Eventually every business owner will have to turn over control of their business to someone else. Among the many options are selling the business to a prospective buyer, selling to a competitor, or turning your business over to a family member. To ensure the smoothest transition, a business owner should start thinking about these options years before they end up in a situation where they actually have to sell.
Working with a Business Broker or M&A Advisor is one way to determine what sales options are optimal for you based on your specific situation. Let’s explore some of the variables you’ll want to consider when you decide to transfer your business to a family member such as a son, a daughter, a nephew, a niece or another relative.
Transferring your business to a family member has some significant advantages. Topping the list of advantages is that the transfer can be considered a gift, which will reduce the real estate taxes you owe. Depending upon how the agreement is written, you also may be able to maintain some control over the business. For many business owners, this factor can be a big advantage.
Seller financing is a common practice when it comes to buying and selling businesses in general. This type of financing is even more common where transfers to relatives are concerned.
Seller financing opens up the versatile option of implementing a private annuity. A private annuity can spread payments out across a long period of time. This could be a win-win situation for both you and your relative. You would receive a long-term stream of income as a result of ongoing payments. Additionally, this decision may very well make ownership more financially realistic for your relative.
If you sell your business to a relative, you still need a formal buy-sell agreement. Even when you are dealing with your most trusted family members, legal agreements must be firmly in place. A buy-sell agreement protects everyone involved.
This contract clearly outlines all aspects of the arrangement. Your buy-sell agreement should include such key information as the value of the business, amount being paid, which employees will be retained, the current business owner’s level of future involvement, and other critical details about future business operations.
Working with Professionals
Ultimately, there are a range of potentially powerful benefits associated with transferring a business to a relative. While you can expect the IRS to closely evaluate the sale, this should not dissuade you from considering this option. Business Brokers and M&A Advisors are experts at buying and selling businesses, and they understand the specifics of transferring businesses to relatives. Working with professionals early in the selling process can help you gain tremendous insight into the best way to proceed.
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