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 business 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:
- Maximize the amount of money the owner receives.
- Keep the owner in control until he or she receives all monies.
- 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:
- 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.
- 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), business 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 business 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:
- 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 of selling the business to family.