With post-pandemic planning on the minds of many family businesses, there's been a renewed focus on the formalization of succession and exit strategies. CSG's Patrick Trask joined accounting and legal experts to review planning considerations and transaction options.
In addition to gifting, related party sales, management buyouts, and private equity transactions, Trask and his co-panelists provided a detailed explanation of employee stock ownership plans. Highlighted as a legacy preservation and estate planning tool, the ESOP was also singled-out for its unique tax advantages and employee benefits.
The panel of advisors included Michelle Rider, Managing Director at Catania, Mahon & Rider, and Michael Turturro, Managing Director at RBT CPAs. Rider, a CPA and attorney, is an estate and succession planning expert with extensive advisory experience across the building trades. Turturro has served as an accounting advisor to major for-profit clients including heavy highway construction, mining, and manufacturing firms.
You can watch the complete video below. Our friends at the Construction Contractors Association of the Hudson Valley and the Construction Industry Council of Westchester & Hudson Valley have graciously made this content available to all.
Featured Exit and Succession Planning Topics
Rider: "It can be very challenging to sell your business and transition to being someone else's employee. I can't downplay how it feels to be an owner and running hard every day, every week, every year on your business and then all of a sudden you sold it. You have to prepare for it emotionally."
"Your business is typically your biggest asset, and you need to be sure that the plan for your business fits with the rest of your estate plan. But you also have to think about what if something happen suddenly that we didn't have time to plan for."
Rider: "We often sit down and discuss the M&A process and possible buyers are. Then we talk about whether your financials are normalized. You want your financials to be as robust and authentic as possible because when a buyer comes in and kicks the tires and looks at your financials, that's what they're going to use to base their offer."
"And then we also talk about what diligence look likes, what are buyers going to be looking for, what are they going to be asking. What are the skeletons in the closet? Can we address those and clean those up now, so you put your best foot forward as a seller."
Rider: "If you're in a family business, gifting can be complicated, and there can be significant tax impacts. I have clients who say, 'OK, dad's ready to retire and leave the business, but he needs a certain amount of cash flow.' This is where equity sales and ESOPs come in."
Trask: "One benefit of the ESOP is that it can offer tax-advantaged liquidity. There's changing winds in the current tax environment that will probably shift towards paying more tax. But there is bipartisan support for employee ownership, and the good news is that by selling to an ESOP, you can defer capital gains taxes."
Trask: "A leveraged ESOP creates a mechanism where you have a known buyer, a financial institution that facilitates the liquidity event, and you're selling your shares to the ESOP trust. Sellers can get upfront, tax-efficient liquidity, figure out how to manage their estate plan, and still maintain a leadership role with the company as they look for the future."
"An ESOP creates a wealth benefit for employees who have helped grow the business. It's also a way to incentivize, retain, and attract talent. Having an ESOP as part of your culture can help maintain your legacy and corporate identity."
Trask: "By closing an ESOP sales as a C corporation, selling shareholders can defer capital gains taxes on the proceeds. There are also non-cash, corporate tax deductions that only C corps are allowed. After five years, a company can convert back to an S corp. The benefit of doing so is that a 100% ESOP-owned S corp pays no income taxes."
"How exciting would it be to manage an employee-owned S corporation? Now you don't have to pay income tax on earnings. All of that additional cash flow can be retained to acquire other businesses or to support capital expenditure needs. It's a powerful tool."
Trask: "Following a leveraged ESOP transaction, the stock value depreciates. This gives you more estate planning flexibility, from a gifting standpoint, on the residual shares."
Rider: "Say you want to have a business liquidity event for mom and dad, so that there's sufficient liquidity for them to maintain their desired lifestyle. But, they're also comfortable gifting another portion to a future generation. A hybrid approach where you do a partial ESOP and then gift what's left, at discounted value, can help mitigate the gifting exemption limits."
Additional ESOP and Estate Planning Topics
Although the presentation was tailored to the construction industry, the lessons and insights are applicable to a wide range of closely-held businesses. The extensive webinar also addresses the following succession planning concepts:
- The distinct business and legacy needs of private business owners
- Key planning considerations in building and completing exit transactions
- Identifying potential buyers
- Employee ownership basics, including ESOP plan structure, financing, and contribution mechanics
- How fair market value is established for employee stock ownership plans?
- Understanding 1042 rollovers and qualified replacement properties (QRPs)
- Aligning business succession and estate plans