What is the appropriate time frame? • Is the talent in the business today? • What is the business worth now/what can it be worth later? • What could transition bring to/benefit the business? • How reliant is the business on you today? • Do you want the business to stay in the family? • How would continued family ownership affect other management/stakeholders?
    5. 5. The Process –Start at the Finish Line –Issues for the Owner Things for you to think about personally—before the Transaction • Why am I doing /considering this? • Gather Transaction Team • CPA, Attorney, Banker, other Financial and Insurance Advisors • What is my financial need? • Does transition solve problems or create them? • What will I do once the business is transferred? • What are some of my other personal and financial goals?
    6. 6. The Process –Start at the Finish Line –Issues for the Owner--More• How does the conversion of this asset coordinate with the rest of my planning?• What Type of Structure do I consider?• How do I keep my eye on operations once I start the process?• Once I start, how do I get to closing?• What happens to the proceeds at Closing?
    7. 7. The Process –Who Could / Should Acquire my Business?Many different choices-each has pros and cons • Take it Public • Strategic Buyer-Competitor • Current Business Partners • Financial Buyer-Private Equity Fund, etc. • Employees—ESOP • Family
    8. 8. The Process—Potential Outcomes Transfer Option Value Established by Value Range Family Sell within IRS Low guidelines (Valuation) Employees Valuation Middle-low Management Seller/Valuation Middle Partners Agreement/Valuation Middle Private Equity Valuation/ Negotiation Middle-high Investors Strategic Buyers Market High Value/Negotiation Going Public Market High
    9. 9. The Process –Considerations for the choice of Acquirer-if Not Family • Ability to pay—Public Markets have certain advantages and limitations • Will you have to self finance?—Perhaps in non public transactions • Guaranteed Price vs. ―Achievable Price‖ • Tax Consequences—entity deal or asset deal? • Reputation and standing of the potential acquirer • Will you be asked to participate in ―new ownership‖? • If you are still involved after the liquidity event, what is the control you retain?
    10. 10. The Process – What is the Business Worth?• Many different ways to value businesses.• Concept of EBITDA or Earnings before Interest, Taxes, Depreciation and Amortization • Usually a multiple that may be standard in your industry• Having business appraisers and/or M and A advisers can help • Who is it worth the most to? • What steps should be taken to enhance the value? • Operating the business on a ―normalized basis‖ • Working through a possible transaction
    11. 11. The Process-Steps to Take—Non Family• Strategic Planning and Due Diligence – Valuation – Operation Review/Enhancement Possibilities – Differentiation of Business• Market Analysis – Identify Potential Buyers – Materials to be provided• Marketing Strategies/Follow Up – Contact and Qualify Potential Buyers• Selection/Evaluations• Closing
    12. 12. Sell the Assets or Sell the Entity• An important decision to consider when transferring the business is to sell the assets or the ownership interest• From a sellers standpoint, especially in a non family transaction, selling the entity is usually preferred. – The sale of the entity creates capital gain for the seller. – Gain on the sales of certain types of businesses can be excluded from income tax. – Certain contracts/relationships may be more problematic to transfer if not for an entity transaction. – Often the buyer will have fewer tax advantages in this type of transaction, and the price to be paid may drop accordingly.
    13. 13. Sell the Entity or Sell the Assets• A sale of assets by a pass through entity (LLC/S corporation) can provide the buyer greater tax benefits via the write up of assets to market value while still resulting in a single tax for the seller.• The buyer can depreciate/amortize the increased value.• This can increase the amount willing to be paid for the business.• Even though the buyer can achieve more tax benefits, sellers can often get capital gain on ―intangible value‖.
    14. 14. Sell the Entity or Sell the Assets-Continued• An asset sale will require both buyer and seller to allocate the transaction price among many different assets and other covenants.• Different depreciation/amortization lives for different types of assets are permitted/required.• A sale of specific assets can also permit the retention of other ―non operating assets‖ in the entity.• A sale of assets may also be preferred because the buyer may not want to assume liabilities that would come with the entity.
    15. 15. Estate Planning Steps to Consider before Sale• Current Estate and Gift Rules Favorable to Transfers – Consider modifying your ownership of the business to transfer upside to next generation/operators of the business – $5 million gift limit (in place through December 31, 2012) – Low interest rates for intrafamily transfers—lowest in history – Discounts available for marketability/minority interest transfers— have been on the block in previously proposed legislation – Reduced Profits resulting from recession may make for attractive gift valuations
    16. 16. Estate Planning Steps to Consider Before SaleStrategies to Consider• Recapitalize into Voting and Nonvoting Ownership• Grantor Retained Annuity Trust (GRAT)• Gift/Sale to Defective Grantor Trust (IDGT)
    17. 17. Properly Setting Up Ownership can Enhance After Tax Return to Family-Example• Facts of the Family – $10 million business S corp.—wholly owned by 1st generation • Assume 15% Cash Flow – $2 million of business real estate—wholly owned by 1st generation – $10 million in Liquid Assets• Strategies to consider – Recapitalize the business to 10% voting and 90% non voting – Gift to 6 year GRAT (non voting ownership of business) or – Sell to Intentionally Defective Grantor Trust (non voting business ownership) – Transfer Real Estate to LLC (management and Financial Interests)
    18. 18. Structure of transfer to GRAT Non-voting ownership GRAT Owner/Grantor (1st Generation) 6 annuity payments (Trust) $1,051,540 per year Family Beneficiaries at Termination of Trust
    19. 19. Structure of Gift/Sale to IDGT Gift $585K NV Stock Intentionally Owner/Transfer Sell $5,265,000 NV Stock Defective (1st Generation) Grantor Trust $5,265,000 Note
    20. 20. Financial Results-GRAT• 35% Discount for Non Voting Ownership• ($9 million * 65%)=$5,850,000 value of Transfer• Annuity Payment from Trust to Grantor is $1,051,540• 1st Generation pays tax on Corporate income (with the distribution from GRAT)• No Gift• At end of 6th year, non voting ownership in the 2nd generation (in hands of business operator perhaps)
    21. 21. Financial Results--IDGT• Same $5,850,000 value as the GRAT• Requires 10% ―seed gift‖/90% note• Uses up $585,000 of Lifetime Transfer Amount• $5,265,000 note for 9 years, interest only at 1.63% with no prepayment penalty• Minimum Annual Payment $85,820• 1st Generation owner pays tax on operations• No Tax Consequence on Note Payment• Beneficiaries of Trust 2nd Generation
    22. 22. Business Real Estate Strategy• By putting the real estate into an LLC and taking back management and non management interests, some of the same discount opportunities may be available.• Also consider transferring some or all of the real estate to family members not active in the business to provide some equalization and cash flow to other heirs.• Caution that this could put ―operators‖ and ―non operators‖ in conflict with each other.
    23. 23. Potential Savings after 6 Years-Business is Flat• With GRAT/IDGT-- – Have facilitated the transfer of 35% ($3,150,000) at no transfer tax cost. Combined federal and state transfer tax savings could be 50% or $1,575,000 – Have enabled senior generation to pay the tax on earnings for 6 years while the second generation has retained the earnings (more for the IDGT than for the GRAT.) Income tax savings could be in the millions – Similar savings available if transactions done with real estate.
    24. 24. Potential Savings after 6 Years-Business up 5%• With GRAT/IDGT-- – 90% Non voting now has pro rata value of $12 million. • Transferred at a value of $5,850,000. • Have transferred over $6 million transfer tax free. • Combined federal and state transfer tax savings could be 50% or $2,925,000. – Have enabled senior generation to pay the tax on earnings for 6 years while the second generation has retained the earnings (more for the IDGT than for the GRAT.) Income tax savings could be in the millions – Similar savings available if transactions done with real estate.
    25. 25. Transaction Choices for Family Transfer• Outright Gift/Bequest – Can have very expensive transfer tax costs and you may not want to ―be that generous‖. – Can have significant impact to children not in the business. • How do you equalize them? – Insurance? – Other Assets? – If transfer is at death, significant liquidity crunch for estate taxes. • Could be covered with insurance/other assets
    26. 26. Transaction Choices for Family Transfer• Combined Gift/sale – Could use GRAT/IDGT strategies described above . – Could consider a GRAT for the benefit of the non active family members so that at the termination of the GRAT their stock is redeemed. – The active family member could ―purchase‖ the business via the IDGT with very liberal terms. – Can in many ways allow the business to pay for the transfer. – Still may need to overlay with insurance or confirm sufficiency of other assets to provide for lifestyle of senior generation.
    27. 27. Transaction Choices for Family Transfers• Annuities/Self Canceling Installment Sales – Other possible strategies that can permit the next generation to purchase the business in such a way as to provide an income stream for the selling generation, but which would stop at the death of the seller. – Could create an issue with providing for surviving spouse • Could solve by having both spouses transfer a portion of the business so that each has an annuity.
    28. 28. Summary/Key Takeaways • What happens with your business has huge emotional and economic ramifications for you, your employees and customers as well as your family. • Understand what you are really trying to accomplish • You only get one shot to do something with it. • It is never too early to start the planning. • Make sure that you have assembled your team before you start the process. • Understand the value of the business and the ways that you can enhance it before sale.
    29. 29. Summary/Key Takeaways • Certain estate and gift rules currently in place may make transfers or transactions more attractive before the end of 2012 • Consider the difference between appreciation and control • Current low interest rates on intra family transfers • Ability to use discounts for family transfers • Adjusting ownership, even years before the transaction can enhance the family. • Strategies such as GRATs and IDGTs can result in significant additional wealth transferred down the generation.
    30. 30. Summary/Key Takeaways• Difference between entity deals and asset deals• Capital gain to seller—can come from both• Tax advantages to buyer—usually from asset deal• Beware asset transactions coming from C corporation transactions.
    31. 31. Summary/Key Takeaways• For all transactions, the correct process is important• For non family transfers, after tax, net guaranteed proceeds should be your guide. – Anything in excess of that is at risk. – Different types of potential buyers will produce different results• For intra-family transfers, ability to coordinate transaction with other estate planning is key. – How to affect those inside and outside of the business – Coordinating business and non business wealth transfer is critical – The impact be on family relationships should be considered
    32. 32. Upcoming NTO WebinarsTo check out other NTO webinars that are available, please use the link below. This link shows the two different NTO webinar series that you can register for – Strategic Edge Webinar and Quarterly Business Tax Update. view today’s presentation slides, here is the link below.
    33. 33. QUESTIONS?
    34. 34. CBIZ MHM, LLC Contacts David Levi Senior Managing Director  612.376.1208 
    35. 35. Thank You