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Jeremy I. Silberman and Charles A. Bruder: Succession planning opportunities

Tuesday, 19 May 2009 ( #411 )
Jeremy I. Silberman and Charles A. Bruder
Jeremy I. Silberman and Charles A. Bruder
Jeremy I. Silberman and Charles A. Bruder are Members of Norris McLaughlin & Marcus, P.A., a full service law firm located in Bridgewater, New Jersey and New York City. Jeremy specializes in franchise and distribution law with emphasis on the materials handling industry. Charles is co-chair of the firm's executive compensation & employee benefits group, counselling clients in areas of executive compensation, stock option planning, business succession planning and ERISA administration. For more information visit Norris McLaughlin and Marcus's website,
In the current economic downturn, equipment dealers, like other business owners, are focused on improving the economic performance of their businesses - increasing sales, reducing costs and exploring avenues of new business opportunities. With the exceptional challenges owners are confronting just to operate their businesses each day, the concept of business succession planning may not even be on the radar. However, the current economic climate provides opportunities for business owners to employ business succession techniques that can result in savings to the owner personally, create incentives for key employees and provide for a smooth transition of the business to family members, dedicated employees, or third parties.

The economic downturn may have had a corresponding effect on the value of the company's stock, even if the company is not publicly traded. While a decline in the company's overall value may negatively affect certain aspects of the company's business operations, it also provides an owner with the opportunity to transfer or use a portion of his or her equity without incurring significant federal estate tax consequences, and without significant income tax consequences to the company's key employees, as reflected in the following techniques:

Gifting Opportunities: US Federal law limits the amount of value a person can transfer to another person without potentially incurring gift taxes. For 2009, the limit is USD13,000. These annual limits often preclude a business owner from gifting more than a mere fraction of the value of his business before incurring taxes. A reduction in the value of company stock due to the economy provides an owner with the opportunity to transfer a larger number of company shares, at their current lower value, without incurring gift taxes. Ideally, the shares will appreciate in value once the economy rebounds.

Trust Transfers: For many business owners, particularly those who are the sole shareholders of the company, an unrestricted transfer of an equity interest in the company to their children or other family members can be a troubling concept. The effective use of an inter vivos trust can help alleviate these concerns by allowing a degree of continued control to be exercised over the transferred stock shares, while still permitting a transfer of ownership to occur for succession planning purposes. Significant care must be taken in implementing these types of ownership transfer techniques to attain the desired tax benefits. Trust transfers may also provide further benefits to the business owner through the use of valuation discounts, thereby allowing the owner to transfer a greater amount of business value to family members than would otherwise be available.

Equity-based Compensation: The downturn in the economy has required owners to make difficult decisions regarding the retention of key employees. Retaining good employees can be difficult even in the best of economic times. Now, with the shortage of available cash combined with a significant reduction in the overall workload of a business, a company may have even greater difficulty retaining its best-producing employees. In lieu of increased cash payments, owners should consider using equity-based compensation, not only to keep their key employees on the payroll, but also as an incentive to such employees by tying a portion of their future compensation to the economic performance of the company. An outright grant of shares in the company may seem like the easiest way to accomplish this goal. However, an outright grant risks unintended consequences, particularly if the employee becomes disgruntled in the future or seeks to sell his or her stock shares to an unrelated third party. However, grants of restricted stock shares (which prohibit the transfer of shares to others without company permission), restricted stock options, or the use of shareholders' agreements with buy-back requirements can address these risks. Owners who want to give key employees an economic stake in the future performance of the company, but who do not want to give the employees actual ownership shares, can use other techniques, such as "phantom stock" arrangements, stock appreciation rights plans, and deferred compensation arrangements. These are incentive arrangements based on the market value of company stock but don't transfer any actual stock to the employee.

Sales of Company Stock Shares: The benefit of selling equity in a company during an economic downturn may not be initially readily apparent. However, the ability to transfer stock shares to a family member or key employee at a reduced fair market value may permit a business owner to accomplish succession planning goals that would otherwise be difficult or impossible to attain in thriving economic times. Such sales are often used in conjunction with other planning devices, such as a part gift/part sale of company stock to a child or grandchild. In addition to permitting the business owner to transfer a portion of his or her equity interest in the company for a reduced purchase price, such a sale may permit a company to raise much needed capital while keeping the ownership of the company in the family.

Net Operating Losses: Business losses are naturally viewed negatively. However, dealers should not overlook the potential tax benefits of current losses which may be used to offset future taxable income of the company. With proper tax planning, these operating losses can provide significant tax savings in the future, when taxable income (and tax liabilities) are substantially greater. Business owners should consider triggering such losses currently so that the losses can provide maximum future tax benefits.

Equipment dealers considering these or any other succession planning techniques must also review their dealership agreements with their suppliers. Often, dealership, distributorship and sales agreements include provisions that purport to restrict the owner's ability to transfer some or all of his ownership. Many states' franchise laws also regulate the degree to which a manufacturer can restrict a dealer's rights to transfer a portion of his equity.

The current economic downturn is making it difficult for dealers to navigate through daily business operations. However, it also provides owners willing to invest some planning time and effort with significant business succession benefits that will contribute to the owner's prosperity, the prosperity of the owner's family and employees, and the continuation of the business.

On June 16, 2009, Norris McLaughlin & Marcus, PA will host a free seminar on "Hot Legal Issues in this Economy for Material Handling & Industrial Equipment Businesses." Issues to be covered include protecting your dealership using state franchise and dealer protection laws, collecting from financially distressed customers, when to consider filing for bankruptcy protection, updates on the Employee Free Choice Act and other labour law issues, and succession planning to minimize costs and risks when selling your business or transferring it to a family member. is a co-sponsor of this event. For registration information, visit the "Upcoming Events" page at Norris McLaughlin and Marcus's website,
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