Objective:

Help a family business owner understand the trade-offs between the various options to succeed or sell her business. Specifically, after each question, describe the differences between to the two options, then describe how this would relate to the family business owner. For instance: What would be the advantages and disadvantages of selling her business using a SCIN technique? What about the same for a Private Annuity?

Assignment:

Review the questions following the case study facts, and as a group provide the trade-offs and pros and cons of the various approaches

Case background:

Molly and Mark were crazy bike racing groupies who met on a bus going to the Tour de France 25 years ago. They spent the next few years working at a local bike racing shop, and traveling the country going to bike races in their beat-up VM Mini-van. They soon got married, and had two children, Raney and Rider.

Molly was always fascinated with high-performance bike wheels and the engineering behind them. After doing some research, she started working on her own high-performance wheels and on the side, and was an early pioneer in carbon wheel technology (she got a patent on her design). She got a few racers to try them, with huge success. They loved them and she and Mark decided to start their own shop called Lead Wheels, Inc. customizing in having their own shop, leveraging this state of the art technology to go from design to production. They struggled to get out of the start-up phase, but eventually things started to take off.

Fast forward to today:

Lead has grown to be a global leader in high-performance wheels. Sales last year were $10 million, and they have over 100 long-time employees. They are highly profitable with high margins and few competitors, and have sunk most of their earnings in the business. Both have still retained their nomadic roots living a modest lifestyle.

Roles for Molly and Mark are fairly straightforward: Molly is the engineering brains, and Mark did sales, using his extensive network of racers. The business was set to keep growing and expanding. They transition into Mountain bike racing right when it was catching on, and this set them on the path towards extraordinary growth. Their signature product is called Lead Jet.

A few months ago, Mark stopped by the shop one late night, having just come back from a long overseas trip. He thought he would check on a new prototype he was pitching to his customers, before he headed home. Unfortunately, he never made it home. He died of a brain aneurysm in his office. He was found the next day by his employees.

Molly was devastated, and for weeks she wondered if she wanted to keep the business going. After some extensive soul-searching, she decided to keep the business going but would also be interested in passing the torch to Raney. Her biggest concern was what to do about Rider. Raney, age 19, is interested in one day being involved in the business, but Rider, 18, is not. Raney says that someday she would like to branch off into new companion products and lines of business, including a Lead racing team of their own.

Molly is still in really good health, but has a family history of Alzheimer's, which has accelerated her thoughts about succession. She has little wealth outside of her business, but does have a 401(k) at Lead with a value of $450,000. She also inherited Mark's 401(k), with a value of $350,000.

Assume the businesshas a cost basis of $2 million.Molly now has a net worth of $15 million (includes her home and a cabin with a backyard velodrome), and no debt either business or personal.

Questions for discussion:

If Molly deciding to sell the business to Raney, how could she make things equitable to Rider?

If Molly decided to sell the business, should she do a SCIN, Private Annuity or an Installment sale? What would be the Pros and Cons of each?

What would be the advantages or disadvantages of using a GRAT?

Let's change the facts and Mark would still be alive. Would a Family Limited Partnership (FLP) be an option?

Let's change the facts again, and Mark is still alive. Mark and Molly have been approached by a major bike racing star, Jacque, who wants to buy in to the company and expand it into different products and markets. They are very interested. Jacque is 20 years younger, and is not married but has a significant other.

Would a Buy-Sell agreement be a good idea?

If so, would you use an entity or cross purchase?

Out of all the options you've looked at in the assignment, which option is the best (assume Mark has died)

What information or facts do you wish you had that would help possibly enhance your answers?