If the classic American dream is to be your own boss with your own business, the American fantasy is that your child will carry on your legacy and continue the business that bears your name for decades into the future. Even if your child works in the business and has been groomed for an eventual takeover, there are still many personal financial planning issues that need your attention before you can hand over the reins.
First, you must consider your transition timeline. Even if your child works in the business, a full ownership transition could take two to three years to complete. It could be even longer depending on your ultimate goals for your retirement. The earlier you begin planning for your exit, the more you may benefit from whatever deal you decide upon. Business sales are rarely cash up front, so the sale may take several years to complete. You don’t want to end up in a situation where your health is declining, and you need the money from the sale of your business because you are unable to work.
Business owners often have both their current livelihood and their future livelihood tied up in their business. Part of exit planning may also include diversifying some of your personal assets out of your business. This is particularly advantageous for business owners who intend to keep the business in the family because you may sell your interest at a discount to your heirs.
One of the first steps for any business ownership transition is to obtain a business valuation, which includes an in-depth process that estimates the economic value of an owner’s interest in a business. A valuation can help you determine if your business is worth what you think it is, and what the tax implications may be if you sell your interest or opt to gift ownership interest over the course of several years.
At the same time, you need to run a cash flow projection for retirement to determine how far your Social Security benefits and personal retirement savings can take you. Because most business owners have a bulk of their personal wealth tied up in their business, the gap between your retirement cash flow projection and your retirement goals is what you need to derive from the sale of your business.
If you and your financial planner determine you need an immediate lump sum from the sale of your business to fund your retirement, the reality may be that gifting the business to your child may not be the best financial move. Not only would you need money to fund your retirement, but gifting shares could significantly affect your estate plan.
Depending on the success of the business and how quickly you need the money, you may consider an installment sale where your child takes over the business and provides you monthly payments from the business revenues. However, if your child does not have outside assets, your child may still need to obtain bank or investor financing because not all business assets, such as accounts receivable or inventory, are eligible for an installment sale per the IRS.
After working hard to build your business, comprehensive exit planning can help preserve the wealth that comes with that success. If you have questions regarding the sale of your business the experts at Henssler Financial will be glad to help: