Effective Succession Planning Steps 5 & 6: Ownership Succession Planning & Identifying Ownership Transfer Options

There are a lot of bases to cover in developing an effective and comprehensive succession plan. To help address all important considerations and contingencies, the HBK Dealership Industry Group developed, "Ten Steps to Effective Succession Planning." This article addresses the fifth step in an effective succession plan, planning for ownership succession, and step six, identifying options for transferring ownership.

Step 5: Planning for ownership succession

For purposes of discussion, ownership succession can be viewed from two distinct perspectives: transfers to a family member or members, and transfers to non-family members.

Transfers to family members

You can hardly overstate the impact of family dynamics on transferring ownership to a child or children. Beyond business, the transfer involves emotion. While the role of a succession advisor is key to properly transferring ownership under any circumstances, an experienced advisor can be particularly helpful in addressing issues that arise when ownership will remain within the family. The succession plan should serve to:

  • Divide ownership between active and non-active family members. Some dealers want to divide their estate evenly among their children, but children typically have different abilities and/or varying degrees of interest in the dealership. This makes equal and fair estate divisions rare. It is better to transfer other assets to non-active children, reserving the dealership for the sibling(s) who is active in the business and, most significantly, demonstrates the skills to run a profitable operation. We often recommend using various types of insurance to equalize the dealer’s estate between active and non-active heirs.
  • Help children active in the business acquire interest in it. Insurance is only one vehicle for helping active children acquire the business at an owner’s death; but, it can be a useful one. Life insurance can provide the proceeds required to buy the business. There are useful and appropriate roles for life insurance trusts, second-to-die policies and other insurance vehicles. But it is not always a go-to solution. Succession planning should begin well before a dealer reaches retirement age, and if planning is done early, gifting or other tax-effective methods can be used in transferring ownership – either during the owner’s life or at death.
  • Help a dealer understand the pitfalls in transferring ownership to inactive children. Inactive children can undermine the effectiveness of their siblings who active in the business. Two non-actives can outvote the active child if ownership is equally divided among three. It is best to transfer other non-dealership assets (or a minority interest at most) to inactive children and keep control in the hands of actively-involved siblings. If minority interests are given to non-active children there is a potential downside for non-marketable and non-income producing asset if the majority owner decides not to make income distributions to the minority owners. Careful planning is the key to avoiding such problems.
  • Help craft a buy-sell agreement. If a buy-sell is an appropriate succession planning tool, then it must be written so that the provisions produce the desired leadership, economic and tax results.

Transfers to non-family members

Dealers not passing along their business to a family member might sell to a neighboring dealer or a public or private equity group. Where there are multiple owners, transition can occur inside the ownership circle, a friendly if not a family transfer. The advisor’s role can be:

  • To determine the provisions in a buy-sell agreement that will serve to keep ownership among the existing partners, if that is desired.
  • To locate a buyer when no obvious successor is in sight. Often employees are willing to buy the dealership but lack the assets to make the purchase. When an owner must finance part of the purchase, it is critical the buyer has the ability to operate the dealership profitably and the commitment to ongoing payments is secured.

Step 6: Identifying options for transferring ownership

Once a successor is identified, the retiring dealer’s cash needs are determined and funding sources are located, we can consider various strategies for transferring ownership, including gifting, selling or redeeming the owner’s interest, selling business assets, tax-free exchanges and others. Each situation is unique and we here in the HBK Dealership Industry Group have developed numerous methods and techniques for transferring ownership in the dealership.

There are too many alternatives to discuss fully in this article however, the transfer option must accommodate the following:

  • The owner’s needs for assets from the business
  • The owner’s willingness to incur taxes on the transfer
  • The successor’s desire to be insulated from the business’ existing liabilities
  • The successor’s desire to reduce future income taxes on the business
  • The amount of cost and complexity the parties are willing to incur

As well, factors such as the availability of funding and the type of business entity can affect the outcome of a transaction.

Rex Collins is a Principal at HBK CPAs & Consultants. He directs HBK’s National Dealership Industry Group, which provides tax, accounting, transactional and operational consulting exclusively to dealers. Rex can be reached by email at rcollins@hbkcpa.com; or by phone at 317-504-7900.

About the Author(s)

Rex is a Principal of HBK CPAs & Consultants and directs the firm’s Dealership Group. He has worked extensively in the dealership industry since 1984 as a department manager, a general manager and an owner, as well as providing tax, accounting and operational consulting services exclusively to dealers as an independent CPA.

This experience includes working closely with hundreds of dealers from coast-to-coast since 1987 on creative tax planning and financial statements issues. He provides clients with a wide range of transaction work services, and consults for them in specialty areas such as operations, government regulatory compliance, valuations and M&A feasibility studies.

Rex is active in many professional associations. He is the current Chairman of the BDO Dealership Industry Group, contributes articles and commentary to dealership industry publications, is frequently called upon to speak to industry associations and conferences, provides expert testimony, and is regularly quoted by industry and the general media.

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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