On September 24, Sharkansky hosted a Business Perspectives event Focusing on Business Succession Planning.  Below is an overview of the discussion.

  • Jean Fallago, JD, LLM, President with the Almonte Fallago Group, Ltd.
  • David Karofsky, President with Transition Consulting Group
  • Patrick McNamara, CFP, Wealth Advisor, Graff-McNamara Group at Morgan Stanley
  • Howard Spiller, CPA, Partner with Sharkansy LLP
Jay Pike, CPA, Sharkansky LLP


What are the different options available in transitioning a business?


  • If you are contemplating a transition, consult an advisor 5 years in advance.  The plan may not take 5 years to implement, but you’ll be educating yourself so you can make good decisions about transition options.
  • Call a business broker or consultant a year in advance of the date you want to sell your business.  The higher the skill level, the longer it takes to sell a business – financial services takes longer than manufacturing.
  • Do you have any key employees who might want to enter into an agreement for a delayed sale?  3-5 years is a good length of time for the transfer.
  • Do you find a minority shareholder to purchase nearly 50% of the business immediately with the following 50% being sold over time when the owner is ready to transition out.


What are your thoughts on generational transitions within a family that has multiple children?

  • Many times an heir apparent is obvious.  When that’s not the case, the transition can be more difficult.  Talk about this 5 or more years in advance.  You’re passing down a legacy, not just an asset.
  • Determine the needs of the business today and going forward.  Compare that with your children’s abilities.  Put your children into roles that will enable them to contribute in a way that that is natural for them.
  • The older generation is more likely to transition out if the younger generation is ready to take over.  Dual leadership is difficult and shouldn’t last for very long.  An organization needs just one leader to make the big decisions.

Please discuss valuation issues and gifting strategies for the transfer of ownership to the next generation.

  • Most of the businesses we work with are S-Corps.  Many decide to recapitalize as they approach their transition to create voting and non-voting stock.  The owners can begin to gift non-voting stock each year without gift tax implications ($28,500 per year with a maximum of $10.5M over a lifetime).
  • Valuations are important as you start to transition stock to the next generation.  Gifting valuations are often lower than external sale valuation.  This is helpful for gifting large chucks of the business.


  • If you’re a C-Corp, depending on your strategy and the potential buyer, you may convert to an S-Corp.
  • Give yourself time to develop and execute these plans including time for look-back periods.

David:  The family business is very often the founder’s largest asset so it is their retirement plan.
What are you seeing as best practices for family business transition?

  • Communication!  Talk to each other.  Understand the values and goals, fears and concerns, of each generation.
  • You can’t get to a win-win without listening to, and understanding the other people involved.
  • Know your financial plan.  What is the dollar number you need to retire comfortably given rising medial and real estate costs?
  • Start early.  This is a long process and it shouldn’t be rushed.

What are some other trends are you seeing in transitioning family businesses?

  • Women, daughters, in leadership and owner roles.
  • The family wants to stay together.  The business was the way to do this.  Instead, the sale of a business can become a family enterprise by creating a family fund our foundation to gift to charities.


How do you determine how much you need to retire?

  • The number that you need to retire is determined by various factors including some that you can influence and others that you can’t.  Plan for the worst, hope for the best.
  • How long will you live?
  • How much would you like to have to live on each year?  (Consider inflation)
  • How much will your rate of return be?  Risk vs reward consideration but stay above the inflation rate.
  • Maximize your social security.

What if there isn’t a next generation in the family to take over?

  • Key employees are a good option.
  • Owners can give “sweat equity” to a key employee.  For example, gift 50% of the stock to the key employee in exchange for 10 years of ongoing wages and benefits for the retiring owner.  There are tax implications.
  • Value the business and sell stock for cash to the key employee.
  • Create phantom stock for the key employee to use to benefit from profit sharing or percent of earnings from a sale.

Jean:  Run a cash flow analysis to balance tax consequences for both parties.
What happens when there is a next generation family member and a key employee interested in being the next business leader?

David:  A trend in business now is to hire non-family leadership.  This person can help mentor the family member if there is a gap in time between the readiness of family generations. The family will prosper from the business only if it has the right people in place to help it succeed.
What about selling to a strategic buyer?
Howard:  Once you start down that road, it’s difficult to turn back.  When you put your business on the market for a sale, word travels fast.  Your competitors will take advantage of that.  A strategic buyer in your industry will want strong management and middle management.  They don’t just want to buy sales.
David:  The intellectual property in an owner’s head holds tremendous value.  A transition period is crucial so that the knowledge transfer can take place.  With enough time in advance of the sale, the transition can happen to make the business more sellable and allow the seller to transition out sooner.
Jean:  Create job descriptions for each key employee.  Retaining each of these people is essential for the buyer.  How does the seller ensure that these people are going to stay through the transition.  Employment agreements help.
Howard:  When a seller signs an agreement to stay on with the buyer, it is often a 3-5 year agreement.  But many entrepreneurs don’t want to work for someone else.  They usually don’t stay for the whole time. So, if you are the seller, don’t be reliant on late-stage payments.  As the buyer, front-load the knowledge transfer and introductions to customers.
David:  Buyers run a business different from the seller.  This can be difficult for the seller to be around to see close-up.   As the seller, have something else you want to do after selling the business.  You need to be looking forward to something else to let go of what you’re leaving in your business.  It can be another business or a hobby.
Financial preparation and tax strategies

  • The easiest way to grow your wealth is to reduce your taxable income and maximize your after-tax investment returns.  Your CPA can help with the first part.  Business owners have additional options for retirement plan design to build a nest egg.
  • If you are taking a lump sum of cash upon a sale of a business, it can be challenging psychologically.  Get professional help on an asset allocation strategy based on a target rate of return.  You’ll likely have a mix of cash, fixed income, equities, alternative investments.  Tax-free municipal bonds and annuities are popular now.

Final thoughts?
Jean:  Agree on as many things as possible when relationships are good.  It’s much harder to do if relationships are contentious.
You need to be psychologically and financially ready to leave a business.  Take time to determine and plan for both.
David:  How do you determine value in a family business?  Valuation experts can give you a value for the financial value but not the psychological perspective of the family.
Just because the founder needs a certain value number to reach his retirement goals, doesn’t mean that’s the value of the company.
Patrick:  Give thought to a financial plan and write it down.  A written plan should include the business, real estate (residences), insurance, and investment assets. Communicate this plan to the next generation so that upon your death they know where and how to access your estate assets.
If you have additional questions that are not addressed above or if the any topics above are relevant to your business and you’d like to discuss your specific set of circumstances, please contact Howard Spiller.