family business succession: valuations, sales, scins, and...
TRANSCRIPT
![Page 1: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/1.jpg)
WHO TO CONTACT DURING THE LIVE PROGRAM
For Additional Registrations:
-Call Strafford Customer Service 1-800-926-7926 x1 (or 404-881-1141 x1)
For Assistance During the Live Program:
-On the web, use the chat box at the bottom left of the screen
If you get disconnected during the program, you can simply log in using your original instructions and PIN.
IMPORTANT INFORMATION FOR THE LIVE PROGRAM
This program is approved for 2 CPE credit hours. To earn credit you must:
• Participate in the program on your own computer connection (no sharing) – if you need to register
additional people, please call customer service at 1-800-926-7926 ext. 1 (or 404-881-1141 ext. 1).
Strafford accepts American Express, Visa, MasterCard, Discover.
• Listen on-line via your computer speakers.
• Respond to five prompts during the program plus a single verification code.
• To earn full credit, you must remain connected for the entire program.
Family Business Succession: Valuations, Sales, SCINs,
and Tax Reform
THURSDAY, NOVEMBER 7, 2019, 1:00-2:50 pm Eastern
FOR LIVE PROGRAM ONLY
![Page 2: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/2.jpg)
Tips for Optimal Quality FOR LIVE PROGRAM ONLY
Sound Quality
When listening via your computer speakers, please note that the quality
of your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory, please e-mail [email protected]
immediately so we can address the problem.
![Page 3: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/3.jpg)
November 7, 2019
Family Business Succession: Valuations, Sales, SCINs, and Tax Reform
Griffin H. Bridgers, Attorney
Hutchins & Associates
Cleveland G. Clinton, Partner
Gray Reed & McGraw
Norman A. Lofgren, Senior Counsel
Gray Reed & McGraw
![Page 4: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/4.jpg)
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
![Page 5: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/5.jpg)
Norm Lofgren and Cleve Clinton
Family Business Succession: Valuations, Sales, SCINs, and Tax Reform
![Page 6: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/6.jpg)
Family
6
![Page 7: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/7.jpg)
Family
Business
7
![Page 8: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/8.jpg)
Family
Business
Succession8
![Page 9: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/9.jpg)
9
![Page 10: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/10.jpg)
Most Small Business Owners Have No Succession Plan
10
![Page 11: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/11.jpg)
Entrepreneur Owner
• Person who organizes and operates a business or businesses, taking on greater than normal financial risks in order to do so
• Mavericks – Entrepreneurs who
• Dare big
• Plan big
• Think big, and
• Often get into big trouble
11
![Page 12: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/12.jpg)
Entrepreneur v. Enterprise
Closely-Held Business
• Few owners – often family
• Financial risk is all on entrepreneur
• “Governance” is closely-held - if not all entrepreneur
Enterprise
• Multiple owners – often non-Family
• Financial risk is all enterprise shared
• Governance is shared, formal and often Institutional
12
![Page 13: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/13.jpg)
Entrepreneur’s Business Mindset
Maverick’s Business
Approach:
• Self-motivated
• Knows product & market
• Takes risks
• Flexible
• Passionate
Concerned that Estate Planning Spawns Infusion of Possible:
• Reliance upon uninspired
• Uninformed/inexperienced
• Guarded/risk averse
• Rigid/unadaptable
• Indifferent
13
![Page 14: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/14.jpg)
Sudden Death & No Plan –Business & Family Risks
14
![Page 15: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/15.jpg)
• No One Firmly in Charge
• Employees Leave
• Customers Leave
• Suppliers are Compromised
• Daily Operations Are Ineptly Handled
• Business Goodwill (Value) Plummets
15
Maverick’s Sudden Death –Business Risks
![Page 16: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/16.jpg)
• Spouse’s Living Resources Depleted
• Outdated or Partially Complete Estate Plan
• Outdated or Nonexistent Entity Structure and Business Plan
• Tailored for Maverick’s Sole Control
16
Maverick’s Sudden Death –Family Risks
![Page 17: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/17.jpg)
Sudden Death and No Plan –Interim Make-Do Options
17
![Page 18: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/18.jpg)
18
![Page 19: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/19.jpg)
Maverick’s Sudden Death –Business Planned Stop-Gap
• Manager / supervisor
• Consider stay bonus and non-qualified deferred compensation plan
• Identify to all employees the substitute person-in-charge
• Key employees
• Non-competition
• Non-solicitation
• Customers
• General services agreement with agreed-upon terms
• Vendors / suppliers
• Memorialize any favorable terms or conditions
• Communicate all stop-gap plans to spouse and family 19
![Page 20: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/20.jpg)
Maverick’s Sudden Death –Business Management Band-Aids
• Advisory board of directors• Retired business owners & industry consultants
• Industry/trade groups• Utilize mentors/be a mentor• ID an out-of-territory competitor
colleague to provide temporary emergency operations aid
• Advise spouse of competitors• In emergency, direct they be
called to promote bidding
20
![Page 21: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/21.jpg)
No Business Plan –But Intends Family Business Succession?
21
![Page 22: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/22.jpg)
Family Business Succession?
• Does the next generation share maverick’s vision?
• Is the next generation prepared to run the family business without maverick?
• Are their estate and business plans that complement each other?
• If not, why does maverick want the next generation to run his family business?
22
![Page 23: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/23.jpg)
Predictable Owner Shortcomings
• No vision
• Not communicated or shared
• No project delegation
• Not modeled or encouraged
• No shared management & leadership
• Not permitting mistakes
• Micromanaging
• No defined roles & accountability
• Poorly defined roles
• Poorly defined expectations
23
![Page 24: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/24.jpg)
Foreseeable Family Obstacles
Obstacles
• No interest in business
• No shared vision
• Jockeying for control
• Sibling rivalry
• Sense of entitlement
Solutions
• Regular family meetings
• Encourage acquiring external experience
• Hire family into established job
• Create advisory board
24
![Page 25: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/25.jpg)
Agreed Family Succession –Interlaced Business and Estate Plans
25
![Page 26: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/26.jpg)
Maverick’s New Structure Keeps Control and Provides Complementing Business and Estate Plans
• Not a sole proprietorship
• Corporation • Is an option, but not seen as nimble• Older businesses – often “C” corp converted to
limited partnership
• Limited partnership • Has advantages but considered cumbersome• Two entities – LP & GP
• Limited liability company
26
![Page 27: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/27.jpg)
Maverick’s Entity StructureLimited Liability Company
• Member interest ties seamlessly to estate plan
• Family/company agreement
• Becomes much of the business plan
• Readable like a contract
• Coupled with a members’ agreement
• Ensures maverick’s control until agreement termination, or maverick’s death or incapacity
27
![Page 28: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/28.jpg)
28
![Page 29: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/29.jpg)
What if family rejects running the business?
• Now you know – find out early
• Simplifies estate / business planning
• Estate planning is now assets, not business
• Business planning is about growth for sale
• Simplifies financial planning
• Sales proceeds required to fund
• Expert current company appraisal
• Simplified exit planning – reach value & sell
29
![Page 30: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/30.jpg)
![Page 31: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/31.jpg)
Valuation31
![Page 32: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/32.jpg)
Valuation
• What is the darn thing worth?
• Most people are not qualified to tell you.
• Don’t listen to your friends
• Business owners tend to overvalue
• Emotional investment overshadows reality
• Don’t settle for less that what its worth!
• Family or expediency…
• Timing is everything
32
![Page 33: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/33.jpg)
Valuing the Business
• What is it worth?
• Various methods of establishing “value”
• Multiple of EBITDA
• Varies significantly depending on industry
• “Book” Value
• Book value represents the total amount a company is worth if all its assets are sold and all the liabilities are paid back.
• “Market” Value
• Public…easy
• Closely Held…Appraisal33
![Page 34: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/34.jpg)
Fair Market Value
The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. (Treas. Reg. 20.2031-1(b))
34
![Page 35: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/35.jpg)
How to Determine FMV?
• Hire a qualified business valuation specialist
• ASA (American Society of Appraisers)
• ABV
• CVA (Certified Valuation Analyst)
• General Appraiser Certification
• CPA?
• CFA?
• MAI (real estate)
35
![Page 36: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/36.jpg)
Appraisers Job
• What does he/she do?
• Looks at published studies of purchases of similar companies
• Analyzes all relevant factors (value of underlying assets, legal, structure, tax, control, liability, marketability)
• Applies discounts or premiums
• Provides a professional opinion of value
• Make sure the appraiser will back up opinion in court
36
![Page 37: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/37.jpg)
Closely Held Business
• Family considerations
• Gift or sale to family members?
• Careful to sell for FMV…or could be a disguised gift
• Keep good books
• Annual audits?
• Fractional ownership
• Majority vs. Minority
• S corp?
37
![Page 38: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/38.jpg)
3838
![Page 39: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/39.jpg)
Buy Sell - Valuation
• Funding the buy sell
• Need to establish value
• Formula
• Book value
• Valuation
• Combination
• Insurance
• Redemption vs. Cross purchase
39
![Page 40: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/40.jpg)
Structure Concerns
• Entity
• C Corp
• Partnership
• Disregarded Entity
• Tax Structure
• S Corp
• C Corp – BIG Tax
• Asset Sale vs. Stock Sale
• HoldCo?
40
![Page 41: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/41.jpg)
Methods of Transfer41
![Page 42: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/42.jpg)
Methods of Transfer
• Is the owner selling on the open market?
• Is there a transfer to a related party?
• Family
• Key employees
• ESOP
• What about estate planning?
42
![Page 43: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/43.jpg)
Selling to an Outsider
• Timing is key
• Waiting for a seller’s market can make the difference
• Are unsolicited offers coming in?
• Talk to your family and key employees about selling? Are there other options?
• Have the courage to turn down a good offer if its not right for you.
43
![Page 44: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/44.jpg)
When it’s a go…
• Get your ducks in a row…
• Get company books in order
• Get your estate planning done (more on this later)
• Get your transition/key employee team up to date and in the know
• Get a valuation
• Talk to your accountants and advisors regarding structure
• Get a legal team in place44
![Page 45: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/45.jpg)
Stock Sale vs Asset Sale
• As a seller…stock sale is usually better
• Capital Gains treatment
• Seller can divest prior liabilities (unless otherwise indemnify)
• Cleaner transaction
• Buyer may want asset sale
• Acquire underlying assets at stepped up basis
• Reset depreciation and amortization
• Can segregate unattractive assets and liabilities
• Others 45
![Page 46: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/46.jpg)
Built in Gains Tax
• Is a sale on the horizon?
• 2 levels of tax if business is a C corp
• Corporate tax for sale of assets
• Qualified dividend on liquidating dividend
• S Corp better – 1 level of tax
• BIG tax look back is 5 years…get the clock running
46
![Page 47: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/47.jpg)
Brokers/Investment Bank
• Using professionals to help bring the business to market is a good thing!
• Even if offered privately…they can help you determine if the offer is market rate
• Get a means of comparison
• If business owner is keen to sell…they can help offer the sale through their networks and get competing offers
• Sometimes the highest offer isn’t the best offer
47
![Page 48: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/48.jpg)
Estate Planning
• Estate Tax/Gift Tax rate is 40%
• Exemption is $11.4 million (reverts to lower exemption 1/1/2026)
• Ability to move business out of taxable estate before sale can mitigate transfer taxes
• How?
• Adapting structure of business
• Gifts and Sales
• Irrevocable Trusts
48
![Page 49: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/49.jpg)
Intra-Family Transfers
• If owner desires to simply send control and/or equity to the next generation…the answer is simple…make a gift and/or sale of the equity
• Valuation is key
• Make sure that a succession plan is in place
• Multiple family members
• Some involved in business and others aren’t
• Some want control…and aren’t ready
• Communicate
49
![Page 50: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/50.jpg)
Gift?
• Owner can give up to Exemption Amount ($11.4 million) to family
• $22.8 million of value if gifts made from 2 spouses
• Must file Form 709 – gift tax returns
50
![Page 51: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/51.jpg)
Sale?
• Sale cannot be less than market rate
• Intra-family transfers must be not less than Applicable Federal Rate (Nov. 2019)
• Short Term – 1-3 years = 1.68%
• Mid Term – 3-9 years = 1.59%
• Long Term – 9+ years = 1.94%
51
![Page 52: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/52.jpg)
Downside to Gifts
• Transferred tax basis in stock or assets
• Relinquish control or income stream
• NextGen may have the business acumen, but not the sophistication to handle wealth, OR vice versa
• Gift Taxes at 40% > Capital Gains 20%
52
![Page 53: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/53.jpg)
Testamentary Transfers?
• Is it better to keep ownership until death?
• Perhaps…step-up in basis on death
• Testamentary trusts
• 754 elections
• Keep income stream
• Management concerns?
• Give away non-voting interests in business
• Keep control until nextgen is ready
53
![Page 54: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/54.jpg)
Lifetime Transfers to Trusts
• Irrevocable Spendthrift Trusts can:
• Shield wealth/business from outside creditors
• Remove assets from transfer tax system
• Protect spendthrift descendants from themselves
• Bifurcate control of business from beneficial ownership – USE of thoughtful Trusteeship or other fiduciary roles
• Keep Business whole for multiple generations
• Downside – transferred tax basis54
![Page 55: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/55.jpg)
Spousal Trust(s)
• Owner wants to keep beneficial ownership AND remove assets from taxable estate
• Give business equity to trust for spouse
• Post sale, spouse can take distributions for his/her needs without inclusion in estate
• Non-reciprocal trusts?
55
![Page 56: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/56.jpg)
BDIT
• Want your cake and eat it to? Grantor Trust provisions under IRC Sec. 678
• Can SELL ownership in entity to a trust created for owner’s benefit.
• Can retain control and beneficial ownership
• MAY remove business assets/proceeds of sale from taxable estate??
56
![Page 57: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/57.jpg)
Re-Structuring the Ownership
• Family Limited Partnerships
• Bifurcate control and equity
• Create structure where discounts are available
• DLOC and DLOM
• Example
• Business is spread among 3 LLCs (OpCo, EmployCoand LandCo)
• FMV is $100,000,000
• Move 3 LLCs into FLP/HoldCo
• Create discounts of 25%-45%57
![Page 58: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/58.jpg)
Why do this?
• Owner can gift and/or sell discounted FLP equity to family (or trusts)
• Move assets out of taxable estate prior to sale of the actual business to 3rd party
• Illiquid business interests are much more effective to plan and mitigate estate taxation than cash or liquid assets
• Leverage discounts…transfer more with less tax impact
58
![Page 59: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/59.jpg)
Is the business an S corp?
• Cannot contribute S corp stock to a limited partnership
• Can create similar discounts by recapitalizing stock among voting and non-voting shares
• Small amount of voting and large non-voting
• E.G. 10 voting – 990 non-voting
• Voting and non-voting equity is the only caveat to the single class of share rule for S corps
59
![Page 60: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/60.jpg)
Self-Cancelling Installment Note60
![Page 61: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/61.jpg)
SCINs
• SCIN – Self Cancelling Installment Note
• Great in low interest rate environment
• Intra-family business succession strategy
• Basics
• Owner sells business to children for a Note
• Term of the Note is less than the actuarial life expectancy of seller
• Note cancels on death of seller – “Mortality Charge”
• Because of cancellation provision – the note is not includable in the taxable estate of seller on death
61
![Page 62: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/62.jpg)
Why do a SCIN?
• Low interest rates
• Prorate capital gains – prorate over term of note
• “Freeze” estate – if the business appreciates in value after the sale
• Risk Premium (or “mortality charge”) built into the loan…so when there is a cancellation, there is no inclusion in estate
• Creates an annuity stream for seller
62
![Page 63: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/63.jpg)
![Page 64: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/64.jpg)
BUSINESS SUCCESSION
CONSIDERATIONS AFTER TAX REFORM
Griffin H. Bridgers
Hutchins & Associates LLC
Denver, Colorado
![Page 65: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/65.jpg)
What Has Changed?
• 21% C corporation tax rate
• 199A deduction for pass-throughs (partnership, S corporation, disregarded entities)
• Lower individual itemized deductions for state and local taxes (capped at $10,000 per year)
• Higher standard deduction ($12,200 for 2019), which discourages itemization at an individual level
• Higher estate tax exemption ($11,400,000 for 2019)
• Higher annual retirement plan contribution limit ($19,000 for employee contribution, $56,000 for combined employer and employee contributions, $6,000 catch up over age 50, $6,000 for IRA contributions)
65
![Page 66: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/66.jpg)
Planning by Entity
• C corporation
• S corporation
• Partnership (LLC or state law partnerships)
• Disregarded entities (single-member LLC; grantor trust)
• Irrevocable Trusts
• Estates and Revocable Trusts
66
![Page 67: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/67.jpg)
C Corporations
• More favorable with 21% corporate income tax rate, combined with maximum 20% rate on qualified dividends
• Beware dividend treatment for sales and redemptions of stock• Difference – return of basis taxed as dividend
• Beware family attribution rules
• Preferred stock freeze transactions may still be in vogue
• NOL harvesting may be more limited
• Basis step-up (for up to $11,400,000 of stock per shareholder without estate tax liability) may be useless if corporate assets sold• To harvest large step-up in stock, conversion to S corporation may be
valuable
• Alternatively, could taxable stock reorganizations be used?
67
![Page 68: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/68.jpg)
C Corporations, Continued
• Beware General Utilities doctrine – still cannot remove appreciated assets without recognition of gain• Tax-free spinoffs may be useful, but can be difficult between related
parties
• Buy-Sell Agreement Issues• Redemption Agreements are subject to limitations of Code Sections 302
and 303
• Life insurance may be included in corporate E&P
• Beware family attribution rules
• No transfer-for-value rule exception for sale of policy between shareholders
• Beware of Code Section 2703
68
![Page 69: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/69.jpg)
S Corporations
• Is there a recent conversion from C corporation?• Built-in gains (BIG) tax for sales of appreciated assets within 5 years• Dividend tax on old and cold C corporation E&P (known as AAA, or
accumulated adjustments account)
• General Utilities can still bite you• Note, however, that liquidation or redemption of stepped-up stock in
exchange for in-kind distribution of appreciated asset(s) could zero out gain• May not apply with respect to hot assets, like inventory and accounts receivable
• Still consider family attribution rules
• Use 199A deduction
• Limit compensation to shareholder/employee, within reasonableness standard, to avoid self-employment income
• Beware – is there a 338(h)(10) election in place for stock sale, or a 336(e) election for stock distribution?
69
![Page 70: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/70.jpg)
S Corporations, continued
• Beware of continued S corporation qualification• Who can be a shareholder?
• Trusts must be electing small business trust (ESBT), qualified subchapter S trust (QSST), or grantor trust
• Entity must be disregarded entity (such as single-member LLC)
• Cannot have two classes of stock by capital rights
• i.e., preferred and common stock not allowed
• However, can have voting and non-voting common stock
• Valuation issues • May be eligible for valuation discounts
• Beware of Code Section 2703
• Lower C corp rate may create argument for tax-affecting valuation, taking away IRS tendency to apply premium to S corporation value
70
![Page 71: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/71.jpg)
Partnerships
• Biggest boon is 754 election • Sale of partnership interest or death of partner permits application of outside
basis step-up to inside basis of partnership assets
• Also 199A eligible
• Beware effect of 704(c) and 704(e) among family members• Kiddie tax now uses tax brackets for trusts and estates
• Valuation: may be able to claim discounts for limited partnership interests, even for non-minority interest• GP interest may not be discount-eligible or may command premium
• Can IRS include partnership assets in contributing partner’s gross estate? See IRC 2036 and 2038, Powell v. Commissioner, and Strangi v. Commissioner • This may be a good thing for estates below $11.4 million
• Note also – are gifts of partnership interests present-interest gifts?
71
![Page 72: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/72.jpg)
Partnerships, continued
• Liberal transfer-for-value rule exceptions for life insurance
• Technical termination rules no longer apply• However, make sure there are still at least two partners after buy-out
• Beware distributive share and allocation issues• Targeted allocations and cash distribution waterfalls
• Profits interest issues and safe harbor
• Traditional allocations – do they have substantial economic effect?
• Beware the now rare nonrecourse deductions
• Note the new partnership audit regime – adjustments at partnership level • What authority does partnership representative have to bind partners in
settling tax deficiency?
72
![Page 73: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/73.jpg)
Disregarded Entity
• Often a single-member LLC
• Make sure there was no past check-the-box election to be taxed as an association (C corporation)
• Eligible for 199A deduction
• Beware state and local taxes on sale of interest (sales and use taxes)
• On addition of partner, beware entity formation issues:• If resulting entity is corporation – check IRC 351 qualification
• If resulting entity is partnership – check IRC 721 qualification, as well as 704(c) and 704(e) issues with respect to new partner
73
![Page 74: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/74.jpg)
Irrevocable Trusts
• Is grantor trust status advisable?• Pay income tax of beneficiaries without gift tax or circular calculation
• Allows for sale of appreciated assets with disregarded gain
• Allows for deathbed “swap” of assets to maximize step-up in basis
• Beware, however, the ongoing issue of grantor trusts at death (no estate tax on post-contribution appreciation of trust assets for now, but for how long?)
• Non-Grantor Trusts• Trusts owning interests in pass-throughs may be eligible for 199A
• Highly-compressed tax rates, so typically not a good idea to retain income in trust (especially ordinary income)
• Due to DNI rules, capital gains typically taxed to trust (even if distributed) unless trustee has state-law power to allocate to income
74
![Page 75: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/75.jpg)
Irrevocable Trusts, continued
• Sale to Grantor Trust• Respected for gift and estate tax purposes, and ignored for income tax
purposes, under current law
• This is what is meant by a “defective” grantor trust
• This could go away in future
• Can remove future appreciation of sold property from gross estate
• Still have to include promissory note, plus interest, in gross estate
• Note that upfront gift of cash for down payment may be needed
• Commonly accepted safe harbor is 10%
• Make sure note is respected and enforceable to avoid gift recharacterization
• Beware entity-level tax and shareholder-level tax (if any)
75
![Page 76: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/76.jpg)
Irrevocable Trusts, continued
• Sale to Non-Grantor Trust• New “hot” strategy is deferred sales trust
• Uses 453 to defer gain on sale of appreciated asset to non-grantor trust
• Typically not available to defer recapture
• Largely untested – letter of code and regs allow it, but IRS could challenge on a variety of grounds such as related party rules, form over substance, and step transaction to name a few
• Alternatives to explore for tax deferral• 1031 exchange
• Qualified opportunity zones
• Carried interests for managing partners (but beware 704(c))
76
![Page 77: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/77.jpg)
Estates and Revocable Trusts
• Estates taxed the same as trusts for income tax purposes• Revocable trust may be treated as income tax estate if 645 election made
• Note several tax elections to be made by executor of estate• 2023A special use valuation
• 6166 deferral of estate taxes
• 303 stock redemption
• Portability election
• QTIP/reverse QTIP election
• Allocation of GST exemption
• Valuation discounts
• Alternate valuation date
77
![Page 78: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/78.jpg)
78
Family
Business
Succession
![Page 79: Family Business Succession: Valuations, Sales, SCINs, and ...media.straffordpub.com/products/family-business... · 7.11.2019 · • Participate in the program on your own computer](https://reader033.vdocuments.net/reader033/viewer/2022043014/5fb1b47558b91d2a00579a5d/html5/thumbnails/79.jpg)
Questions?
• Thank you!
79