A Primer for Exiting From Your Business—And Transferring It to a Family Member

After extended evaluation, reflection, and reading our piece on considerations when thinking of selling your business, you’ve decided that it’s time to pass your business to another member of your family. Maybe you’ve chosen a son or daughter as part of a longer term, multi-generational plan. Maybe you’d like your spouse, sibling, cousin, or niece to take things to the next phase. In any case, you know this is the right next step.

There are a few ways to transfer your business ownership to your chosen family member—and in this post, we’ll cover them all.

Preliminary Step: Valuation

Before we cover your conveyance options, first let’s discuss valuation. Having a good supportable valuation of how much your business is worth can be a crucial determining factor in how you’ll transfer your business. Business valuation can require a complex analysis, but the main components are as follows:

  • How healthy are your profits? (EBITDA is the usual indicator used—that’s earnings before interest, taxation, depreciation, and amortization.)

  • Where is your industry trending? 

  • What are your competitive advantages?

  • How strong is your management team—presumably, this is your management, minus yourself (unless you’d like to retain some involvement after the transfer). 

  • Do you have a good customer base?

Once you have determined what your business is worth, it may become clearer whether you’d like to transfer your business as a sale or a gift. Here are the relative advantages of each.

Option 1: Sale—Full or Partial, With (or Without) Financing
 
There are many advantages to selling your entire business to a family member. For one thing, you will realize the proceeds. Whether these are paid all at once—or financed over years—the money is yours to keep, minus state and federal capital gains tax. You can find new investments, travel the world, build a dream home, and generally support your every ambition.
 
At the same time, you’ll keep the business in the family, securing it for another generation.
 
At the outset, you’ll want to work with the family member to understand their payment approach. Will they self-finance, take out a third party loan, borrow from another family member—or ask you to finance the purchase by accepting installment payments? You’ll need to draw up a purchase agreement, with a financing component if needed.
 
If you opt to sell only part of your company, you’ll remain an owner, with a new co-owner. If your new co-owner holds a minority share of your company (i.e. less than 50%), the sales transaction may be entitled to a minority discount, which offers a break from the purchase price in exchange for lack of control over the company. Discounts for lack of marketability may also be possible.
 
As an alternative to a full or partial sale of the business, you can also divide the assets, selling some (e.g. your customer base and/or employees) while keeping others (e.g. your office space). This will allow you to offset any capital gains taxes with additional income derived from renting or leasing office space or other retained assets. Partial business sales are actually gaining momentum in the middle market (as a way to finance growth). This approach tends to take longer than a traditional sale, since a successful hand-off can require multiple appraisals of specified assets.
 
Whatever you decide, First American Bank can advise you on how to make this exit—and can structure any ensuing purchase loan.
 
Option 2: Gifting the Business to Fully Divest
 
If you’ve reached a certain level of financial security, you might opt to gift your business to a family member. Consider this option if the total value of the business is less than the federal estate tax exemption amount (currently $11,700,000 individually or $23,400,00 jointly in 2021). Alternatively, if the value of your business exceeds your available exemption amount, you may still elect to gift. You will owe federal gift taxes on any amounts exceeding the exemption, but after divesting, the future growth of the business would not be included in your estate.
 
While we only recommend this approach for financially secure business owners, First American Bank can help you plan how to gift your business to a family member, if that is your choice. And, of course, you could consider gifting some and selling the rest. It’s the infinite combinations of tactics that make these discussions so valuable.
 
Readying you and your family for business success
 
Your business experts at First American Bank can help you understand how to transfer your business to a family member, no matter your situation. With on-point experience dating back over 40 years, we’re primed and ready to prepare you for your next big step.
 
Transferring your business requires foresight, planning, and expert guidance. Reach out to one of First American Bank’s advisors today to make the most of this process.

Make sure you’re in the best position possible for your future exit.
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