The definition of wealth for most business owners includes the emotional desire to see the next generation of their family take the reigns of the family business and succeed. Too often, however, the business owner fails to take the necessary planning actions to see the vision through to completion.
Transferring ownership and control of a family business is an emotional decision even for the most well-intentioned entrepreneur. A number of factors must be considered when designing your business transfer plan, but the overriding element is to start early by placing the next generation in positions of responsibility in early adulthood and gradually increasing their decision-making capacity over time. Allowing them to make “mini- mistakes” will build their confidence to make more important strategic business decisions later on.
When the time finally arrives to transfer ownership control of a family business, the most common transfer technique is a private installment sales agreement with customized loan repayment terms. There are special income-tax planning concerns associated with a non arms-length installment sale that must be considered before the sale is executed.
The family installment sale is often a combination bargain sale and gift, but interest must be charged on the installment note or the IRS will calculate interest on the transaction for you. Advanced estate transfer strategies may be required to discount the value of the asset transfer to stay clear of adverse gift tax consequences.
An advanced strategy to transfer ownership without ceding control employs a family limited partnership with voting and non-voting classes of ownership.
Our role as a business planning specialist is to forge a successful intra-family business succession by helping the owner take the necessary financial steps to position the business and ready the family members to seamlessly effect a change of ownership and/or control.
