Ownership Transfer and Business
Succession
Presented by
John Reed

Ownership Transfer vs. Business Succession
• Ownership transfer can occur with or without a
change in management through the use of
voting and nonvoting shares.
• Business succession can be planned with or
without an immediate ownership transfer
• Business succession begins be assembling a
management team and spreading the
concentration of management responsibility

Why Consider It Now?
•Business valuations historically low
•Interest rates low
•Bonding is more difficult
•Having a succession plan in place is attractive
to sureties
•Owner estate tax planning

General Succession / Transfer Strategies
• Sale to an outside buyer
• Employee Stock Ownership Plans (ESOP)
• Transfer at death or disability through an
insurance contract
• Developing buyer(s) from within / becoming a
Succession Organization. Hardest part usually
is finding and developing the new leader

Outside Sales and ESOPs Harder To Do In Today’s
Market
• Limited market for construction companies
today.
• Contractor consolidators out of business
• Venture capital firms generally not interested
in contractors.
• Employee Stock Ownership Plans (ESOPs)
are less viable today than they once were.

Ownership Transfer Methods
• Create new company / Wind down old company
• Insurance funded transfer at death or disability
• Bargain sale
• Significant bonuses to buyer used to purchase
seller’s stock
• Phantom stock or nonqualified deferred
compensation
• Gifting using annual and lifetime gift exclusions

Grantor Retained Annuity Trusts (GRATs)
• An estate planning transfer technique
• Not a new strategy, but one that fits well in today’s
economy.
• Transfer of shares from one shareholder to other(s)
• Utilizes IRC 7520 rate for month of transaction.
• Death during term results in estate tax inclusion.
• Not a good technique for transfer to grandchildren as
GST allocated at end.
• Can zero-out, resulting in no gift.
• Authority for GRATs is defined in IRC.
• Valuation self-adjusts.

Zero-Out GRAT
• Owner transfers (often nonvoting) stock to
GRAT
• Owner retains an annuity interest equal to
assets transferred, resulting in zero gift.
• If assets appreciate more than IRC 7520 rate,
(2009 rates have ranged from 2.0% to 2.6%,
currently at 2.4% for May 2009), all additional
value is transferred to new owner without using
any unified credit.

Sample GRAT Calculation
•Fact pattern – S corporation contractor worth
approximately $3,000,000. Net income
$250,000. Tax on S corporation income
handled through owner withholding.
•Contractor wishes to make key employee a
10% to 15% owner.
•Normal shareholder agreements put in place.
•Uses a Zero-Out GRAT as the transfer
vehicle.

Sample GRAT Results
•Shareholder contributes 35% of company in non-
voting shares to GRAT in February 2009 in exchange
for an annuity of $166,788 per year for 5 years (5 year
annuity payment at 2%).
•New owner’s distributions (35% of $175,000) paid to
old owner as partial funding of annuity. Difference
between annuity value and distributions received paid
in shares of stock (shares returned).
•At end of 5 year period, new owner retains 13%
ownership in company.
•Zero gift, so no gift tax paid or exclusion used

Zero-Out GRAT Calculation

Zero-Out GRAT “Sweet Spot”
• Low IRC 7520 interest rate
• Income generates cash flow available to distribute
without a net depletion to equity
• No debt service in company
• Equity growth (after distributions) greater than the
IRC 7520 rate
• Ability to justify a larger valuation discount

LarsonAllen LLP
• Appendix
– Information about LarsonAllen and
LarsonAllen’s Construction and Real Estate
Group

LarsonAllen Construction and Real Estate Group
Nationally Oriented CPA & Business Consulting Firm
Established in 1953 by Rholan Larson & John Allen
History & Focus on Privately-Owned, Owner-
Operated Businesses
Primary Advisor Relationship – “Total Client
Service”
Managed by the “LEADERS” culture
Ranked in the top 20 CPA firms in the U.S.;
approximately 1,400 employees; 27 offices and
client service centers in 9 states

LarsonAllen Locations
Upper Midwest
Minneapolis, St. Cloud, Austin, Alexandria and
Brainerd, Minnesota
Eau Claire, Wisconsin
Midwest
St. Louis, Missouri
Dallas, Texas
East
Philadelphia, Pennsylvania
Washington DC
Boston, Massachusetts
Southeast
Charlotte, North Carolina
Fort Myers, Naples, Orlando and Tampa, Florida
Southwest
Phoenix, Arizona
In addition, there are ten client service centers.

Construction & Real Estate Group
Construction and Real Estate industry
commitment –
Focus on industry knowledge and practice development
Dedicated construction group staff of 100 professionals
Firm-wide
Specialized A&A and tax training for all staff and principals
Construction industry association memberships and active
involvement
Serving construction and real estate clients
ranging from startups to companies with
revenues greater than $1 billion covering a
wide variety & type of contractors and real
estate entities.

Florida Construction and Real Estate Principals
Naples
Sue Christopher (Lead Florida Principal),
schristopher@larsonallen.com, 239.280.3562
Stan Schneider, swschneider@larsonallen.com, 239.280.3566
Michael Kosinski, mkosinski@larsonallen.com, 239.280.3517
Orlando
Les Eiserman, leiserman@larsonallen.com, 407.802.1203
Tampa
Jack Rybicki, jrybicki@larsonallen.com, 813.384.2701
Fort Myers
John Reed, jreed@larsonallen.com, 239.226.9903

Noticeably Different
Construction Operations Consulting
Information System Selection and Implementation
Business Planning and Corporate Structure
Management Training – Project Managers,
Estimators, etc.
Reporting Relationships
Performance Measurement and Assessment
Dispute Resolution Support
Advisory/Devil’s Advocate Services
Expert Witness
Claims Documentation and Assistance
Cost Segregation Services