The Importance of Well-Structured Estate Planning in Mergers and Acquisitions

By Michael Megarit 

When board members and officers are deliberating an M&A, they are focused on the short-term financial and strategic benefits of the deal, such as the upside in revenue synergies, market share gains, and cost efficiencies. These benefits usually outweigh the cost of doing a deal, which is often secondary to the collaboration and coordination necessary. Still, all this focus on the deal usually leaves seller/owner and family without planning for the afterglow – that is, for what happens immediately after they put their signature on the line. This article discusses why, from a legal, financial and personal perspective, sellers need to ‘get their house in order’ as an acquisition plays out.

Understanding Estate Planning in the Context of M&A

Estate planning is broadly defined as ‘the process of anticipating and arranging, during a person’s lifetime, for the disposal of that person’s estate after death.’ For the purposes of our discussion, during the M&A process, estate planning deals with any consideration relating to the restructuring of ownership, current and future tax, family wealth transfer, personal financial and suchlike objectives, and how best to achieve them in the context of the transaction.

1. Tax Implications.

Not surprisingly, the most important motive for estate planning in the context of M&A transactions is to minimize tax. Realizing a business by sale can involve substantial capital gains, and the form of a transaction can significantly affect how much tax the seller pays.

a. Capital Gains Tax:

But when a business owner sells her business, the net profit (i.e., the amount realized on the sale less her adjusted basis in the company) is taxable under the rate for capital gains tax. The estate planning techniques available to business owners are at least as extensive as those available to the wealthy. For example, a charitable remainder trust or a structured installment sale could defer the tax exposure.

b. Estate and Gift Taxes:

The growth in the value of many owners’ estates includes the value of their business. An M&A deal could grow the value of that basis, and thus increase estate tax, when the owner dies. Advanced estate planning strategies, such as a grantor retained annuity trust (GRAT) or an intentionally defective grantor trust (IDGT), can be employed to reduce estate taxes on the future growth of a business when that business is moved out of the owner’s estate.

2. Succession Planning

An integral component of estate planning related to M&A is succession planning, which has a major role in assuring the continuity of the business and the goodwill that the seller built up.

a. Continuity of Business:

Good estate planning leaves a clear map of succession, and therefore, this aspect is more easily accounted for in the transition planning after the M&A sale, more so in family firms where the stakes are highest, sentimental and continuity considerations are important.

b. Control and Legacy:

With estate planning, sellers can exert control in choosing who gets what after they leave the big entity for which they once worked, perhaps even conditioning the preservation of the business on certain things or employing trust agreements that lay out how the business will be run in the future.

3. Financial Security

Good estate planning can ensure that you sell the company and come out rather comfortably.

a. Diversification:

In the aftermath of a sale, the seller’s balance sheet is transformed from his or her business equation into a portfolio of liquidity, and liquidity represents a bundle of choices to anticipate and diversify the risks of a life with much more time for estate planning and a lasting lifestyle. 

b. Wealth Management:

At the same time, M&A infuses a healthy dose of liquidity into family balance sheets, where repositioning may be necessary to meet updated goals in their financial plan and legacy structures, such as new systemic investments, philanthropic causes, or wealth transfers with attractive tax impacts on the next generation.

4. Legal Considerations

Such edifices of structures and legal consequences for both transactions and holdings—not arcane commandments but discriminating radically from jurisdiction to jurisdiction—are facts that proper estate planning will take great care to cover as far as it can, assuring those executorial and seller wishes are attended to. 

a. Ownership Structure:

Estate planning is the study of the legal ownership structure of assets, perhaps with an eye for adjusting things to some extent to further the seller’s own personally considered objectives and the requirements of law, that is, with an eye for the realities of the world. Estate-planning instruments include trusts and wills and other legal devices.

b. Compliance:

You want to be sure you are doing it right, and following local laws as well as international ones. Estate planning can assist you in making sure that you are following the rules and laws.

Final Thoughts

While seemingly optional, these steps are the cornerstone of M&A activity and estate planning. They guard the seller’s financial future, ensure that the overall process is fair and transparent, and protect a personal legacy. Ultimately, when done properly, the estate planning contemplated by an M&A transaction should be a starting point for the transaction itself. In sum, these actions constitute individual prudence, or for the seller, personal due diligence – a sense of doing one’s homework and taking the necessary steps that protect a personal interest and help land a lucrative outcome. 

Disclaimer: This article is for informational purposes only and is not intended to provide tax, legal, or financial advice. Readers should consult their own tax, legal, and financial advisors to discuss their specific situation and how this information may or may not apply to them.

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