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:
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:
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:
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.
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:
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.