Defining the Role of a Board Chair

Business MeetingThe prior Family Business Advocates blog post provided an overview of the different legal roles that shareholders, directors, and officers play in the intersection of ownership and management of a company, but how does a family-owned business manage the intersection of all three of those legal roles? Answer: The Board Chair (a/k/a Chairman, Chairwoman, Chairperson).

  1. What is a Board Chair?

Simply put, it’s the leader of the Board of Directors. The Board Chair sets the agenda for, and presides over, meetings of the Board. The Board Chair also acts as a link between the Board and the executive officers of the company. The bylaws of the company often determine the scope of the Board Chair’s duties and obligations.

  1. Is the Board Chair an officer, director, or shareholder?

A director, but maybe all three. As a director, the Board Chair has fiduciary duties to the shareholders of the company, but that does not mean the Board Chair cannot also be a shareholder (and often times in a family-owned business the Board Chair is a shareholder).  The bylaws may provide that the Board Chair is also an executive officer of the company; however, many argue that best corporate governance practices favor appointing a non-executive officer Board Chair in order to reduce potential conflicts of interest (among other reasons). It is also important to note that the role of the Board Chair may change over time. A company may start out with a dual CEO/Board Chair role but later bifurcate the role as the family business matures or for succession planning purposes.

  1. Who appoints the Board Chair?

The company’s bylaws govern the appointment or election of a Board Chair. Typically, the Board Chair is elected by the other directors, but a family-owned business may develop its own unique process for selecting the Board Chair. For example, the position may rotate among different branches of the family tree, allowing a subset of the directors to select the Board Chair for a specified period of time.

  1. Why does a family-owned business need a Board Chair?

Every business with a Board of Directors needs a leader of the Board, but the role of the Board Chair is particularly important in a family-owned business. In a family-owned business, the Board Chair often acts as the voice of the family in interactions with the CEO.

  1. What qualities should a family-owned business look for in a Board Chair?

In addition to knowing the company’s business objectives, the Board Chair for a family-owned business needs to understand the family and its goals, challenges, and maybe most importantly, politics. There is no one-size-fits-all approach to selecting an appropriate Board Chair, but here are a few qualities to consider:

  • Familiarity with the company’s goals and strategies
  • Sound judgement
  • Experience and leadership maturity
  • Interpersonal skills
  • Organizational skills
  • Accountability
  • Reputation in the community
  • Relationships with others
  • Forward-looking vision
  • Time and desire to take on the role

We want to hear what you think. What additional qualities would you add to this list?

The Different Roles of Shareholders, Directors and Officers in Family-Owned Businesses

Business man giving a presentationMany family-owned businesses are organized as corporations to protect the owners from personal liability for business obligations. One consequence of organizing as a corporation is the legal separation of ownership and management. In order to secure protection from personal liability and to assure effective corporate governance, it is important for family-owned businesses to manage the inherent overlap that exists in their ownership and management. This blog post provides an overview of the different legal roles played by shareholders, directors and officers.


Stockholders are individuals or entities that hold an ownership interest in a corporation. The ownership interest is represented by shares of stock. An ownership interest does not, however, give a stockholder the right to control the day-to-day affairs of the corporation. Typically, the most important right that a stockholder has is the right to vote. Voting rights provide stockholders with limited control over the corporation’s affairs by allowing them to, for example, elect the individuals that will serve on the corporation’s board of directors and approve the corporation’s bylaws. Stockholders exercise their right to vote at annual meetings or special meetings that are called by the corporation. Stockholder’s voting rights are subject to the terms and conditions set forth in the corporation’s organizational documents (i.e., articles of incorporation and bylaws) and other agreements between some or all of the stockholders.


The board of directors of the corporation is made up of members who are elected or appointed by the stockholders. Membership on the board is not usually limited to stockholders or employees of the corporation. Directors govern the corporation on behalf of the stockholders and owe fiduciary duties to the stockholders and the corporation. The board of directors’ duties usually include hiring and dismissing the corporation’s officers, establishing and assessing the overall direction and strategy of the corporation, and approving annual budgets and corporate policies.


Officers are appointed and removed by the board of directors.  Officers manage the day-to-day affairs of the corporation and carry out the policies adopted by the board of directors. The structure of management varies widely between corporations.  In many instances a single individual may serve in multiple offices. For example, many boards of directors choose to have the top manager serve as both the president and CEO of the corporation.

With this background, it is important for family business owners to review the roles that various individuals are playing within the corporation.  Over time, as a business grows and develops, changes may begin to occur organically, and corporations must consider what corresponding legal formalities need to be observed to keep pace.

A Reprieve from Proposed Regulations Related to Valuation of Family Businesses?

Gift house with bowIn December, we posted a blog discussing a much anticipated hearing held on the Treasury Department’s issuance of proposed regulations under Section 2704 of the Internal Revenue Code (sometimes referred to as the 2704 proposed regulations) that could significantly impact the valuation of interests in family-owned businesses for estate and gift tax purposes. Comments made by Treasury Department representatives at the December 1 hearing allayed some early concerns regarding the scope and impact of the 2704 proposed regulations. However, many questions regarding the future of the proposed regulations still remained after the hearing adjourned. 

Additional news regarding the future of the 2704 proposed regulations came in the first few days of the 115th U.S. Congress. New bills were introduced in the House and the Senate to prevent the Treasury Department and Internal Revenue Service from finalizing the 2704 proposed regulations. The House bill (H.R. 308) was introduced by Rep. Warren Davidson (R-Ohio) and referred to the House Committee on Ways and Means. It essentially prohibits funds from being used to finalize, implement, administer or enforce the 2704 proposed regulations. The related Senate bill (S. 47) was introduced by Sen. Marco Rubio (R-Fla.) and referred to the Senate Finance Committee.

We will continue to post updates regarding H.R. 308 and S. 47 as they progress through committee, and any activity by the new Congress and administration regarding estate and gift tax issues of importance to family business owners. Please let us know if you would like to discuss these developments and their impact on transfers of ownership interests in your family business.

Rollover Equity in the Sale of a Family-Owned Business

Portrait of Father and Son EntrepreneurIf you sell your family-owned business to a private equity buyer, the buyer will most likely pay a portion of the purchase price with equity in the buyer’s new company, rather than with cash. The equity that you receive in the buyer’s new company in exchange for a portion of the equity in your existing business is commonly referred to as “rollover equity.”

Rollover equity stakes typically range from 10 to 20 percent of the buyer’s new company. Rollover equity is beneficial to the buyer because it reduces the cash portion of the purchase price and aligns the seller’s interest with the success of the new company.

While the rollover equity component reduces the amount of cash that the seller receives at closing, rollover equity can also benefit the seller. If the equity rollover is structured properly, the seller will not pay tax on the value of the rollover equity until there is a future sale or liquidity event with the buyer’s new company. Rollover equity also gives the seller a potential “second bite at the apple.” If the buyer grows the acquired business (either organically or through additional acquisitions), the seller will participate in the future growth of the business and will profit from a future sale or IPO of the new company.

In our experience, private equity buyers may also allow family-business owners to hold their rollover equity in a trust or a family limited liability company or partnership, which creates opportunities for future gifts and estate planning.

It is important to carefully consider the rights and restrictions that will be attached to your minority equity position in the new company. For example, your rollover equity may be in the form of common equity in the new company, while the private equity buyer owns preferred equity with financial and governance rights superior to yours. There also will be restrictions on your ability to transfer your equity in the new company. In addition, the buyer will likely have “drag-along” rights that will enable the buyer to require a sale of your rollover equity in a future sale or liquidity event approved by the buyer (even if you don’t like the deal).

While there are a number of tax, corporate and estate planning issues to consider and negotiate, including a rollover equity component in the sale of your family-owned business can be mutually beneficial to the buyer and the seller.

Special Needs Trusts Through the Lens of a Financial Planner

Special Needs Trusts Through the Lens of a Financial PlannerI met recently with my friend and advisor, Lauren Pearson, CFP®, to learn more about Special Needs Trusts. Lauren is a managing director and partner at HighTower Twickenham, an industry leading wealth management firm. Lauren has a great deal of experience advising families in this area and has experience in her own family.

D.: Lauren, what is your advice?

Lauren: If you have a relative or a loved one with special needs, you naturally want to provide for them in some way. In most cases, this generosity is demonstrated by providing for them in your will. Although well intended, your outright gift could compromise Social Security Disability Income (SSDI) and Medicaid benefits for the special needs person. Reinstating these benefits normally falls upon the caregiver which is more than arduous. If you are thinking of providing for a special needs loved one in your will, you might consider the following:

1) Always talk to the primary caregiver of the special needs person about your intentions. Note that the primary caregiver may be unaware of the need for a Special Needs Trust. If this is the case, please reach out to your estate planning attorney, preferably an attorney with experience drafting Special Needs Trusts, for advice and counsel. See list of interview questions for trusted advisors below.

2) If you are the primary caregiver for a special needs person, you should review all your estate planning documents and beneficiary information. My family thought all beneficiary information was up-to-date until we met with our attorney. A piece of property was to be split per stirpes with my brothers, one who has Down syndrome. This arrangement would have jeopardized my brother’s SSDI and Medicaid benefits. Make sure to review your documents regularly with your attorney.

3) For primary caregivers, think about what you want your loved one’s life to look like after you are gone. I encourage the families with whom I work to designate one person as the trustee and one person as the primary caregiver, if possible. Check with these people every two to three years to make sure they are still willing and able to serve in this capacity.

4) Make sure your trusted advisors are coordinated. It is important for your financial planner, estate planning attorney, and CPA to understand your intentions to create or contribute to a Special Needs Trust. If you are utilizing life insurance, include your agent in the conversation.

D.: So, might a Special Needs Trust be an appropriate way for a parent or other family member to provide financial support for a Special Needs family member?

Lauren: Yes.  A Special Needs Trust can enable a person with a disability (mental, physical, or certain chronic illnesses) to have held for their benefit an unlimited amount of assets without affecting Social Security Disability Income (SSDI) and Medicaid benefits. In a properly drafted Special Needs Trust, the assets held in trust are not considered countable assets for purposes of qualification for certain governmental benefits. The purpose of this trust, which is why the assets are not countable, is to provide for the special needs person beyond resources provided by the government.

D: When is a Special Needs Trust unsuitable?

Lauren: I have run into the case where someone has a small insurance payout and they know they can’t leave it outright to their special needs loved one, but it would cost almost as much to set up a Special Needs Trust. If you do not have a loved one capable of serving as trustee and there are not substantial assets to place in trust, consider a pooled trust like The Alabama Family Trust.

D.: What advice do you give your clients to select the right team to handle a Special Needs Trust?

Lauren: Ask the right questions. The internet is your friend because most professionals have bios listed on their company websites. Look for information in the bios that shows the professional is a subject matter expert or has a true interest in serving families with special needs.

Once you narrow down your providers to specialists, you need to find the right fit for your family. Here is a list of interview questions for families with a loved one with special needs:

1) How did you start working with special needs families?

2) How many special needs families have you served?

3) How long have you been working with special needs families?

4) For financial advisors/planners: Will you serve in a fiduciary capacity 100 percent of the time for my family? Very important.

5) Ask for references. Some industries do not allow references for confidentiality reasons but it is good to ask.

6) Ask the advisor to give you a case study where they have worked with a family like yours.

Update On Proposed Tax Regulations Affecting Availability of Valuation Discounts to Family Business Owners

Update On Proposed Tax Regulations Affecting Availability of Valuation Discounts to Family Business OwnersIn September, we posted a blog discussing the Treasury Department’s issuance of proposed regulations under Section 2704 of the Internal Revenue Code (sometimes referred to as the 2704 proposed regulations) that could significantly impact the valuation of interests in family-owned businesses for estate and gift tax purposes. When first issued, there was significant discussion among business and estate planning advisors, valuation firms and business owners regarding the extent to which valuation discounts (primarily, lack of control and lack of marketability discounts) would be reduced (or even eliminated) when valuing gifts or other transfers of family-owned businesses. In the following months, a consensus emerged that the 2704 proposed regulations would not entirely eliminate valuation discounts, but many questions remained regarding their impact on valuations of family-owned businesses.

On December 1, 2016, the IRS held a much-anticipated hearing on the 2704 proposed regulations. At the hearing, numerous valuation experts, business advisors and taxpayer advocacy groups commented on potential problems and other valuation issues that would result if the 2704 proposed regulations were finalized in its current form. Also at the hearing, the Treasury Department representative confirmed they did not intend to include a “deemed put right” in the 2704 proposed regulations that would eliminate the use of all discounts when valuing transfers of business interests, and that the Treasury Department planned to clarify this when the regulations were finalized. Therefore, while it is likely that the proposed 2704 regulations (if finalized) will still impact how family business interests are valued for gift and estate tax purposes, the impact on such valuations should not be as significant as originally feared.

It is difficult to predict what changes will be included in the final regulations, or when the 2704 proposed regulations will be finalized. The IRS must consider the comments made at the hearing and a very large number of written comments that it has received in response to the regulations. Most advisors believe the earliest the regulations could be finalized is late in the first quarter of 2017. Further, the timing of when the 2704 proposed regulations will be finalized (or whether they are finalized at all) may be impacted by the transition from the Obama administration to the new Trump administration in January 2017, including the possibility of the repeal of the estate tax under a Trump administration.

We will continue to post updates regarding the progress of the 2704 proposed regulations and any activity by the new administration regarding estate and gift tax issues of importance to family business owners. Please let us know if you would like to discuss these developments and their impact on transfers of ownership interests in your family business.

Charitable Lead Annuity Trusts: A Potential Win-Win for Your Assets

Charitable Lead Annuity Trusts: A Potential Win-Win for Your AssetsIn this final installment in our three-part series, we discuss the planning technique known as Charitable Lead Annuity Trusts (CLATs). Like Intra-Family Loans and Grantor Retained Annuity Trusts (GRATs) described in previous blogs, a CLAT is an excellent strategy to use during a low-interest-rate environment, and is particularly effective for individuals who are either currently making, or intend to begin making, sizeable annual gifts to charity and who also wish to transfer wealth to younger generation family members in hopes of minimizing estate and gift taxes.

A CLAT is similar to a GRAT in that it is established through an individual’s gift of assets to a trust to be held for a defined period of time, after which the remaining CLAT assets, if any, will be distributed to younger generation family members. The primary difference between a GRAT and a CLAT is that the annual annuity payments paid by the CLAT are not paid to the individual establishing the trust (the grantor), but rather are paid to one or more charitable organizations.

A charitable income tax deduction is available for the present value of the charitable annuity payments. The present value calculation uses the IRS-prescribed interest rate known as the “7520 rate,” which references the Internal Revenue Code section detailing how the rate is determined, in effect for the month of the grantor’s gift to the CLAT (or for one of the two preceding months, if that produces a larger deduction). The November 2016 7520 rate is 1.6%.

As with a GRAT, it is possible under current law to set the present value of the charitable annuity payments to equal the initial value of the assets transferred to the CLAT, so that the value of the taxable gift made to the CLAT is zero or close to zero. So, if the CLAT assets appreciate at a rate greater than the 7520 rate, there will be residual assets remaining in the CLAT at the end of its defined term to pass to younger generation family members, just as with a GRAT.

The principal objectives in establishing a CLAT are to create a win-win situation whereby you receive a charitable income and gift tax deduction for the value of some or all of the assets gifted to the CLAT, and also benefit lower generation family members to the extent the CLAT assets earn a rate of return greater than the 7520 rate during the defined CLAT term. Any excess appreciation will pass to non-charitable beneficiaries (i.e., younger generation family members) at the end of the CLAT term at no additional gift tax cost. Thus, a CLAT works best in a low-interest-rate environment since there is a greater probability of an investment return in excess of the 7520 rate. For this reason, CLATs are an ideal choice for individuals wishing to combine charitable pursuits with (tax efficient) transfers of wealth to family members.

Have Your Cake and Eat it Too? “Zeroed Out” Grantor Retained Annuity Trusts

Have Your Cake and Eat it Too? “Zeroed Out” Grantor Retained Annuity TrustsWith IRS-prescribed interest rates at historic lows and much like Intra-Family Loans described in a previous blog, a Grantor Retained Annuity Trust (GRAT) presents an excellent opportunity to transfer wealth to lower generation family members with reduced (or no) federal transfer tax costs.

A GRAT is a trust often established by a parent, the trust’s “grantor,” who transfers assets — such as stock or closely held business interests — to the trust for a specific term, typically between two and 10 years. GRATs often provide that the parent retains the right to receive back, in the form of annual fixed payments (the “annuity”), 100% of the initial value of the assets transferred to the trust, plus a rate of return on those assets based upon the IRS-prescribed interest rate known as the “7520 rate,” which references the Internal Revenue Code section detailing how this rate is to be calculated. The IRS’s 7520 rate for November 2016 is 1.6%. Any assets remaining in the GRAT at the end of the term pass to the named beneficiaries, typically the grantor’s children, without additional gift tax. This type of GRAT is often referred to as a “zeroed-out GRAT” since it does not result in making a taxable gift due to the retention of an annuity equal to 100% of the assets contributed to the GRAT.

As an illustration, assume the grantor contributes $1 million of XYZ stock to a two-year zeroed-out GRAT during November 2016. Here, the grantor will receive two payments of $512,033 each from the GRAT at the end of the first and second years. If the XYZ stock appreciates at more than the 1.6% 7520 rate during the trust’s two-year term, there will be a residual value left in the GRAT at the end of two years that would pass to the beneficiaries free of gift tax. So if the trust assets appreciate at 10% annually during the two years, there would be approximately $135,000 of value to pass to the beneficiaries transfer tax-free. If the trust assets appreciate at 7% annually, there would be approximately $85,000 left to pass to the beneficiaries transfer tax-free.

A downside of this technique is that the grantor must outlive the selected trust term for growth in excess of the 7520 rate to be distributed to the beneficiaries free of transfer tax. If the grantor dies during the trust term, the GRAT assets remain includible in the grantor’s estate for estate tax purposes. Accordingly, it is vital to select a term for the GRAT that the grantor is expected to survive.

To summarize, the GRAT technique presents somewhat of a “free shot” to shift future appreciation of assets to beneficiaries without any gift or estate tax. Under current law, there will be no taxable gift made assuming a zeroed-out GRAT is used. Further, if the grantor survives the GRAT term and the assets appreciate, a transfer to the trust beneficiaries will occur with respect to any appreciation over the 7520 rate on an annual basis. If such appreciation does not materialize, the grantor will receive all of the trust assets back through the annuity payments. In other words, the grantor will generally be no worse off from having tried the GRAT technique even if it does not work out as hoped. And in many instances, the grantor can “roll over” the annuity payments into a new GRAT and try again.

How Much Should I Expect to Pay An Investment Banker To Sell My Family-Owned Business?

How Much Should I Expect to Pay An Investment Banker To Sell My Family-Owned Business?In our last blog post, we highlighted the benefits of retaining an investment banker for the sale of your family-owned business. As you might expect, investment bankers do not work for free. In today’s blog post, we outline the typical fee structure for a middle-market investment banking firm that you might retain in the sale of your business.

Investment bankers typically charge a success fee or transaction fee, along with a retainer fee. The success fee is usually a percentage of deal value. The deal value includes the amount of cash and the fair market value of securities or other assets that you receive in the sale (and would include, for example, the amount of debt of your business that is assumed or paid off by the buyer at closing). Deal value also customarily includes the amount of any installment note payments, releases from escrow, or earnout payments made by the buyer after closing, but you should not pay a success fee on post-closing payments unless and until the payments are actually made by the buyer.

The percentage of deal value may be fixed (such as 2 percent or 3 percent), but can also be structured as an adjustable, formula-based success fee where the percentages change at certain amounts or “break points.” For example, the success fee might be structured as 1.5 percent for deal value up to $20 million, 2 percent for the portion of deal value in excess of $20 million up to $30 million, and 3 percent for any portion of the deal value in excess of $30 million. The success fee is typically subject to a minimum fee that the investment banker must be paid at the closing. In our experience, the minimum success fee usually required by experienced, middle market investment bankers is $500,000-700,000.

Investment bankers try to lock in the success fee and protect themselves against your terminating their engagement before the closing occurs. The engagement letter will likely include a “fee tail” period that remains in effect for nine to 12 months after the engagement is terminated. If you terminate the engagement before closing and then later complete a transaction on your own (or with another investment banker) during the fee tail period, you will still owe the success fee to the first investment banker. You may be able to negotiate certain exceptions to the fee tail. For example, the investment banker may agree that the fee tail applies only to buyers that the investment banker contacted about the deal during the engagement.

Investment bankers customarily require payment of an up-front retainer fee when the engagement begins. The retainer fee is generally non-refundable, but should be credited against the success fee due at closing. In our experience, the typical retainer fee ranges from $50,000-100,000 in middle-market transactions. You will also be required to reimburse the investment banker for out-of-pocket expenses.

While the success fee, the retainer fee, the fee tail period, and the expense reimbursement are common elements in almost every engagement letter, you should remember that the dollar amounts, percentage amounts, break points and many other terms in the engagement letter can and should be negotiated. If properly structured, the engagement letter terms will motivate the investment banker to help you achieve your goals in the sale of your family-owned business.

Should You Hire An Investment Banker To Sell Your Family-Owned Business?

Should You Hire An Investment Banker To Sell Your Family-Owned Business?Yes. In almost all circumstances, the buyer (whether a strategic buyer or a financial buyer) will have more financial resources and will be more experienced in buying and selling businesses. Retaining an experienced and effective investment banker will help you level the playing field.

If your goal is to maximize price, you need to get as many offers as you can and take the highest one. You will not achieve the highest price without a competitive process. An investment banker should know your industry and the best potential buyers. The banker should get to know your business well.

With your help, the banker will prepare a confidential memorandum (or “book”) about your business, including historical financial information, financial projections, and information about operations and customers. The investment banker will then contact and solicit offers from as many potential buyers as possible and then help select a smaller group with the best potential to close on the best terms for you. If the banker knows your industry well, the banker should already have a short list of potential buyers for your business before the engagement begins.

In our experience, though, good investment bankers do much more than just identify potential buyers and then wait until closing to collect a fee. They also:

  • assist with financial modeling;
  • propose and analyze different transaction structures;
  • analyze and compare the offers from different potential buyers;
  • help to manage unrealistic expectations about price and other deal terms;
  • organize and manage the seller’s due diligence disclosures (typically through a virtual, on-line “data room”); and,
  • once a buyer is selected, assist the seller and its counsel in negotiating the definitive acquisition agreements.

Negotiations with a potential buyer can be heated at times and involve some degree of posturing by both sides. A good investment banker can also serve as a buffer between you and the buyer, either helping to defuse tensions or, in some cases, acting as the “bad guy” on your behalf. Having an investment banker to act as the bad guy during negotiations can be especially helpful if you will be required to work with–or for–the buyer for some period of time after closing.

It can be challenging to run your business and manage the sale process at the same time. The sale process may take up to 12 months. You will better serve your business if you stay focused on management and day-to-day operations and let an experienced investment banker run the sale process for you.

Please stay tuned for our next blog post: “How Much Should I Expect to Pay My Investment Banker When I Sell My Family-Owned Business?”