Succession planning: Deep resources and objectivity help a family patriarch plan his future

Family business executives in their middle years face real choices when it comes to succession. Who will take up the mantle? Will they want to do it? How will control be divided, if at all? Are there ways to protect family assets in the process? What are the tax considerations? Are my kids ready to take charge?

Such was the situation for a private company executive who had inherited a business from his father and turned it into a robust enterprise with double-digit growth and revenues in excess of $50 million. The owner was certain he wanted to pass the company down to his kids, but he wasn't sure when and how to do it. So he reached out to PwC for help.

"His initial concerns were about whether his kids were ready to run the business, and what was going to be the mechanism to make that transfer. He wanted to know, 'How do I avoid this big estate tax that may cause my heirs to have to sell my company?'" recalled PwC Personal Financial Services partner, Karl Weger. "Yet at the same time, he wanted to remain in control of the business for as long as possible—perhaps for the rest of his life."

So Weger and his team worked to develop a succession plan that would lay the foundation for a handoff, yet keep control in the executive’s hands. The PwC team began by helping recapitalize the company into voting and non-voting shares. This would allow the owner to disperse the wealth of his company to the next generation in a tax-efficient manner over several years, forming trusts and protecting the assets from creditor or divorce claims.

The team also provided guidance to avoid the possibility of a sudden untenable tax burden for the executive’s children upon his death—a surprise that often confounds other families who fail to plan ahead. PwC also encouraged the company to establish a true board of directors while the executive was still there so that the board would be in a position to offer unbiased advice to the next generation of company management.

During the next several years, the company performed extremely well, growing its revenues three-fold and expanding into other countries. Buyout offers poured in, and the business owner began to reconsider his succession plan.

He decided to sell the company. Because he still had control of the business, the executive was able to seize the opportunity and act on it without the possibility of derailment by family dissent. The owner sold 90% of the family stake. In doing so, he relinquished family control, but gained a healthy nest egg for his retirement and funding for the children’s trusts through sale of their non-voting shares.

Throughout this process, a range of potential issues presented themselves: income and estate tax considerations, governance, and valuation, along with the myriad details of preparing a company to be sold and managing the wealth that results from the sale. PwC was on hand to assist with all of them.

Today, the family remains minority shareholders with a 10% stake in their former company. Some of the children still work there, as do other key employees and stakeholders.

Because the owner had a well-considered succession plan developed and managed by PwC's objective team of advisors, he was able to react and adapt to changing business conditions and make well-informed business decisions while preserving the value of his business both to himself and to his heirs.

"When we first began, he thought he was going to be getting primarily income tax and wealth transfer tax advice," said Weger. "Which, of course he did, along with advice and assistance in a great many other areas. But, over the years, he began to call and ask questions about things that he was thinking of doing in the business, to ask 'How will this impact my plan? What do you think of this?' He came to see our relationship as so much more than just taxes.