The Appeal of Selling the Business to Family

The Appeal of Selling the Business to Family

This article continues our series describing the advantages and disadvantages of the five primary Exit Paths that business owners might choose. In our last article, we showed you some of the challenges and dangers for business owners in third-party sales. Today, we’ll examine some the advantages of selling the business to family, specifically, children. As always, our goal is to introduce important issues so that business owners, Exit Planning Advisors, and Advisor Teams can communicate and strategize on the same terms.

For many owners, transferring ownership to their children is a fundamental, almost instinctive, exit goal. According to The BEI 2016 Business Owner Survey Report, 27% of business owners were interested in pursuing this Exit Path. Let’s look at some of the advantages of transferring ownership to family in the context of the three fundamental goals of all BEI Exit Plan designs:

  1. Maximize the amount of money the owner receives.
  2. Keep the owner in control until he or she receives all monies.
  3. Minimize the owner’s risk.
     

Advantages of Selling the Business to Family
 

Advantage 1: Financial Security
 

Like a transfer to management or key employees, properly structured transfers to children can support financial security. Through a properly structured transfer framework, business owners can accomplish two goals on their way to financial security:

  1. Business owners can receive the income they need or want during and after their exit, even if the business’ value does not justify that sum of money.
  2. Business owners and their Advisor Teams can design the transfer so that owners retain control of their businesses during the buyout period, and until they get all of the money they want and need.
     

Advantage 2: The Time Factor
 

It normally takes longer for an owner to phase out of ownership in a transfer to children than it does through a sale to a third party or an Employee Stock Ownership Plan (ESOP). That longer transition time provides owners several benefits:

  • It creates options should something unexpected happen, such as the owner’s sudden disability death or incapacitation, or a sudden windfall of cash, such as through an unexpected inheritance.
  • The time it takes to complete a successful transfer to children gives those children time for on-the-job training and observation. This allows owners to prequalify their children for ownership.
     

Advantage 3: The Time Margin
 

While still receiving income and maintaining control (assuming proper planning), owners have time to slow down and develop other interests and pursuits outside of the business. This means that they have the time to prepare themselves, their children, and their businesses for life after the transfer. Additionally, the inherent trust that owners tend to have with their children—which often does not exist in non-family-run companies—allows many owners to feel more comfortable about reducing the time they spend in the company.

Advantage 4: Tax Consequences
 

Using BEI’s unique family-transfer exit strategy, advisors can minimize (and often avoid) the income taxes owners incur on transfers of ownership to family members.

Related: Why Business Owners Favor Third-Party Sales

Advantage 5: Values-Based Goals. 
 

Achieving values-based (i.e., softer) goals is often the deciding factor for owners in selecting a particular Exit Path. Transferring a business to children meets several of these values-based goals:

  • Legacy. The joy and satisfaction owners gain from working with their children continues throughout and after the ownership transfer.
  • Benefits to Children. Owners offer their children greater employment and financial opportunities than available elsewhere.
  • Family Identity. Owners can maintain the business as the family’s focal point and the “glue” that helps the family stick together.
  • Fulfills Children’s Expectations. Children who have grown up in the business, know it, and want to stay in it acquire ownership.
  • Family Pride. Owners continue to reap considerable (and justifiable) satisfaction from family traditions and values that benefit family, employees, customers, and community.
  • Community. The children are unlikely to move the company out of the owner’s community.
     

Advantage 6: Successor Choice
 

Owners and their spouses can select the child or children to be their successor owners.

In our next article, we’ll look at the flip side of these transfers: the challenges.

John Brown
Exit Planning
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John Brown started his career in Exit Planning 30-plus years ago as an estate planning attorney.  He created The Seven Step Exit Planning ProcessTM and successfully teste ... Click for full bio

Most Read IRIS Articles of the Week: Feb 19-23

Most Read IRIS Articles of the Week: Feb 19-23

Here’s a look at the Top 11 Most Viewed Articles of the Week on IRIS.xyz, Feb 19-23, 2018


Click the headline to read the full article.  Enjoy!


1. Don’t Get Pinged by the Social Security Earnings Limit


I’d like to introduce you to Peggy. Born in 1956, Peggy will be 62 in 2018. She has worked in retail her whole life, the past twenty-five years spent in management. Peggy divorced from her husband 14 years ago, is still single and has no children. — Dana Anspach

2. We're Back to “Bad News is Good News” and “Good News is Great News”


This week the markets shrugged off last week’s fears and went back to the slow and steady melt up, despite economic news that looked likely to once again rock the boat. — Lenore Elle Hawkins

3. Q1 2018 Factor Views


Themes established in 2017 across a wide range of markets and factors continued to resonate through the fourth quarter. Economic growth was strong and supportive of equity markets across the globe, a range of volatility measures reached all-time lows, and business and consumer sentiment remained elevated. — Yazann Romahi and Garrett Norman

4. A Beneficial Basket of Commodities


Advisors and investors that feel they are hearing more and more about commodities and the corresponding exchange traded products in recent months are right. That is a natural result of dollar weakness and yes, the greenback is floundering again in 2018. — Tom Lydon

5. 3 Trends Shaping the Future of Asset Management


As the industry works to cope with new regulation, wades through an outpouring of new products, learns to satisfy investors’ shifting priorities and manages the active-passive debate, the viability of business units will be questioned, and at times radical measures will be taken. Peter Hopkins

6. 5 Ways Advisors Leave Money on the Table, and What to Do About It


My hope is that this article points out some opportunities for you to make more money and serve your clients at a higher level and that you decide to do something about it. — Bill Bachrach

7. The Market Has Gone Wild! Is It Time to Change Your Investment Strategy?


Whether the market is flying high or taunting your emotions with new lows and some bumpy volatility, here are four things every investor should keep in mind ... — Lauren Klein

8. How to Deepen Client Relations and Capture New Business Using Engaging Content


Why financial advisors NEED to understand much more clearly the power of good digital market. With tools like AdvisorStream, it’s easier than ever to get the content you need to drive leads and referrals today! — Kirk Lowe and Matt Halloran

9. Three Ways The Most Successful Gain Big Attention


How do some firms and ideas go from nowhere to everywhere in a few short months? All of a sudden a restaurant becomes popular, a gas station gains a cult following, or a Broadway show becomes too popular to get a ticket for years. — Maribeth Kuzmeski

10. Who Are the Hottest FinTech Firms and Influencers Around the World?


"Worldwide, $27.4 billion poured into fintech startups in 2017, Accenture reports, up 18% from 2016. With so much in play, it’s not surprising that 22 companies are new on this, the third edition of our list."  — Chris Skinner

11. The New Stock Market Normal Is Not What You Think!


Many sensational headlines have been written the past few weeks about market declines, but two things have increased for sure: the viewership and the ad revenues of financial media organizations — Preston McSwain​​​​​​​

Douglas Heikkinen
Perspective
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IRIS Co-Founder and Producer of Perspective—a personal look at the industry, and notables who share what they’ve learned, regretted, won, lost and what continues ... Click for full bio