Over the past three seasons, fans of the hit HBO series Succession [1] have had an entrée into the fabulous lifestyles enjoyed by members of the Roy family and a front-row seat from which to observe the myriad succession struggles the family faces. While not every business experiences the same palace intrigue as the Waystar Royco media conglomerate, there are still many issues to consider when addressing your own company’s future and legacy.  Many Baby Boomers (currently ages 59 to 77), particularly those who are owners of privately-held, multigenerational companies, work well past traditional retirement age.  These owners and their families, however, will need to make some hard decisions sooner than later, hopefully with a better outcome than the Roy family.  This DE Insight provides a high-level overview of several typical planning options.

1. Sell to Other Owners. The organizational documents (such as articles of incorporation, bylaws and shareholder agreements, partnership agreements or operating agreements), of many closely-held businesses contain provisions that provide the terms upon which a sale may or must be consummated with another owner/partner/member upon the death, disability or retirement of another owner/partner/member. Other closely-held businesses will have standalone “Buy/Sell” agreements containing these provisions.   Such provisions and agreements, in addition to outlining the specific terms of the buy/sell transaction, provide a framework for the orderly transition of ownership and give assurances to the surviving owners regarding business continuity.  Parties to these agreements often obtain insurance products that can contribute to or fully fund one or more surviving business owner’s buyout of the non-surviving owner.  These include life and/or disability insurance policies, with cash benefit to surviving/non-disabled partners, key person policies, and buy-sell funding policies. In order to avoid “Cousin Greg” type situations, it is ideal to carefully discuss, plan and implement these types of provisions and agreements both with experienced counsel and the other owners.
2. Gift or Sell to Employees. Another possible succession planning avenue is gifting or selling interests in the business to employees of the company through one or more plans or methods. These can include, but are not limited to, granting of capital, profits (sometimes referred to as economic interests), and phantom profits interests to employees of partnerships and/or LLCs, or various employee stock plans, such as ESOPs, ESPPs, or employee stock option plans for corporations. Other related strategies include management-led buyouts, employee buyouts, and, more rarely, buyouts using a “co-op” acquisition structure. Each of the foregoing options comes with advantages and disadvantages, and the correct option will often depend on the form of business entity involved, the current owners’ or employees’ timeline, and the value of the business. Again, experienced counsel can guide owners and employees through this transition.
3. Gift or Sell to Heirs. Another form of succession planning involves the intergenerational transfer of ownership from owners to their children or other family members, either outright or through the use of various kinds of trusts. The current lifetime estate/gift tax exemption (also known as the “unified credit”) of $12.92 million per individual makes this type of succession planning even more attractive for at least the near future. Transfers such as these are typically part of more extensive estate planning on the part of the transferring owners. Their desirability will depend largely on the value and current ownership structure of the business, the applicability of estate and gift taxes at both the federal and state levels to the transfer, and the family’s timeline.
4. Sell to Third Parties and/or the Public. The final two options both involve sales of the business to parties outside of the immediate family. Some business owners choose a private sale of some or all of the assets or equity to a third party, whether another individual or a group of individuals. More valuable businesses can consider a traditional initial public offering (“IPO”), or merger with a special purpose acquisition company (“SPAC”) that offers shares to both private investors and the public.

Regardless of which option owners of a closely-held business choose to continue or discontinue their legacy, four fundamental considerations apply. First, it is important to regularly review and update the organizational documents of the business and any related standalone agreements. Second, it is crucial to know the value of the business, as the value can affect the tax and estate planning side of these transfers. Third, it is necessary to consider the likely timeline: Is it a matter of decades or a matter of years before the business changes hands? Finally, in order to avoid plotting and scheming of the type in which the Roy family has engaged, it is important to communicate with and involve the next generation in these plans, especially if the owners of the business want to have control over its future direction. Experienced legal counsel can advise owners and companies of their options to avoid becoming the next streaming sensation — or worse yet, the next Dickens novel! [2]

[1] https://en.wikipedia.org/wiki/Succession_(TV_series)

[2] See, e.g., Bleak House (https://en.wikipedia.org/wiki/Bleak_House) and the never-ending case of Jarndyce and Jarndyce.

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