Closely Held & Family-Owned Businesses
Serving as a trusted adviser to owners, entrepreneurs and executives, our closely held and family-owned businesses lawyers represent regional, national and global entities across a variety of industry sectors throughout all stages of the corporate life cycle, from formation and growth to succession planning and exit events.
Our Approach
We recognize the unique challenges involved in owning and running a closely held and family-owned business — including developing an effective management team, seizing on growth opportunities and assembling a well-integrated group of outside professional advisers — and the environment in which they arise that may involve limited capital and human resources. With resources and backgrounds across a variety of disciplines — including tax, corporate, mergers and acquisitions, employment, employee benefits, and trusts and estates planning — our team provides an integrated, readily available set of legal services to clients amid an ever-changing and dynamic landscape.
Our Services
Building a Solid Foundation
It is important to ensure that tax and liability considerations, ownership issues, and transition and exit strategies are appropriately addressed at the formation stage. Our closely held and family-owned businesses lawyers assist new ventures in selecting the most advantageous legal structure (corporation, limited liability company, business trust, partnership or other entity). We counsel clients on important corporate governance, voting and control issues to ensure that decision-making is aligned with business objectives. Our lawyers support clients in ownership and management continuity strategies through buy-sell arrangements and employment and phantom equity arrangements to attract and retain key employees. We advise on the acquisition, protection and exploitation of technology and other intellectual property rights that are important assets of an emerging or established company.
Growing the Business
In supporting business growth, we assist in the planning, structuring and negotiating of acquisitions, including leveraged buyouts, strategic alliances and joint ventures. We also work with our clients to create boards of advisers that bring accountability and an outside perspective to the company’s planning efforts. Our lawyers match companies with interested financing sources and handle various financing options, including commercial bank loans, sales and leasebacks, tax-exempt financings, plant and equipment loans, lines of credit, term loans, letter of credit facilities, conventional collateralized loans and subordinated debt.
Planning Succession Issues and Exit Strategies
Our lawyers have a wealth of experience working with owners and their families and their respective accountants, wealth management advisers and investment bankers to help closely held and family-owned clients facilitate tax-advantaged succession of their business, while also integrating such succession strategies with the business owner’s objectives. This planning includes buy-sell and voting trust agreements, funding arrangements to provide estate liquidity, family partnerships, deferred compensation arrangements, and various tax-leveraged options for transferring an interest in a business, such as private annuities, installment sales, sales to grantor trusts, grantor retained annuity trusts (GRATs) and other estate “freeze” techniques.
Where a client aims to realize some of the value of its business outside the family, we plan and implement a variety of strategies to accomplish this objective, including the sale of the business, a recapitalization of the equity through a strategic or financial investor, or the pursuit of a public stock offering.
Resolving and Preventing Disputes
If conflicts arise among the owners of a business, its employees, its customers or its suppliers, our experience in business law, as well as with mediation strategies, enables us to resolve conflicts cost-effectively. Our alternative dispute resolution (ADR) lawyers — regionally and nationally recognized — have served as mediators to efficiently resolve disputes involving closely held and family-owned businesses. If litigation is necessary, our litigators have a wealth of knowledge in such matters.
Representative Matters
- Represented a closely held manufacturing business that increased its revenues by 2,000% in four years via leveraged acquisitions, which included the negotiation and drafting of the acquisition agreements, as well as senior and mezzanine debt financing documentation.
- Represented numerous closely held business owners in a wide variety of industries (including multigenerational family-owned businesses, mechanical services businesses, energy consulting, technical staffing, healthcare technology, frozen food manufacturing, industrial products distribution, recycled rubber products, specialty pharmacy, continuing care facilities, physician practice groups, architecture and food processing) in mapping out and implementing their business succession plans, which include growth of their business through acquisitions, the sale of the business (to strategic or financial buyers or to key management personnel) or passing equity onto the next generation while maintaining control of the company; and working closely with those owners to address complicated intergenerational issues in connection with those transactions.
- Represented a closely held company with operations in engineering, technical recruiting, healthcare, industrial inspection and construction management in connection with its acquisition of an engineering services firm.
- Represented the owner of a large closely held business in connection with the creation of rolling grantor retained annuity trusts (GRATs) resulting in the gift-tax-free transfer of several million dollars in appreciated stock to dynasty trusts for descendants.
- Represented the owner of a closely held business and various private equity interests in connection with the creation of an intentionally defective grantor trust for “selling” appreciated company stock income tax-free to the long-term trusts to freeze the value of the stock and remove all future appreciation from the owner’s estate.
- Represented the owner of various closely held businesses in the formation of a family limited partnership for asset management and enabling the discounting of significant gifts of limited partnership interests to long-term trusts for descendants.
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Entrepreneur 2 Entrepreneur: David J. Winkowski
Supreme Court Sides with IRS in Stock Redemption Agreement Case
The U.S. Supreme Court issued a decision on June 6 with significant repercussions for business owners who use life insurance as part of their business succession planning. In an uncommon 9-0 ruling, the justices in Connelly v. United States held that for federal estate tax purposes, the value of life insurance proceeds payable to a company upon a shareholder’s death was included in the corporation’s federal estate tax value, and this value was not offset by the company’s obligation to redeem the deceased shareholder’s stock under a buy-sell agreement. The Stock Redemption Agreement at Issue Brothers Michael and Thomas Connelly were the sole shareholders of a building supply business. The brothers and the company entered into a stock redemption agreement that allowed the surviving brother to purchase the shares of the first brother to pass away. If the surviving brother declined to purchase the shares, the company would be obligated to purchase them. The company obtained $3.5 million of life insurance on each brother to finance the redemption. After Michael Connelly died, Thomas Connelly declined to purchase his shares, and pursuant to the stock redemption agreement, the company became obligated to redeem them. The agreement laid out a number of methods for setting the redemption value of the shares (e.g., periodically executing a certificate of agreed value or having multiple independent appraisers provide valuation reports). However, the brothers never performed any of the valuation mechanisms. Instead, Thomas Connelly (as executor of his brother’s estate) and Michael Connelly’s son (an estate beneficiary) privately agreed to value Michael Connelly’s shares at $3 million. The company paid $3 million to the estate, and the estate valued Michael Connelly’s shares at $3 million on the estate tax return. The Internal Revenue Service (IRS) audited the return and assessed additional federal estate tax on the basis that the value of Michael Connelly’s shares included a proportional share of the life insurance proceeds. Michael Connelly’s estate paid the tax and sued the IRS for a refund. The estate claimed that the company’s obligation to redeem Michael Connelly’s shares was a liability on the company’s balance sheet, which offset the life insurance proceeds dollar for dollar. In contrast, the government argued that a redemption obligation is not a liability in the traditional sense and that a hypothetical buyer of Connelly’s shares would not have treated this obligation as a factor in reducing the purchase price. Supreme Court Affirms Lower Court Decisions The U.S. District Court for the Eastern District of Missouri and the U.S. Court of Appeals for the Eighth Circuit both ruled in favor of the government and the Supreme Court agreed, affirming the lower court decisions. The Supreme Court considered what a willing arm’s-length buyer would reasonably pay for Michael Connelly’s shares as of the date of his death. In the court’s view, the stock redemption at fair market value had no economic impact on either shareholder. Therefore, a willing buyer would not consider the redemption obligation as a liability. The court was careful to limit its holding to the specific facts of the case. In a footnote, the court mentioned that it does “not hold that a redemption obligation can never decrease a corporation’s value” if the underlying facts differ. For instance, a redemption obligation could “require a corporation to liquidate operating assets to pay for the shares, thereby decreasing its future earning capacity.” However, the company’s obligation to purchase the shares from the deceased shareholder’s estate did not, on its own, offset the life insurance proceeds used to finance the purchase. The Supreme Court did not address Internal Revenue Code Section 2703(b) and its regulations, which allow shareholders to set the value of company shares for federal estate tax purposes by agreement if certain criteria are met. However, the lower court opinions made it clear that the Connelly brothers’ failure to follow the terms of their agreement caused Section 2703(b) to not apply and instead allowed the IRS to determine the fair market value of the shares without reference to the agreement. The value of a decedent’s property at death should reflect its fair market value, which is the price at which the property could change hands between a willing buyer and a willing seller. In Connelly, the court determined that the fair market value of the corporation was increased by the life insurance proceeds payable to the corporation. Going Forward While Connelly held that a stock redemption obligation is not a liability that offsets life insurance proceeds in an estate tax analysis, careful planning and the use of alternative buy-sell arrangements (e.g., cross-purchase agreements or life insurance LLCs) may significantly reduce estate tax exposure. Business owners with buy-sell agreements in place should consider meeting with their advisers to review current valuation and funding provisions to ensure that their business documents will meet their intended planning objectives. Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest.
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