Owners of closely held businesses, where one but not all of the owner’s children are involved in the operation of the business, face unique business succession issues. The problem has little to do with the business itself but rather to do with minimizing the possibility of fights among the owner’s children. This problem can be avoided by selling part of the company to an Employee Stock Ownership Plan (ESOP), and gifting the cash realized in the sale to the uninvolved children.
The business owner’s dilemma is succinctly stated by the following question: How does one: 1) leave the business to the “involved” child; 2) equalize the value of each child’s inheritance; and 3) minimize the possibility of significant disagreements among the owner and the children? If the owner has sufficient liquidity outside the value of the business, the problem is easily solved by leaving or gifting cash or other assets—equal to the value of the business—to the uninvolved children. For example, if the business is valued at $12 million, he or she would require $24 million in other assets to equalize the uninvolved children. Typically, few closely held business owners have sufficient liquidity to equalize their uninvolved children, as it is typical for a business owner to have 75 percent or more of his or her net worth tied up in the business.
