Exit Planning for Family Business Transfers

Exit Planning for Family Business Transfers

A family business transfer is a common exit path for business owners. Just like any family affair, family business transfers come with benefits and drawbacks. You can work alongside your family members, gradually retire, and keep family pride, tradition, and the business in the family. Conversely, these transitions can bring out differences of opinion and family conflict. As business owners begin exit planning for a family transfer, there are key fairness, financial, tax, and timing considerations.

“Fair” Exit Planning for Family Transfers

If you think about it, most of the family business owners you know are likely sole owners. Why is that? Often, co-ownership just doesn’t work out. It isn’t easy to parcel out shared control and ownership across multiple siblings. That’s not to say it doesn’t happen. It is possible to transfer to more than one child, but the best practice is to transfer your business to one “business-active” child who becomes the sole successive owner.

So, how do you fairly support children who are inactive in the business? You make an equitable distribution of the balance of family assets to the inactive children. Develop a solid estate plan, including a will, trusts, and buy-sell agreements, to distribute business and non-business assets as fairly as possible to your heirs. It’s not an exact science, and there’s a lot to consider in planning. For example, the business-active child will likely receive his or her share of your estate in business interests; however, the value of the business interest he or she receives will be difficult to gauge against the unknown future value of other interests going to inactive children.

Financial Security & Timing

As the business owner, your financial security is the linchpin in a successful family business transfer. By the end of the transfer, you need to know you will receive the amount of income you need to live comfortably, independent from future business cash flow. Ensuring financial security can take some finesse. As you slow down and prepare yourself and your business for what comes next, you have several options. Depending on your financial needs, you could maintain ongoing involvement in the business or participate in profits as an owner until you receive the money you need to exit. It can take some extra time for business owners to receive full fair market value, and some owners settle for lesser amounts in family transfers. For liquidity and cash flow reasons, most family transfers are financed or executed over a longer period of time as compared to a typical third party sale.

Careful tax planning is also needed to minimize certain liabilities throughout the transfer of ownership to your family. You need a plan to leverage opportunities over time and balance taxes from income, capital gains, gifts, and your estate.

A Back-up Plan for Your Exit

Even an exit plan needs a back-up plan to ensure appropriate wealth distribution and business continuity. There’s always room for unforeseen circumstances to offset any plan. A comprehensive estate plan can still support the goals and objectives of your business transfer to your family, even if something unexpected happens to you. Some owners determine the business-active child does not possess the drive or interest to carry the business. Others find that substantial differences in management style and practices emerge. Changes in business value can affect a child’s ability to buy out the company. It pays off to be prepared with a back-up plan, such as a sale to a third party.

Getting Started

The professionals at Altus Exit Strategies, a wholly-owned subsidiary of Albin, Randall & Bennett, are industry leaders here to help your business through the Exit Planning process and other succession planning needs.

Take a moment to examine the areas of your exit plan that need to be addressed using the Altus Exit Strategies Smart Exit Planning: Ready or Not? Assessment.

Successful business exits require the involvement of a specialized team of advisors. As a certified exit planner, I understand the tax benefits and potential tax consequences around timing an exit and how to pull together the right team, resources, and strategy to increase transferable value and set you up for a successful exit. Contact me today for more information.

by David Jean, CPA, CCIFP, CExP

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David Jean is the Director of Altus Exit Strategies and a Principal at Albin, Randall & Bennett, where he is also the Succession Planning Services Practice Leader. David works with business owners who want to improve their business’s value before they sell through the Seven-Step Exit Planning Preparation™ process. He has worked with companies from $5 million to $50 million in revenue across a range of industries.

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