Every business should have a solid succession plan in place. For government contractors, this becomes particularly important as many businesses are small, family-owned operations. More often than not, these businesses find themselves busy, bogged down by the intricacies of their work, and may put succession planning on the back burner.

No business wants to find themselves in the midst of a death, life altering accident, unexpected departure, or sudden retirement without a guide for who will step in and how the company will continue to operate. The age-old proverb from Benjamin Franklin, “an ounce of prevention is worth a pound of cure”, holds true for every family-owned business. The ultimate goal in creating and continuously evaluating your succession plan is to secure financial stability for your business and family.

Below are a few options for businesses to consider when establishing and evaluating their succession options.

Keep the company in the family.

For a family-owned business, the natural thought and consideration may be to pass the company on to a child. However, it is critical for a family business to ensure that their children truly want to run the business and there is a clear delineation of roles in place if there are multiple children who will be involved. During the business owner’s lifetime, gifting minority or majority interests in the company to adult children allows for easier transition of roles and responsibilities and also helps to reduce the owner’s taxable estate.

Sell to a trusted employee.

Not every business will want to or will be able to pass their legacy onto their children. In this case, the business should consider selling their interests to a trusted employee (non-family member). Identifying this employee and others to assume key leadership positions takes advanced planning and time but will ultimately ensure that the business continues to run efficiently once family members have stepped down.

This option can potentially allow owners to keep some interest in the company while being more hands-off. The sale of a minority interest can be structured at a discounted value to ease the financial burden on the purchaser, as well as using an installment sale, where the purchase price is paid over time.

Sell to another business.

For owners who wish to sell their company and alleviate all responsibilities of management from their estate, they should consider a merger with, or an acquisition by, an unrelated entity. The owner can also gift their interest into a trust in order to take valuation discounts before any sale negotiations commence. In this case, future appreciation of the business will continue to grow outside of the estate of the original owner.

During the succession planning, owners will need to identify which type of transaction is best suited for their family and business. The sale of an entity occurs when a former owner sells their share of interest or stock in the company to the new owner, and the assets and liabilities of the business remain with the entity. In an asset sale, an owner is selling their actual assets, which can be tangible or intangible. An asset sale generally tends to benefit the buyer more, while an entity sale may be preferable for the seller. The type of entity involved, whether partnership, LLC, S-Corp, or C-Corp, will add to the complexity of the transaction, and each option presents numerous variations and challenges, so it is important to thoroughly discuss them with a tax professional.

For new businesses, the choice of entity at formation is an important first step that can influence the taxation and mechanics of an eventual sale. Citrin Cooperman is skilled in advising on the business entity structure and the pros and cons of the various entity types both in current operations and potential future mergers or sales.

Considering how your business will continue to thrive can be daunting, but having an effective, actionable plan in place is the best safeguard to ensure that what you have built will be appropriately taken care of. Our dedicated Government Contracting Industry Practice can help you establish or evaluate your business’s succession plan so you can focus on what counts – building a strong infrastructure for your family and employees. For more information, please contact Kathleen Poorbaugh at kpoorbaugh@citrincooperman.com, Christopher Bond at cbond@citrincooperman.com, or your Citrin Cooperman Advisor.