Beginning the Transition Process

William J. Killory, CPA, Partner (Jun, 2013)

All businesses go through transitions as leadership changes hands over the years.  Closely held and family owned businesses are no exception to this immutable force of business although it is more dramatically felt due to the personal nature of the company.  This is a first in a series regarding transitioning closely held businesses where we will touch upon important considerations in the process.

To quote Steven Covey’s Seven Habits of Highly Effective People, “begin with the end in mind.”  Transition planning is a long term process that should start many years before your planned departure.  This will give you time to build value in the company.  Value is the combination of good financial results and a solid balance sheet, something that cannot often be achieved overnight.  Time also gives you the opportunity to build financial strength outside of the value of the company.  Qualified retirement plans are one of the best remaining tax shelters still available.  They allow you to defer income into the future and help establish a strong base for financial independence when it comes time to transition out of your company.  This may be helpful in negotiating with a third party or make the intra-family transfer easier to complete.

Planning well in advance gives you time to build a strong management team.  If the value of a company rests only in one key person, you, then where is the value when you go?  In a family business this allows you to assess the varying skill of the next generation and pass on the skills that made you successful in the first place.  You may also come to the realization that the next generation is not interested or not capable and the best thing to do is to prepare to sell to a third party.

Time gives you a chance to create the right structure.  If you are operating as a C Corporation you face the prospect of substantial double taxation and diminished value when selling or transferring your company.  Conversion to an S Corporation requires a ten year period to avoid the built in gains tax that may result when you sell your company.  If you have real estate in your company you may want to consider transferring that to another entity.  This will allow you another income stream in retirement or the ability to transfer valuable assets to family members not involved with the business.

Time allows you to confer with your trusted advisors.  Talk to your accountant, lawyer and financial planner.  Understand the tax ramifications both from an income tax and estate tax perspective.  Once you have established a plan, don’t cast it in concrete or be afraid to make changes with time.  Review it as circumstances dictate, tax laws change and family dynamics evolve.  In the unfortunate event of an untimely death or disability you should have a back-up plan.  If you’re prepared with a plan in advance then your loved ones and employees will have some direction and guidance that will be sorely needed.

When you are going through the transition planning there is no one perfect plan or one way of doing things.  As always, your Dermody, Burke & Brown advisors are available to assist you in this process.


The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.

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