1. Succession Planning For Equipment Dealers
Passing the Torch
Succession Planning For Equipment Dealers
SAMUEL I KREAMER J.D.,C.P.A.
ATTORNEY AT LAW
7155 LAKE DRIVE, SUITE 200
WEST DES MOINES, IA 50266
KREAMERLAW.COM

2. Succession Planning For Equipment Dealers
Passing the Torch
Succession Planning For Equipment Dealers
OVERVIEW
The Succession Planning Process
External Succession Plan
Sale of Your Business to an Unrelated Party
Merger
Internal Succession Plan
Sale of Your Business to a Related Party
Passing Your Business by Gift or Inheritance

3. The Succession Planning Process
Preconditions: Igniting the Flame
Obtain true “buy in” of current owners/managers
Establish clear and prioritized goals for:
Owner
Business
Successor
Identify successor
Get buy-in from critical third parties

4. The Succession Planning Process
The Parties Involved
Current owner/decision makers
Your Advisory Team
Attorney
Successor
Accountant
Facilitator/Counselor
Make puzzle pieces come in one by one

5. The Succession Planning Process
Statutory Implications
Iowa Code 322F.5 and 322F.5A (in general) provide that:
Manufacturers my not refuse to give a dealership to a buyer/recipient who is otherwise qualified.
If the heirs/estate of a dealer want to terminate the dealership they can trigger the buy-back provisions.
Nebraska Revised Statute §87-705(3) and (in general) provide that:
A manufacturer/supplier may not “unreasonably” deny a transfer of a dealership.

6. The Succession Planning Process
Initial steps
Perform a Legal Audit
Key documents with non-owners
Internal operational documentation
Define Roles
Job descriptions
Performance objectives
Hold Meetings
Attendees
Formal structure

7. External Succession Plan- Sale of Your Dealership
Overview
Results in the passage of the “Value” of the business rather than the business itself
Sale considerations
Timing of the sale
Lifetime
Post Mortem
Buyer is normally a competitor wishing to expand

8. External Succession Plan- Sale of Your Dealership
Structuring the Transaction
Purchase and Sale of Equity:
Favored by Seller
Buyer acquires all assets and liabilities (cash and liquid assets are frequently excluded)
Requires more “due diligence” than asset sale
Except for cash basis partnerships, all of proceeds should get capital gain/loss treatment
Only one layer of taxation-Shareholder/owner level
No Employee termination costs
Purchase and Sale of Assets:
Favored by Buyer
Buyer acquires all assets and liabilities (cash and liquid assets are frequently excluded)
Buyer acquires only the assets it wants
Except for cash basis partnerships, all of proceeds should get capital gain/loss treatment
If the Seller is a “C” Corporation, the selling entity has tax on sale of assets, and then Shareholders have an additional tax upon liquidation
Can Trigger Employee termination costs

9. External Succession Plan- Sale of Your Dealership
The Marriage Analogy
Contract-Engagement
Fully sets out the terms of the transaction
Representations and Warranties
Establish the legal liabilities of the Parties
Limitations
Knowledge
Materiality
Length of time
No “standard”
10 year limitation on written contract
Not all need have same limit
Most problems become apparent in first 24 months
Consider liquidated damages provision
Closing-Marriage
Dating
Confidentiality Agreement
Exclusive dating
Letter of intent
Living together
Due diligence
Checklist
Engagement
Contract
Marriage
Closing

10. External Succession Plan- Sale of Your Dealership
Other Considerations
Payment Terms
Rarely all cash- Seller often takes a promissory note
Often time contingent payment based on earnings
In asset purchase transactions
Normally cash, marketable securities, and accounts receivable are excluded
Often there are closing adjustments for inventory
Non-competition agreements
Length of time
Proscribed activities
Adequacy of consideration
Judicial reformation
Amortization for buyer over 15 years regardless of period for payment
Taxable as ordinary income to seller but no FICA
Consulting agreements
Adequacy of job description
Deductible by buyer when paid or accrued
Taxable as ordinary income to Seller but subject to Self employment tax (same rate as FICA)
Termination provisions

11. External Succession Plan- Mergers
Overview
Two ownership groups combine to form one
Works best with co-equals with similar goals, objectives but different capabilities and/or territories
Generally a merger is a non-taxable event- it is treated as a different form of ownership of the same value
Mergers are more of a business continuation plan than an exit strategy

12. External Succession Plan- Mergers
Benefits and Drawbacks
Benefits:
Economies of scale
Larger overall volume rebates
Reduction of duplication of divisions
Business continuity
Access to territories
Access to management and staff
No employee termination costs
Non-taxable event
Drawbacks:
NO CASH
Additional known liabilities
Additional contingent (unknown) liabilities
Management disagreements
Employee dissatisfaction (cultural differences)
Disentanglement problems

13. External Succession Plan- Mergers
Recommendations
Create a system for amicable resolution of management disagreements
“Merge” through the creation of a “series” limited liability company
Establish “puts” and “calls”
DOCUMENTATION IS CRITICAL

14. Internal Succession Plan
Overview
Sale to employee(s) and/or family members
Lump sum
Installment sale
Can defer taxes
Interest can be beneficial to seller
Greater risk of non-payment
Sale to ESOP
Timing
Lifetime sale
Postmortem sale

15. Internal Succession Plan
Overview
Types
Mandatory/permissive
Cross-purchase/
Redemption
Triggering Events
Death/disability/retirement
Business disagreement
Date certain

16. Internal Succession Plan
Buy/Sell Agreements Among “Family Members”
Buy/sell price will be subject to scrutiny if:
The buy-out is structured as a redemption in a family owned entity; and/or
If purchaser is a family member
Could result in a “dividend” to the “seller” rather than a “sale” of the stock
Buy/sell price might/might not establish estate tax value of stock:
Even if only triggered at death, the buyout agreement must be a bonna fide business arrangement
The buy-out agreement must not be determined by the IRS to be a device for the transfer of value to family members for less than adequate consideration
Must be a price which is same as “arm’s length transaction”.

17. Internal Succession Plan
Basic Gift and Estate Rules
Gift Tax
Tax on the donor based on the value given to each donee.
Annual exclusion from lifetime taxable gifts for 2018 is $15,000 per donor (husband and wife can be considered as TWO donors)
“Lifetime” exclusion from taxable gifts for 2018 is $11,180,000
Unlimited non-taxable transfers to Spouse
Donee takes Donor’s “basis” for computation of gains or losses.
Estate Tax
Tax on the estate based on the value of the estate.
Exclusion for 2018 is $11,180,000 BUT a surviving spouse may claim any unused exclusion in the estate of the first to “pass”
Unlimited marital deduction
“Basis” for computing gain or loss “steps up” to date of death value.

18. Internal Succession Plan
Gifting of Shares
Benefits
Reduce taxable estate
Gifted shares are not part of the Estate
Appreciation attributed to stock is removed from estate
Donor may not have to pay gift taxes
$15,000 Annual Exclusion for 2018
$11,180,000 lifetime exclusion-PER DONOR
Because of minority and liquidity discounts, you can remove a greater share of the business than the mere prorata share of the stock.
Drawbacks of Gifting
Stock held in an estate gets “step up” in basis and may therefore ultimately result in a reduction in capital gain
Donor may wish to retain voting control
Considerations
If gifts of stock are not prorata among beneficiaries, use other assets to “balance” the estate.
A buy/sell agreement is recommended, even with “heirs”.

19. Passing the Torch Conclusions
Succession planning is the passage of management and/or ownership of your dealership
Succession plans come in two primary “flavors” External and Internal
Succession planning is a process, not an event
Many steps to this journey
Experienced professional assistance is key

20. Passing the Torch
Questions?