Your business is more than just a job; it’s a very personal asset and the means of providing for your family, your employees and yourself. So it’s no surprise that passing down the family business is one of the most difficult experiences you’ll encounter.
The good news is that there are plenty of tools for exiting the family business, with varying degrees of complexity. Sometimes, however, a buy-sell arrangement is the right tool for the task.
This was the subject of a recent article in Forbes titled “Exiting The Family Business: Tax Tips And Techniques,” which included some important tax and planning pointers. At its most basic level, the simple efficiency of a buy-sell arrangement is easy to understand and appreciate. Commonly, the owner (and parent, likely) is going to need retirement income to retire. However, the family business was their only source of income and their greatest asset. If properly structured, the sale of the business can allow the next generation to assume control in a way that guarantees the financial well-being of the retiring parent and the entire family.
This transfer could be accomplished with an outright lump sum sale-purchase or through installment payments over time. The founder may even gift some portions away and sell others. But before settling on a final sale structure, both parties must carefully consider the tax implications of their various options.
A sale of anything carries with it tax implications. When it comes to transferring a business, there are ways to structure the transfer to fully compensate the exiting owner for the value of the business while minimizing the tax burden on the next generation. For example, the Forbes article discusses combining an ongoing consulting agreement or deferred compensation arrangement with a reduced (but still reasonable) sale price. The practical effect of such an arrangement is that the exiting owner receives the full value of the business and the business keeps more cash, since some of the payments to the exiting owner are tax deductible.
With propert professional guidance and careful planning, business owners can structure a buy-sell arrangement that will ensure their own financial future while minimizing the cash flow impact on the next generation.
For more information about business transfers and succession planning, buy-sell agreements or other estate planning matters, contact us at Peak Legal Group.
Reference: Forbes (March 6, 2013) “Exiting The Family Business: Tax Tips And Techniques”