Case Study: A Control‑First, Liquidity‑Later Succession Strategy
About This Case Study
This case study examines a multi‑generational family enterprise facing a common but complex challenge: how to transition leadership and wealth to the next generation without accelerating tax, destabilizing governance, or forcing irreversible decisions before successors have proven readiness.
The scenario contrasts a traditional inter vivos share sale funded by promissory notes with a more deliberate control‑first, liquidity‑later approach that separates operating risk from family wealth, preserves compounding, and creates a lower‑risk platform for next‑generation development.
Names, entities, and identifying details have been anonymized. Dollar values and assumptions are representative of real‑world planning scenarios.
Background: The Family Enterprise
The founding shareholder (the “Founder”) is a principal owner of a privately held operating company (“OpCo”) in a complex, relationship‑driven industry.
OpCo:
Has multiple shareholders
Operates in a cyclical, capital‑intensive environment
Requires hands‑on management and political navigation
The Founder holds OpCo shares through a holding company with:
Current fair market value: approximately $20 million
Adjusted cost base (ACB): approximately $400,000
Long‑term growth assumption: 10% annually
The Founder and spouse have two teenage children who may enter the business in the next decade, though long‑term interest, aptitude, and alignment remain unknown.
The Initial Proposal from the Founding Shareholders CPA firm: Inter Vivos Share Sale via Promissory Notes
Rationale
The Founder initially favored selling OpCo shares to the children (directly or through their corporations) during his lifetime, funded by promissory notes. This approach is often perceived as tax‑efficient due to:
Earlier “freezing” of value
Shifting future growth to the next generation
The appearance of orderly succession
Mechanics
Under this approach:
OpCo shares are sold at fair market value
A capital gain is immediately triggered
Promissory notes replace equity on the Founder’s balance sheet
Children inherit growth — and debt — immediately
Structural Consequences
While technically viable, this strategy produces several unintended outcomes:
Accelerated taxation decades earlier than required
Elimination of compounding inside the Founder’s estate
Fixed receivables replacing appreciating equity
Early leverage placed on successors
Governance risk if successors are not ready, aligned, or interested
At a 10% growth rate over 30 years, a $20 million asset compounds to more than $260 million. Under a promissory‑note structure, this compounding is forfeited by the Founder’s estate.
The conclusion: while familiar, this approach is tax‑visible, estate‑shrinking, and highly irreversible.
Reframing the Problem
Rather than asking, “How do we move ownership now?”, the planning question was reframed as:
“How do we preserve control, optionality, and compounding while creating space to evaluate the next generation — without forcing outcomes prematurely?”
This led to a fundamentally different architecture.
The Alternative Strategy: Control First, Liquidity Later
The recommended strategy separates three elements that are often incorrectly combined:
Control
Economic ownership
Liquidity timing
By decoupling these elements, the family retains flexibility while reducing risk.
Step One: Capital Reallocation Without Succession
Objective
Reallocate capital from existing structures into a simpler investment platform without:
Selling OpCo shares
Triggering tax
Altering OpCo governance
Implementation
Approximately $10 million was accessed from existing corporate‑owned life insurance cash surrender value (CSV) on a tax‑efficient basis and redeployed.
This was explicitly framed as capital reallocation, not succession.
The Founder retained full economic ownership of OpCo
Control remained unchanged
No ownership was transferred to the next generation
Step Two: Creating a Separate Wealth Platform
A new family investment entity (“HoldCo”) was established to house real estate and other long‑term investments.
Why a Separate Platform?
Compared to OpCo, this investment platform is:
Asset‑based
Cash‑flow driven
Governable
Benchmarkable
Forgiving of mistakes
In contrast, OpCo is:
Relationship‑heavy
Politically complex
Less tolerant of error
Operationally demanding
Succession was deliberately shifted away from OpCo and into this simpler environment.
Step Three: Deploying Capital Into Real Assets
Capital Stack
$10 million equity
Conservative leverage (60–80% LTV)
Focus on stabilized, income‑producing assets
Asset Profile
Real-Estate
Marketable Securities
Longer term investments
The objective prioritized durable cash flow over speculative appreciation.
Step Four: Cash‑Flow Architecture
Sources
Real estate net operating income (NOI)
Dividends from OpCo (still owned by the Founder)
Uses
Debt service
Reserves
Reinvestment
Distributions
Earned compensation to next‑generation participants
This structure created multiple income layers while avoiding dependency on any single source.
Step Five: Staged Succession
Phase One: Founder Controls, Next Generation Operates
Founder retains voting control
Children work full‑time in the investment platform
Compensation is earned through salary, dividends, and performance‑based incentives
No ownership is gifted, but rather earned through experience and performance
Phase Two: Gradual Transfer of Control
Voting control transitions based on performance
Economic participation increases over time
Founder steps back operationally, not economically
Phase Three: OpCo Succession Deferred
Options remain open:
Retain OpCo shares until death
Insurance‑funded redemption
Partial redemption if earned and appropriate
No irreversible decision is made prematurely.
Key Takeaway
This case illustrates a critical principle in advanced family enterprise planning:
Succession should occur where mistakes are survivable — and decisions remain reversible.
Operating companies generate wealth. Investment platforms preserve it. Confusing the two creates unnecessary risk.
By separating operating risk from family wealth, preserving compounding, and delaying irreversible ownership transfers, the family achieved:
Long‑term tax efficiency
Stronger governance
Meaningful next‑generation development
Reduced family and shareholder friction
Most importantly, the strategy allowed time for intent, capability, and alignment to reveal themselves — before ownership became permanent.
This is not about minimizing tax today. It is about maximizing control, clarity, and value across generations.
Take Action
What do you think? Does this align with your views? Let’s have a conversation. Reach out to me directly by email at brett@senatuswealth.com