Published on: 10/17/2023
The Best Way To Transfer Family Business
What is the best way to transfer family businesses? Family businesses are as vital to family dynamics as they are to the economy, which means transferring ownership within a family business can also be incredibly complex and emotional. That’s why it’s crucial to develop and implement a plan for transferring ownership of the business effectively.
The best way to transfer the business is by creating a succession plan. A succession plan is a comprehensive document that outlines the transfer of ownership and management of the business to the next generation or another chosen successor. It should include details such as who will take over when the transfer will occur, how it will be financed, and any contingency plans in case of unforeseen circumstances. But it’s not the only way!
The financial advisors at Avidian Wealth Solutions are here to talk about the different ways to transfer business ownership to family members, as well as go through a few important questions that any small business owner should ask themselves before transferring ownership.
How are family businesses passed down?
How do I transfer ownership of a family business? Much like transferring ownership of property from parent to child, there are numerous ways in which family businesses can be passed down from one generation to the next. They essentially fall into two categories: selling the business to your family members or gifting it to them.
Selling the family business
Selling the business to family members is a common way to transfer family businesses. This approach allows for a more structured transfer of ownership and can provide you with a significant financial return on your investment.
This option provides a clear valuation of the business and helps to make sure that the family members who receive the business are genuinely interested in seeing it succeed. You can even lend your family the money to purchase the business in exchange for a promissory note and potentially guarantee yourself a stream of income for the duration of the loan.
Gifting the family business
You can also decide to give your family business to your heirs through either gifts or inheritance. The lifetime federal gift tax limits and exemptions change annually, but once you gift the business to your heirs it will no longer be part of your estate, and you will no longer be liable for taxes on it.
The other option available to you is leaving your business to your family members as part of your estate. This can simplify the transfer process and may have significant tax advantages depending on the size of your business, but may lead to conflicts among heirs, and the loss of a huge asset can greatly impact small business owners’ retirement plans.*
*Continue reading about small business owner retirement strategies
Business succession planning
Regardless of whether you decide to gift or sell your business, you will need to make sure that you’ve done the difficult work of business succession planning. Succession planning is the cornerstone of transferring business ownership to family members. It involves identifying and grooming the next generation of leaders within the family to take over the business when the time comes. This process typically starts long before the actual transfer takes place.
Among other things, succession planning involves:
- Identifying potential successors within the family
- Making sure that they receive the necessary training
- Slowly beginning the transfer of responsibilities
- Establishing a timeline for the transition completion
- Preparing yourself and any legacy leadership for life after your exit
You can make succession planning for a small business more manageable by working with financial professionals who know the ins and outs of the process of transferring a family business.
What form of business is easiest to transfer?
If you’re looking to transfer business ownership to a family member, the structure of your business might affect how easily you are able to get it done. The following are some common business structures and their implications for transfer:
- Sole proprietorships, while they have very limited scalability, are usually very simple to transfer to a family member.
- Partnerships — while they can be more complicated than sole proprietorship, and alignment between partners is essential — are still fairly simple business structures for transfer.
- LLCs are used to reduce liability for ownership and offer protections and flexibility for management. Amending these agreements to allow for business transfers is more complex than transferring sole proprietorships or partnerships.
- Corporations often have the most complex legal and administrative requirements for ownership transfers, but also often have procedures already established for such an event.
Although all forms of businesses come with their own circumstances and complications unique to their structure, in general, the smaller or simpler your business is, the easier it will be to transfer. Similarly, the larger or more complex your business is, the more difficult it is to transfer.
Whether you’re wondering how to transfer a sole proprietorship to a family member or how to make sure your children are ready to take over the corporation, what you can do to set everyone up for a smooth transition is work with trusted legal and financial advisors, who can help make sure your interests — and the interests of your family — are protected.
Questions to ask yourself about transferring business ownership to a family member
Successful business transfers require a lot of expertise and hard work, but preparing to transfer business ownership to family members requires a lot of honesty on the part of business owners and heads of families. Here are some questions to ask yourself before you attempt to transfer ownership of your business:
- What are my goals? What do I want out of this transfer? Consider your long-term goals for the business and for your family before going through with any transfer of ownership.
- Who are the suitable successors? Identify who has the qualifications, the interest, or the intangibles that you value to run your business.
- What is my business worth? You’ll need to have a number. A fair market valuation is the starting point for any successful transfer of ownership.
- How will this transfer affect my family? Both your family’s finances and interpersonal relationships should be considered before going through with a transfer.
- What is the timeline for the transfer? Set your time horizon and stick to it, so that you can step away from the business when it’s time for you to move on.
- What is the contingency plan? In order to make sure that you and your family are prepared for anything, you should work with trusted business advisors to explore contingency plans and failsafes.
Once you have the answers to these questions, you’ll move on to discussing whether the transfer will be a sale of a gift, how the buyout might need financing, if any negotiating will be necessary, and the legal and tax implications of your transfer.
The best way to transfer family business is with a trusted advisor
Transferring a family business is a significant event for any family, one that requires careful planning and serious consideration long before the transfer should take place. Whether you decide to sell or to gift, to remain fully invested or only partially, the best way to transfer family business is the way that helps to make sure that your legacy and values are retained long after it’s time for you to step away. How do you do this? By working with a professional who can guide you every step of the way.
Avidian Wealth Solutions offers family office wealth management in Houston, Austin, Sugar Land, and The Woodlands. If your family business is going to go through a change of ownership, whether now or in the future, call us and ask how we can help make the process as smooth as possible. Schedule a conversation with Avidian today to get started.
More Helpful Articles by Avidian Wealth Solutions:
- Will AI Replace Financial Advisors?
- What is an Exit Plan (and Why Does it Matter?)
- What to Know About the Great Wealth Transfer
- How Is Passive Income Taxed?
- How Do Charitable Donations Affect Taxes?
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