Business Succession Planning forUncertain Times: What is Your Planfor ‘The Worst’?

Goals for Business Succession Planning

presented byThomas C. Hoffman, II, Esq.Knox McLaughlin Gornall & Sennett, P.C.Copyright © 2020 Knox McLaughlin Gornall & Sennett, P.C.

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Business Succession Planning Goals

Protect the BUSINESS and your FAMILY

Protect your FAMILY and the BUSINESS

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Business Succession Planning Goals

Are you and your family ready for businesssuccession?

– Immediate business succession

– Long-term business succession plan

Is your business ready for business succession?

– Immediate business succession

– Long-term business succession plan

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Family

Is your business the primary asset available tosustain your family upon your deathimmediately, and/or in the future?

Is your business in a position to be able tosustain your family without you?

– Management

– Market

– Strategic plan

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More Business Succession PlanningGoals

Flexibility

Estate tax and income tax efficiency

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Estate Plan

Will / revocable trust

Power of attorney

Healthcare power of attorney

Multi-generational trust planning

Immediate succession planning: who votes thestock in the company

Special business trustee / special businesstrustee committee

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What Happens to the Business?

Market and sell the business?

Maintain the business to preserve for the family?(see Family Private Equity Model, later in thispresentation)

Do you have such a person or committee ofpersons?

Have you provided guidance to your special businesstrustee or your special business trustee committeeregarding your intentions?

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Potential Members of Committee

Spouse?

CPA?

Key employee?

Other family member?

Friendly competitor?

Consultant?

Attorney?

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Advisory Committee / Board of Directors

Develop now!

How do you find independent members?

Develop chemistry between independent members and list ofpotential committee members listed on last slide (advisors).

Rules and governance for committee and board of governors.

Who appoints new members?

– Self perpetuating?

– By majority vote with concurrence of key person?

– Spouse?

– Other key family member?

– Any other person?

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Ad Hoc Family Business Succession

Unscientific observations from 60 years ofKnox Law business succession planning:

1/3 of family business successions to the nextgeneration are successful

1/3 … are mediocre to below average

1/3 … are family and business disasters

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Why Family Businesses Fail –“What Bit Me?”

60% of failure is due to a lack ofcommunication and trust within the familyaround group decision making, education andgovernance. Family culture?

25% of failure is due to unprepared heirs.

Only 3% of failure is due to failures in financialplanning, taxes and investments!

SOURCE: Williams and Pressier; Tom Rogerson

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The Journey

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What Business Owners Want: TIME!

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Business Succession Planning:What Are Your Options?

Transition to Your Family (Descendants)

Sale to Third Parties

Sale to Key Employees (including ESOP)

Gift to Your Favorite Charity (Penn State?)

From April 2017

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Five Ways to Transition A Business

1. Sell/Gift To Family

2. Sell To Employee(s)

3. Sell To External Buyer (Strategic Buyer orPrivate Equity)

4. Sell To Existing Partner(s)

5. Family Private Equity Model: Hold the BusinessAs Investment

In all cases, use the MaxProtect Plan®

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We Are All Bakers

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What A Great Idea!

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The Family Private Equity Model Epiphany

The light bulb goes on!

Owner treats his/her company as an operatingcompany; something that spins off cash.

The epiphany is when the owner treats thecompany as a financial vehicle, which has manyalternatives.

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Family Private Equity Model Platform

Child A2018 Irrevocable Trust

Voting Stock: 33%Non Voting Stock: 33%

Child B2018 Irrevocable Trust

Voting Stock: 33%Non Voting Stock: 33%

Child C2018 Irrevocable Trust

Voting Stock: 33%Non Voting Stock: 33%

Independent Board of Directors

Professional OfficersPresident, VP, Secretary, Treasurer, etc.

Best Family Investment, Inc.

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Profile the President

Attributes

Skills

Experience

Behavioral Profile

Define the Potential OutcomesAt the Entity Level (as a financial vehicle)

Build &Sell

President /ManagementBuyout

Merger ofUnequal

FamilySuccession

Private EquityPlatform

Family Private Equity Model Options

21SOURCE: Tom Rogerson

22 SOURCE: Tom Rogerson

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Dealing with Taxes

Federal estate tax

Pennsylvaniainheritance tax

Income taxes

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Federal Estate Tax

YearExclusionAmount

YearExclusionAmount

2007 $2,000,000 2014 $5,340,000

2008 $2,000,000 2015 $5,430,000

2009 $3,500,000 2016 $5,450,000

2010 N/A 2017 $5,490,000

2011 $5,000,000 2018 $11,180,000

2012 $5,120,000 2019 $11,400,000

2013 $5,250,000 2020 $11,580,000

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Portability

The $11,580,000 credit is now portable

Any unused portion can be transferred tosurviving spouse

Surviving spouse could potentially have$23,160,000 of exemption for lifetime gifts andtransfers at death

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Example

Spouse 1$11.58million

exemption

Spouse 2$11.58million

exemption

$23.160 million passesfree of federal estate

and gift tax

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Pennsylvania Inheritance Tax

Assets Passing to Spouse or Charity 0%

Assets Passing to Descendants 4.5%

Assets Passing to Siblings 12%

Assets Passing to All Others(including Nieces and Nephews)

15%

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Outright Gift or Sale to Descendants

Keep it Simple Stupid!

Or, Is “Keeping it Simple” Stupid?

Selling the business to descendants

Part sale / part gift of business todescendants

Gift of business to descendants

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Why Use Generational Trust Planning for the Sale ofBusiness to Your Descendants

Ownership in Trust helps deal with:

1. Divorce

2. “Other” creditors

3. Substance abuse

4. Privacy

5. Disability

6. Bankruptcy

7. Uncertain business management

8. Flexibility

9. Income tax

10.Federal estate tax (and PA inheritance tax, if any)

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Common Misconceptions about Trusts

Inflexible

No access

Create “trust fund babies”

More harmful than helpful

Unnecessary if no taxable estate

Etc.

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Techniques for Selling or Gifting Business toMulti-Generational Trust

Sale to trust

Part sale / part gift to trust

All gift to trust

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Thank You!

Thomas C. Hoffman, II, Esq.Knox McLaughlin Gornall & Sennett, P.C.

thoffman@kmgslaw.comcc Linda: lbinney@kmgslaw.com

Office (814) 459-2800Cell (814) 572-5194

Please know there is no charge for our initial meeting (whetherin person, on the phone, or via webcam).

After developing the client’s intentions more thoroughly, weprepare a written engagement letter with a firm estimate ofthe cost prior to the client being obligated to pay any fees.

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Disclaimer

These materials should not be considered as, or as asubstitute for, legal advice and they are not intended nordo they create an attorney-client relationship. Becausethe materials included here are general, they may notapply to your individual legal or factual circumstances.You should not take (or refrain from taking) any actionbased on the information you obtain from these materialswithout first obtaining professional counsel. The viewsexpressed do not necessarily reflect those of the firm, itslawyers, or clients.

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Copyright Notice

Copyright © 2020Knox McLaughlin Gornall & Sennett, P.C.

All materials contained here are protected by UnitedStates copyright law and may not be reproduced,distributed, transmitted, displayed, published orbroadcast without the prior written permission ofKnox McLaughlin Gornall & Sennett, P.C.