6 Ways to Transfer a Family Business

  • Clifford M. Cohen,
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Ways to Transfer a Family Business

Retirement can be a tricky subject for many business owners. While some will be eager to discuss the topic, many others may not be ready to contemplate it. When you have concerns about transferring your family business, it will always be in your best interest to ensure you are working with a knowledgeable estate planning lawyer in Maryland

Many business owners want to keep their businesses within their families, but it can be difficult to navigate the process of choosing the proper successor. When you are considering who to transfer your business to, you not only want to consider the economic impact to the business and yourself, but also the new management of the business and exactly how things will be transferred when you are dealing with multiple children.

Goals and Objectives of Business Transitions

Your transition from running a business will not necessarily mean that you are selling the business. Several transition alternatives exist for business owners, and business owners should fully evaluate all of their options so they are able to choose the path that will offer the greatest rewards for both themselves and the business.

As a business owner, you must begin by asking yourself whether you want to have an  ongoing role in the company, how much money you will need to live the life you want after the transition, whether you will still need cash from the business, what the risks are relating to the business transition, the importance of your employees, and exactly how much you want to incorporate your family into the transition. Some of your transition options may include any of the following:


Keeping the Business in Family

A business owner may want to transfer ownership to another generation of their family, but they first need to identify the family members who will both be capable of running the business and also willing to become an owner. Transfers of business within families can usually happen by either gifts or sales, or possibly combinations of gifts and sales. It is also possible for a business owner to transfer ownership but not management.


Transition to Existing Owners

Transferring businesses to existing owners can be less problematic because such owners are already familiar with a business but it is also possible that the exiting owners could have different interests when it comes to certain goals and other objectives.


Transition to a Management Team

When a business owner already has a solid management team in place, then transitioning the business to such management teams can be beneficial for the existing employees. A business owner will not only know that their buyers understand their business but they may also allow continuing participation following the transfer.


Sale to a Strategic Buyer

 Strategic buyers can be a good alternative for business owners who want parties who can form a relationship with the business and possibly elevate the business beyond what it is already is. Such buyers could be competitors or might be part of a business supply chain.


Sale to a Financial Buyer

 Financial buyers are typically private equity groups (PEGs) without existing relationships to your business and are seeking returns on investments in businesses. Such buyers may only be seeking a way to continue to grow the business and then sell it again to create a large financial return.


Sale to an Employee Stock Ownership Plan (ESOP)

An ESOP can offer several tax benefits but can also involve regulatory oversight and reporting. The options could represent a solid choice for those business owners wanting to transition over a period of time or in a hybrid manner. The ESOP represents a qualified retirement plan under the Employee Retirement Income Security Act (ERISA) and can be most beneficial to a company’s employees. 

Considerations When Transferring to Family Members

Transferring family businesses to another generation can involve several different tax and estate planning issues that are much different from sales to third parties. One of the first concerns will be the transfer tax relating to gifts, estate, and generation-skipping transfer taxes for any transaction that involves a family member. 

Federal tax law allows people to gift up to $16,000 to as many people as they want annually without incurring a gift tax, also known as the gift tax annual exclusion. People also have lifetime gift tax exemptions of $12.06 million, which means that any transfers exceeding the lifetime exemption amount are subject to a tax rate of 40 percent. 

Another common technique to support a family business transition to another generation of owners can be an installment sale and intrafamily loan. While this will involve selling a business to a family member using a loan with a promissory note payable over time, there are also many important tax rules inherent to such transactions. 

An owner selling their business to a family member must substantiate a sale price, meaning the Internal Revenue Service (IRS) does not just allow a business buyer and seller to negotiate whatever price they desire. For a related-party transaction, a business owner must hire a qualified third-party valuation professional to conduct a business valuation that substantiates the company’s value for a sale.

Another option could be a Self-Canceling Installment Note (SCIN), which will prevent the unpaid balance of a promissory note from being included in a lender’s estate at death. This tactic is most appropriate in situations in which lenders might not survive the full term of a loan. 

An intentionally defective grantor trust (IDGT) might be another way for business owners to leverage an installment sale as part of a business succession plan. An IDGT is a trust that removes an asset from a grantor’s estate for transfer tax purposes, but also offers income tax benefits.

Call Us Today to Schedule a Free Consultation with an Experienced Estate Planning Lawyer in Maryland

When you are considering transferring a family business, make sure that you have experienced legal representation on your side. The Law Offices of Clifford M. Cohen offers more than three decades of experience navigating these types of issues for clients, so we will be able to help you determine the best possible path forward for you and your company.

Our firm works closely with business owners of all ages and income levels, so we can help you devise the most comprehensive plan that will honor all of your wishes. Call (202) 895-2799 or contact us online to schedule a free consultation so we can sit down with you and go over everything you are dealing with, allowing us to better understand all potential challenges and identify ways to overcome them.