By Matt Stringfellow, CPA and Brad Whitfield, CPA, CVA

With a large segment of the business population beginning to enter their retirement years, ownership transition has become a hot topic lately.  Senior owners, who are often the founders of their business, begin to grapple with the issue of planning for the long term future of the firms they have built. When such succession planning happens to involve family dynamics where the children or grandchildren are a part of the business and therefore part of the succession plan, family succession brings with it a host of issues that are more difficult to deal with than a typical ownership transition plan.

One of the most prevalent issues in any succession plan is the inability of the owner to “step aside” and allow the new team to function without interference. Founders especially have a hard time letting go after building and growing the company from its inception. Rather than functioning as a valuable advisor, the founders stay too involved in the day to day operational issues. This is even more acute when the successor is the child of the owner.  If the owner is too hands-on during the pre-succession training period, the necessary skills may not be effectively passed along experientially to “the kid(s)” or the next business generation.

Another important issue in succession planning is the value equation. What will it cost to buy out the owner and how will it be structured? Business owners almost always have an inflated idea of the true value of their business- it’s just human nature.  The established value must be able to withstand scrutiny as an arm’s length transaction. Any value calculation is advisedly arrived at by a properly drawn formula that is relevant to the particular industry in which the company operates or by an independent business valuation by a credentialed appraiser. This is even more important in a family setting, both from a tax standpoint and to prevent subjectivity in setting a value, which could cause a disruption in family harmony.

There are several ways a sale can be structured.  In its simplest form, it can be a sale of stock between the owner and the buyer.  An alternative structure is an internal partial or full redemption of the stock by the company, which results in a step-up in ownership percentage for the other shareholders.  Or it can be a combination of a sale of stock and compensation to the seller. Both buyer and seller should be aware that the way the sale is structured can result in radically different tax results for both parties. A professional tax advisor should be closely involved in the determination of the sale structure to prevent unforeseen tax results.

While there are many other issues involved with any good succession plan, those mentioned here are especially important in any family business. As in all business matters, always seek competent, experienced advisors to guide you through the business transition process.