You have built your small business on your hard work and sweat. You may even have your son/daughter/niece/nephew or other family members working with you in the company. Now you are ready to move on, or at least slow down.
Often times a small business owner thinks how natural and easy it would be to transfer the company to those family members working in the business. Yes, it probably is a natural next step, but it isn’t as easy as just erasing your name as owner and filling in your family member’s name.
The small business owner needs to consider many factors before making any formal transition of the business. Some of these include:
- Do I have enough retirement savings to live comfortably without selling my business?
- Am I really ready to completely let go, or do I still want to be involved to some extent?
- Are my family members ready to step up to the plate and run the business?
- Are there key employees who are not family members that need to be considered?
- What are the tax consequences of gifting or selling my business?
If you are ready to retire, fully or partially, you need to determine what your financial needs look like and how they will be met. Do you have retirement plan assets to draw from or was the business your retirement plan? If you have the means to otherwise meet your retirement needs, and are so inclined, you may decide gifting the business to your family members is the way to go. If you are falling short of meeting your retirement needs or want your family members to have some skin in the game, you might consider selling them the business or doing some combination of a gift and a sale. Some small business owners will sell their company to their family members for an amount less than fair market value. This strategy ensures the small business owner receives additional assets for their retirement needs but does not burden their family with a full purchase price. The difference between the selling price and the fair market value is the amount of the gift. The fair market value of the business will need to be determined by a qualified business appraiser.
Whether it is a gift, sale or some combination, are you ready to completely let go? Are the family members ready to take the reins? Perhaps you could consider gifting or selling only a small percentage of the business, while retaining the controlling share. The valuation of a non-controlling interest in a small business will likely be worth less than the pro-rata share of the whole business due to discounts to the fair market value for lack of control and lack of marketability. Depending on your circumstances and the value of the business, this may allow for gifting of other assets without incurring a gift tax liability. The current (2020) gift and estate tax exemption is $11.58 million per individual and $23.16 million per married couple.
“It takes a village” doesn’t just apply to raising your kids. It also applies to transitioning your business. You need to have a team you can rely on every step of the way, including your lawyer, accountant, financial adviser, business valuation expert and even your key management employees. Please reach out to your Henry+Horne adviser with any questions.
Melissa E. Loughlin-Sines, CPA, CFE, CVA, CFF, ABV, Director, Litigation+Valuation Services