Cannon Financial Institute

Don’t Fumble The Handoff


The American Dream, owning your own business, being your own boss, passing the family business to your heirs, or selling it for a big payday. Yet most people have a hard time getting the latter portion done effectively. In fact, only about half of business owners have succession plans. Why would this be? Primarily it is because business owners are too busy running their businesses to consider the details of succession, and for others they avoid the topic because, like many estate planning issues, it hits very close to home emotionally and with the family dynamics it can be a difficult topic.

Much time and attention has been placed upon analyzing the topic of business succession and why businesses sometimes fail, like the Hughes Risks and the Family Office Exchange risks which seek to quantify and identify the inherent risks in business succession. The objectives of the business owner vary widely here and thus the techniques that can be utilized to aid with the transaction financially.

For sake of simplicity and organization let’s organize this discussion around three categories of Issues to get to an appropriate result: Transaction, Tax Consequences, and Techniques.


There are two key factors in Transaction; Who and When. The first critical thing to understand is succession to whom? The techniques used will be completely different if the objective is to pass the business to the kids versus sell it to a third party. In general, the object of the business succession will either be family, employees, or a third party. Each of these intended future owners involve a distinct set of criteria to determine how best to make the transition.

Keep in mind this is not just about money to most business owners, it involves transferring something they have strong feelings toward. Do not ignore the feelings in lieu of the finances. Second, WHEN the transfer is intended to occur is also important. Will the transfer be made during life, or at death? Clearly a backup plan always needs to be in place, but when the intended transfer will occur also changes the type of technique used.

Within the transaction one must also consider both the transfer of power, and the transfer of assets. For example, I may want assets to transfer equally to my children, but have only one child I feel is competent to run the business. As to the transfer of assets the distinction between a sale versus a gift, or a combination of the two drives the methods used and even the desired valuation, which can significantly affect our next topic.

Tax Consequences

The transfer of a significant asset by sale or gift causes tax consequences, but the type of tax consequence and methods to control tax consequences depend on which type of tax. Sales generally generate capital gains, but can trigger some ordinary income as well, and gifts can trigger the gift tax or estate tax depending on whether the transfer is during life or at death. In some cases, the transfer may also involve multiple generations and trigger another tax called the Generation Skipping Transfer Tax.

Great care should be taken when gathering and dispensing Tax information to then involve a tax advisor to render the actual tax advice. Tax advice ultimately involves everything going on in the business owner’s earnings and expenses, not just the portion related to the transfer.

Once the transaction is clearly defined, and the tax consequences are considered, we can get to the third step of considering the final step.


Rather than beginning with techniques, as many do, and confusing rules that can pertain to each one, by getting clear on the transaction and tax consequences, the list of techniques shrinks and preferences in the first two categories make it clearer which technique may be best for the business owner. Each technique could be the subject of its own article, so we won’t delve into the specifics here, but let’s identify some of the common techniques and a few characteristics as well as other similar techniques.

From the simplest standpoint there is the outright sale of the business. Used most often for pure monetization events, outright sale is usually used when transferring during life or at death to third parties. At death when this has not been arranged in advance it can cause significant loss in value because of the desperation sale, potentially with estate taxes looming. Outright sale is also fairly tax friendly in that long term capital gain rates are less than half of ordinary income tax rates. Deferred income and retained earnings can be taxed up to the top rates.

Valuation is key to any business succession strategy, but as you can imagine, the goal is different for different transactions. In a sale transaction the business owner generally wants the highest value possible, while in a gift transaction they may want the lowest. Gifts may be made outright or in a trust (for control of the proceeds) and in various trusts which may help discount the valuation. Grantor Retained Annuity Trusts (GRATs), and Sales to Intentionally Defective Grantor Trusts are often used for this purpose quite successfully. Often these techniques are coupled with other structures like Family Limited Partnerships to unitize and create minority interests for subsequent transfer.

Sometimes changing the business structure helps which may be accomplished through a Recapitalization or Stock Offering, or even having the business governed by a Family Office. These transactions can also take place all at once or over period of time. In the case of Intra-family Loans, Private Annuities, Financed Net Gifts and Buy-Sell Agreements, the transfer is often made in one transaction and then a stream of payments takes place over a long period of time. The same can occur using techniques like ESOPs, when the stock is sold to a retirement plan or with Charitable Remainder Trusts where a transfer and subsequent sale creates a stream of income to the business owner.


There is no one technique that is right for everyone, nor one “best” technique, since the factors that lead us to the appropriate technique are as unique as the business owners themselves and the family and business dynamics. Make sure to properly educate yourself on the foundational techniques mentioned here and align yourself with an experienced team of educated tax advisors, and legal advisors to make what is often the single most important transaction in a business owner’s life, a great success.


To learn more about this topic, register for our Family Business Succession course. 

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