Not long ago, the WWW Company worked out of a townhouse with cardboard boxes substituting as desks. The company was small but had big aspirations. Now, the company is a leader in the world of high-speed, dedicated Internet access. E-business offers tremendous growth opportunities for further commercialization of their expertise and product lines.
This company is not a venture capital backed flier, but rather a family-owned company. The majority owners, Mr. and Mrs. Webster, questioned if the time was right to sell their stock and transfer ownership to their five children, all in their mid-thirties. The family had a laundry list of concerns:
Where did the Webster's begin when addressing these very important business and family issues?
The Webster's started out by ensuring that all of their financial, tax, and legal advisors were working together to meet their needs. They wanted to be sure that everyone understood the issues that were most important to them and were working in conjunction to help the Webster's develop a customized business succession plan.
The Webster's then needed to understand the different vehicles that were available to transfer the ownership of their privately held business to their heirs. They wanted to be sure that they used the best tools from a tax and legal perspective based on the significant increase in the value of their business. One of the most appealing options for the Webster's was the Grantor Retained Annuity Trust (GRAT). This type of trust can be an appropriate "recapitalization" strategy to establish a freeze on the value of the stock placed in the trust at its initial fair market value. Any appreciation in the value of the stock would be avoided when the shares are subsequently distributed to the children.
How much is a share of stock in a privately owned business worth? This is not as objective as valuing a piece of real estate. The Webster's needed to retain a third-party valuation professional to determine a valuation using a variety of benchmarks. For business succession purposes, minimizing the valuation may be viable through various legal structures. A family-owned share of stock may be heavily discounted if it is not particularly liquid or marketable. How should the minority ownership be valued? Again, the Webster's asked their advisors to collaborate to find the best firm to handle the valuation their unique business.
The Webster's found the right vehicle to effectively handle their business succession plans and they obtained the necessary valuation of their company's stock. What was their final step in implementing their plan?
The Webster's needed to make sure they had the right financial institution on hand to help them implement their plan from a financing perspective. Because the WWW Company was in such an ideal business position, they had far more ideas and market opportunities to pursue than they could possibly fund internally. Deciding which ideas merited funding and finding a financial institution that was comfortable funding the transfer of stock and the growth of the business was an important step for the Webster's. They needed someone who would understand the unique nature of their business and would discuss all of the appropriate financing options, repayment scenarios, interest rate trends, and collateral considerations. It is important that the repayment plan does not drain cash flow from other strategic initiatives. It was very important for the Webster's to find a flexible company to work with in the event of an unanticipated change in business fundamentals, family dynamics, or cash flow.
As the Webster's learned, it is never too early to start thinking about business succession and, if appropriate, financing your succession plan. Assembling your key group of advisors enables you to simplify the legal, tax, and financing implications. Your selection of a financial institution, or better yet, a financial ally, is an important step to implementing your plan and maintaining the growth of your business.
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.