Question:  

I’m in preliminary discussions with my business partners (family and non-family) about selling my portion of our business. What factors should be considered?

Answer: 

This is one retirement planning strategy you want to start planning for early. A carefully and thoughtfully designed strategy put in place well in advance of your full departure is essential to make sure your business enjoys continued success for generations to come.

Not that easy

The facts are a bit grim. Only 30% of privately held businesses survive into the second generation, and less than 15% survive into the third, according to Nuveen Investments. A well-planned transition strategy can help your business stand the test of time. It can be difficult to think about being replaced. That explains why only a third of business owners surveyed for the 2018 U.S. Trust Insights Report on Wealth and Worth had established a formal succession strategy.

You have an estate plan to protect your loved ones; a succession plan does the same for your business. If for any reason you’re no longer at the helm, there’s a safety net in place for your legacy. A thorough succession plan considers your exit from the business as well as your retirement needs and estate planning. It provides an orderly transition of management and passing control of the business. It also avoids potential pitfalls of loved ones having to make tough decisions during stressful times or leaving the future of your business to happenstance. And it’s never too early to start thinking things through.

Consider these questions with your team of financial professionals:

How can you protect your business and ensure future continuity?

How can you gracefully exit the business and realize the maximum value for your hard work?

What if something happened to you unexpectedly? Have you created an effective contingency plan that protects your staff and customers?

You may want to groom an heir from within the family, groom someone outside the family, consider an outright sale, or have an expert take over until your chosen heir is old enough or fully prepared. Any one of those scenarios takes time to develop.

Succession strategies

The financial implications of business succession are complex, but you and your financial advisor can tap into strategies to help you refine your plan. Here are three examples:

* Sale to intentionally defective grantor trust (IDGT) – Don’t let the name throw you off. A sale to an IDGT is a sophisticated planning strategy to transfer assets from one generation to another while minimizing income, estate, and gift tax liabilities. Families with closely held businesses structured as partnerships or S corporations may find it particularly helpful as they smooth transfers to your heir without incurring gift or capital gains taxes on the sale and shift the value of the assets out of the grantor’s estate.

* Grantor retained annuity trust (GRAT) – A GRAT can help insulate assets that you expect to appreciate significantly from being overly taxed and can create a meaningful difference in net proceeds for business owners contemplating a sale or transfer. This is one technique that can transfer wealth with little practical impact on the underlying transaction, yet with substantial wealth transfer results.

* Self-canceling installment note (SCIN) and intra family loan – When you use an SCIN to finance the sale of your business interest, the buyer promises to make payments of portions of the sale price to you for a specified period of time. If the seller dies before payment in full on the note, the note is canceled, and no further payments need to be made to the seller’s estate or beneficiaries. Selling a business interest to a family member in a lower tax bracket using an SCIN may allow for a reduction in overall family tax liability. An intra family loan can be used in coordination with an SCIN.

Putting a plan in place means you and your business are prepared no matter what happens, even in the case of disability or a sudden death. But it’s not just about being prepared in an emergency. It’s about sustainability. While these can be difficult conversations to have with family members and business associates, they can actually bring comfort – knowing everyone is on the same page when it comes to the future success of your business. Stay focused and plan accordingly.