Case Study: Business Succession
“Manuworld Manufacturing” is a maker of parts for large manufacturing systems. Founded in the 1960s by a scientist who had never worked in business, the company developed products that the manufacturing community wanted and needed. By keeping the company lean and re-investing profits back into the business, the company had substantial value by the time the founder was ready to retire 40 years later. In addition to a company with substantial value based on significant annual revenue and no debt, the company leased land from another entity owned by the founder, providing an additional revenue stream.
As the founder approached retirement, he worried about how he could retire from the business and leave his son in charge, while ensuring that his son and three daughters (who were not in the business) would be financially taken care of and would receive an equal share of the company’s value.
Edward A. Shapiro, P.C. devised a ten year plan that did the following:
- Transferred principal ownership over that time period to his son;
- Averted the payment of estate taxes as gifts were made over the ten-year period and capital appreciation was transferred from the first generation to the second;
- Created an employment contract for the founder that would allow company proceeds to flow through to the three daughters who were not in the business;
- Established a real estate partnership that would give additional value to the daughters (to equal the son’s share) by ensuring a revenue stream of company lease payments to the partnership, with an option ultimately for sale of additional land; and
- Ensured a phase-out where the founder would work less and less over time and his son would establish full control of the business.
The plan achieved all of its objectives with great success. Manuworld Manufacturing continues to thrive, generating healthy margins that are realized by the son and three daughters. It leases land from a real estate partnership controlled by the daughters. Payments to the founder as part of the employment contract – those that do not flow through to the children – ensure a strong quality of life for the founder and his wife. The company continues to be unburdened by debt.
The founder has gotten what he needs (a comfortable retirement); the son has a career and owns a successful business; the daughters have the income they need, and equity with their brother who runs the company, avoiding family conflict, which is so common in family businesses.