Planning for the sale or succession of your business can be a daunting task, but it is crucial to ensure a smooth transition and maximize the value of your business. Whether you are looking to sell your business to an external buyer, transfer ownership to a family member, or prepare for retirement, there are a multitude of issues to consider. From succession and continuation to valuation and appraisal, sales and disposition, tax, and other issues, careful planning is essential to protect your assets and ensure a successful transition. In this article, we will discuss some key considerations in each of these areas to help guide you through the process.
One key issue to consider is the degree to which the success and continuation of the business rely on the individual skills, knowledge, and expertise of you or another key person. If this is the case, it is crucial to plan well in advance for the training of a suitable successor and mitigate any key person risks that could jeopardize your business. Another important consideration is whether you want your children or other family members to take over the business, as this could impact your legacy goals and the equitableness of your estate. It is important to work with an estate planning attorney to develop a plan that addresses these concerns and ensures your wishes are carried out. If you plan to remain involved in the business after you sell or retire, it is also crucial to consider the extent of your involvement and work closely with the new owners or management team to ensure a smooth transition and a successful future for the business.
When preparing for this transition, it is crucial to take steps to ensure that your business is properly valued and made more attractive to potential buyers. This can involve hiring outside experts, such as a valuation expert, business appraiser, attorney, or accountant, to help provide an accurate valuation of your business and offer guidance on ways to improve its valuation. Additionally, you may need to review and tidy up your business, remove any assets you wish to keep, and address any pending or potential liability issues to avoid any negative impact on the business’s value. By addressing these issues proactively, you can help ensure that your business is properly valued and that prospective buyers are not deterred by any legal or financial risks.
Selling your business through an installment sale can provide a steady income, but it’s essential to consider the potential risks and impact on the future success of the business. To ensure that the terms of the sale are fair for both parties, you need to consider the payment schedule, interest rates, and other conditions. You should also have a contingency plan in place to address any potential issues that may arise during the sale. Rushing into a sale without proper consideration could negatively impact the sale price of the business, so it’s important to take the time to fully evaluate the decision to sell and to ensure that the terms of the sale are equitable. Additionally, it’s important to consider the emotional and personal factors that may be influencing the decision to sell and take steps to address these before making a final decision.
It is important to review how the sale may impact your overall tax planning goals. Options for reducing the tax impact may include spreading out the taxes using an installment sale, utilizing deductions and credits, or selling shares to employees through an employee stock ownership plan (ESOP) to defer capital gains and diversify proceeds into your portfolio. For C-Corporations, it is especially important to investigate whether the sale of business shares might qualify for the tax treatment of qualified small business stock, but it is important to be aware of the rules and limits that apply. Seeking guidance from a tax professional is essential in choosing the best option for your specific circumstances.
When considering the potential transfer of your business to your heirs, it’s essential to address potential estate tax and illiquidity issues. Gifting non-controlling shares or interests in the business through a family limited partnership (FLP) is a strategy to transfer ownership of a portion of your business to your children while retaining control over the entity. This approach can potentially reduce the value of your estate and avoid or minimize estate taxes, especially when using valuation discounts. Additionally, setting aside additional funds, such as through a life insurance policy, can address estate illiquidity concerns. Your heirs may also be able to elect Section 6166 installment payments for any estate taxes owed, which can spread out the tax burden over a longer period of time. It’s crucial to consult with an estate planning professional to determine the best approach for your situation.
State laws vary considerably and can have a significant effect on the sale or transfer of business ownership. For instance, some states have specific rules governing the sale of a business’s assets or stock, while others have unique tax requirements that must be considered during the sale. Understanding the various state-specific issues that could arise will help you better plan for a smooth and successful sale or transfer of ownership.
Business owners who take the time to address each of these areas of concern will be better equipped to ensure a successful outcome and a bright future for their enterprise. Whether you plan to sell your business or pass it down to future generations, thorough planning is essential for a smooth transition of ownership and continued success. Download our checklist below to see where you stand in addressing all of the issues we discussed.
ACKNOWLEDGMENT: The information in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. Integrated Financial Partners, doing business as konvergent wealth partners, does not provide legal/tax advice or services. Please consult your legal/tax advisor regarding your specific situation.