How to Transfer Business Ownership to Family
Did you know that there are more than 33 million small businesses in the United States? If you have a business, you might be wondering how you can pass it on to your family members. Many people think that it’s an easy thing to transfer business ownership.
But this is not always true. Transferring a family business can be tricky if you don’t know what the process entails. This is why you need to do plenty of research before you make this decision.
Where should you start with this process? What is the best option for you and your family regarding a business transition? Keep reading and learn more about how it works below.
Sell or Gift the Stock Over Time
Business ownership is determined by stock ownership. Suppose your business has 100 stocks. The business owner will initially own all or most of them.
This is what gives them most of the power over the company. If you own 50 of those stocks, you own half of the business. Once you no longer own any stocks, you won’t own the business.
This is why selling or gifting stocks to your family is a good way to transfer ownership to them. Selling a business is not as necessary as selling your business stocks. There is no need to do this all at once.
You can give your family members a few stocks here and there over the years. This allows for a slow and smooth business transition. You can determine how you want to give the business stocks to your family.
Do you want them to buy the stocks, or would you rather gift the stocks to them for free?
The Details
This process may need some financial planning to pull off successfully. This is because there is a lot to consider regarding the transfer of business ownership.
Things will change once your family owns more of the business than you do. Once your family owns the majority of the stocks, they’ll have more power to make decisions concerning the business. If you don’t like those decisions, there’s not much you can do.
This is because you no longer own the majority of the business. While you can still make some decisions with any remaining stocks you may have, those decisions may be very minor. Once you transfer all of the business ownership to your family, you’ll no longer have the freedom to make decisions regarding the business.
Sell the Whole Business via an Installment Sale
An installment sale is a good idea if you are worried about losing a lot of the sale money to taxes. Suppose your business is worth a million dollars. Selling this business at once and having your family pay in a lump sum is simple, right?
Not necessarily. Doing this will require you to pay huge amounts of taxes on the money that you received. You might have to pay hundreds of thousands of dollars in taxes. But you can avoid this with an installment sale.
This sale requires the buyer to pay you, the seller, in installments. You still have the opportunity to sell your business at one time. But you will not receive all the money for the sale at one time.
You may receive a small percentage of the payment for the year, followed by another small percentage next year, and so on. You can also get several payments within one year if you want to get the process done faster.
But most people prefer to spread the process out so they aren’t overwhelmed by taxes.
What You Need to Know
Once you sell the business, you might prefer to receive 10% of the payment that year. You may receive another 10% next year.
You can also do this if you don’t want to sell the business all at once. You can instead sell percentages of it every year. Your business ownership will slowly trickle away to your family.
The main problem with this is that it takes a while. If you want to part with your business right away, you might have to consider another option. Also, there is no telling if the value of your business will decrease over the years.
This could leave you at a disadvantage if you don’t think ahead.
Consider Stock Redemption
This option requires the company to buy out the current shareholders in favor of increasing the ownership of other shareholders. The money you gain from this sale will be subjected to capital gains taxes. This may sound like a bad thing, but it could be beneficial.
This is because capital gains tax rates are lower than other tax rates your payments could have been subjected to. The problem with this method is that it won’t work if you are the only shareholder. There has to be more than one shareholder for the company to buy out the others and transfer ownership.
This process can also be complicated if you’ve never done it before. This is why it’s a good idea to have someone who can help you, like a broker. Having a professional on your side will make the process much smoother and easier to understand.
How to Transfer Business Ownership
Learning how to transfer business ownership can be a daunting task if you don’t know anything about it.
Stock redemption is a good option, as is an installment sale. You can also try selling or gifting the business’s stocks over time.
A business broker can make this process much easier. Are you ready to get started? Check out our services and see how we can help.
Read MoreHow Leases Factor into Business Sales
If you’re planning to buy or sell a business that involves a lease, this can lead to an extra level of complication. Oftentimes, such as in the case of a restaurant or retail establishment, the location is essential to the success of the business itself. That means that if you’re buying a business, you’ll have to make sure any lease issues you might encounter are straightened out before you sign on the bottom line. But even if you’re buying a business that isn’t location-sensitive, you’ll still want to iron out all the details about your lease ahead of time.
Negotiating a Lease
If you’re buying a business with a lease, one word of advice is to have a clear way out of the lease in the near future. After all, with a business so new to you, you might make changes in the short term. The general recommendation is to negotiate a one-year lease that has an option for a longer period of time.
In many instances, the buyer of a business with a lease will find that he or she doesn’t have too much leverage. However, buyers typically find that there is more opportunity to negotiate if the lease is close to its expiration date or the business is performing poorly.
Future Contingencies
When you’re first negotiating your lease, you may also want to think about the big picture. For example, if your business is in a mall, you might want to confirm that no future tenants will be allowed to move in and be your competition. Along similar lines, some businesses located in shopping centers seek to outline a reduction of rent if the shopping center’s anchor store were to close, as that could negatively impact the business.
When you negotiate your lease, you’ll also want to think about the far-off future when you’d like to sell the business. You will want to make sure that the landlord allows for lease transfers, and you’ll want to confirm the requirements necessary for a potential transfer.
Another thing to consider is what if the property did become available in the future? If this were to occur, you might want to negotiate the option to potentially buy the property. Otherwise, you might find yourself in an unfortunate situation where you are forced to move your establishment.
Basics for Your Lease
A lease should always outline your responsibilities as well as those of your landlord. Make sure you carefully review the lease with your attorney. You’ll want to be sure that you thoroughly understand all the terms. It should cover various issues that might arise in the future and how they will be handled. For example, if there were a fire or disaster, who would pay to rebuild the building? How are the taxes, fees and maintenance handled for the property?
Unfortunately, in some situations a landlord’s lack of flexibility with a lease has even sunk a deal. If the landlord is unwilling to agree to a new lease or offer concessions to an ongoing one, buyers often will find the situation too restrictive. In certain instances, however, sellers have been willing to offer concessions to buyers to counterbalance issues with a lease.
The fate of your business could literally depend on your lease. If you set things up correctly in the beginning, it will most likely benefit you tremendously in the long run.
Copyright: Business Brokerage Press, Inc.
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