1. Business succession planning 2012
Mark Coriell

2. INTRODUCTION Closely held businesses; farming operations
4 organizing questions:
When should the succession begin?
What is being transitioned?
What documents are needed?
How much will this succession cost?
Primarily talking about family businesses and transitioning that business to the next generation, particularly in cases where there are multiple children but only one successor.

3. When should the succession begin?
Lifetime vs. Post-Mortem
POST-MORTEM ONLY
Sale/gift from estate or trust
Will the successor operator be adequately prepared?
Will the business be unexpectedly devalued?
Unexpected loss of key person
Banking problems
How will the current operator fund his/her retirement?

4. When should the succession begin?
LIFETIME; LIFETIME/POST-MORTEM HYBRID
Practical Advantages
For sales, retirement income (cash) to first generation
First generation oversight; assistance
*Be careful in income tax-advantaged redemptions
First generation imprimatur over transition for other, non- business, members of second generation

5. When should the succession begin?
LIFETIME; LIFETIME/POST-MORTEM HYBRID
But first generation doesn’t want to give up ownership yet
Employment Agreements
Find out if second generation can handle responsibility without giving away control
Financial incentives
Stock/membership acquisition incentives
For gestation period prior to ownership, easier to terminate employment than buy-back stock or deal with unhappy minority shareholder
Non-competition/trade secret protection

6. When should the succession begin?
LIFETIME; LIFETIME/POST-MORTEM HYBRID
It’s time for ownership
Unless the business is real estate heavy, the next generation probably can’t borrow to purchase the business outright
Installment sale or part sale/part gift
Valuation
First generation takes back promissory note and security (retirement income!)
Flexibility
Interest

7. When should the succession begin?
LIFETIME; LIFETIME/POST-MORTEM HYBRID
It’s time for ownership
Early introduction to financing institution
Particularly if business relies on line of credit or other financing arrangement to operate, the first generation has probably been a long-term customer of the bank
Introduce second generation to bank toward the beginning of the process
Perhaps get second generation on loans (even smaller ones) at the beginning of the process to get his/her name in front of lending committee
Continue banking relationship at the transition point without necessity of first generation
But watch personal guarantees

8. What is for sale? ASSETS V. STOCK ASSET SALES
Almost always the case in non-family transactions
Buyer doesn’t want built-in risk related to the business – just assets
However, beware non-payment of state-mandated premiums
Substantial expense to first generation: depreciation recapture
IRC 179

9. What is for sale? ASSETS V. STOCK STOCK SALES
Very common in interfamily succession
Protects company-level contractual relationships
Shareholder to Shareholder v. Redemption
Where are the dollars the cheapest?

10. What are the documents? Business Side
Operating Agreement/Buy-Sell Agreement
Joinder Agreement
Company resolutions
Promissory Notes
Security Documents (Security Agreement, Financing Statements, Mortgage, Stock Pledge Agreement, etc.)

11. What are the documents? Estate planning side Trusts
Reduces possibility of having probate court involved in operating business
Longevity (if necessary)
Federal estate tax reduction
Ohio estate tax repeal effective 1/1/13
Overcome spousal election issues (if applicable)

12. What are the documents?
Real estate side (particularly in farm setting)
Long-term lease
Rental income for first generation retirement
Secure favorable terms for second generation operator
Binding upon other non-operators in second generation to give successor operator additional time raise capital or complete installment sale (perhaps can’t afford both operations and real estate at once)
Take lease/rent negotiations out of the hands of second generation non-operators
Reduces conflict in second generation

13. What is the cost? Estate and gift tax becoming less relevant
Federal estate tax exemption $5M+
Federal gift tax exemption; annual exclusion
But watch for Medicaid implications
Ohio estate tax repeal
Income tax
Shareholder to Shareholder v. Redemption
Promissory notes to estate/trust
Partnerships (LLC’s taxed as partnerships) to estate/trust
C-Corps to estate/trust

14. What is the cost? What about S-Corps to estate/trust?
Potential problems
2 year trust problem for typical revocable trusts (estate administration + 2 years) – lose S election
6166 election may allow more time

15. What is the cost? What about S-Corps to estate/trust?
Potential solutions
Qualified Subchapter S Trust
All income distributed or required to be distributed to only one income beneficiary
Separate trusts for all children in the 2nd generation
Voting Trust
Each beneficiary deemed a shareholder
“all distributions with respect to the stock” paid to beneficial owners
Terminates by terms or by state law on date certain
Ohio = 10 years

16. Questions? Mark Coriell Laycock & Coriell 54 East Main Street
Norwalk, Ohio
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