Successfully Transferring a Business

a new life chapter

Business Succession: A Family Owned Company.

This is an example of how we can assist our clients to transition their family business.
Charles, 61 years, a successful entrepreneur, owns a manufacturing company outside of Los Angeles. About to retire, he wants to keep the business in the family by transitioning it to the next generation. The client assembled a team of professionals – his attorney, accountant and a wealth advisory firm. The role of the wealth advisory firm would be place the owner’s overall objectives within the context of his wants and needs, while coordinating with the ongoing planning processes, estate planning strategies, financial and lifestyle issues that began well before the transfer.

Our approach would be to focus on both the specific and unstated goals of the client. If, for example, it turned out that Charles was interested in reducing his taxable estate, and simultaneously building the eventual wealth of his children and the new owners, while also donating some wealth to charity, we would focus on how much should be retained within the company and the effective timing of the transfer.

We feel that understanding what the client wants is the most important aspect of a business succession. In this case, it turns out that the original goal of transferring the business to his sons was not what Charles ultimately prefers. Charles realized that he had no retirement plans as he loved working. He would come to this realization after we would have coached him on the emotional aspects of the transition, what he wanted to do after retiring, and the meaning he placed in his company as it related to his self-worth and passions.

The firm yielded earnings of $6 million, and using a multiple of 5xEBITDA (Earnings before Income, Taxes, Interest, Depreciation and Amortization), the business would potentially yield $30 million cash, leaving the family with approximately $25 million after taxes. Charles wants to make sure that both his sons will inherit a substantial legacy, while at the same time ensuring that his spending needs of $300,000 a year would be met. Given these goals, we would work with him to identify what his core “needs” are (such as not running out of money), and distinguishing these from “wants” (leaving his sons with a legacy and contributing to charity). By understanding Charles’ attitude towards risk, and using sophisticated modeling tools, as well as our Strategical® method of investment allocation strategy, we would forecast how he could live financially independently for the rest of his life. We could also factor in multiple scenarios of how Charles would potentially do with his investments, were he to only spend $250,000 a year, for example. Any amount left in the portfolio could be used for philanthropy and his family legacy.


The optimal solution in his particular situation may be a bond-orientated 45/55 portfolio, requiring capital of $15.8 million, based on our modeling.

This investment allocation would have a small risk (5%) of experiencing a 20% portfolio correction within the next 35 years. In terms of the business sale, Charles has the option of accepting $30 million upfront, or opting for $20 million up front, while continuing to work as a consultant for 5 years, earning $350,000/year, but having the potential to participate in the business earnings and performance over the near term. This second option appeals most to Charles, as he is interested in continuing to be involved in the business and likes the possibility of sharing in the future proceeds of the firm. Lastly, we would consider adding a grantor-retained annuity trust, or GRAT, to leverage gifting substantially to the charities and the family.
Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of the strategy selected. You should consult a Financial Advisor before implementing any investment strategy. This is a hypothetical example and not meant to reflect the situation or any actual client or the performance of any particular investment. You should ‚Ä®consult a Financial Advisor before implementing any investment strategy.