Smart Ways To Transfer The Family Business with Bank of America

These three strategies can help you create a meaningful legacy while generating a healthy retirement income.

FOR MOST BUSINESS OWNERS, retirement is either a topic they embrace or the last thing they want to think about. If you're anticipating that day, you may have already begun preparing to step away from your business. “For many business owners, their retirement plan is their business,” says Judith Anderson, senior vice president of Retirement Personal & Wealth Solutions at Bank of America.

“For many business owners, their retirement plan is their business.” 

— Judith Anderson, Senior Vice President, Retirement Personal & Wealth Solutions, Bank of America

Indeed, selling your business—or passing it on to the next generation—at retirement can enhance your income, provided your company has the necessary systems to function without your direct involvement. “If you determine that the company can thrive without you at the helm, your next step is to obtain an accurate valuation of its worth,” advises Joe Astrachan, emeritus professor of management at Kennesaw State University in Georgia.

A professional valuation and tax expert can assist you in overcoming your emotional ties to the business, assess its true value, and arrive at a realistic figure. With that information, consider these three options for transferring or selling the business to family members, friends, longtime employees, or other interested buyers. Each option has its benefits.

Consider Transferring The Business As A Gift:

If you're looking to pass your business down to a child or grandchild, the lifetime federal gift tax exemption allows you to transfer part or all of the company as a gift. Keep in mind that this exemption can change each year, so it's a good idea to check our Annual Limits Guide for the latest information.

Your advantage: While you may need to pay federal gift taxes on any amount that exceeds the exemption, transferring the business means it won't be part of your estate anymore. This also means that any future growth of the company won't lead to additional transfer taxes on your estate. Plus, you might be able to enhance your retirement income by continuing to work for the business and receiving a salary from the new owners.

Provide Financing Assistance To The Buyer:

If you're considering selling your business to a family member or a trusted employee who lacks sufficient funds, you have options. One approach is to sell the business to heirs or an outside buyer while lending them the money for the purchase. This can be done through a promissory note, allowing the buyer to repay you directly.

Your advantage: You and the buyer can agree on terms that suit everyone involved. The buyer gains the chance to own a business, while you benefit from a consistent income stream from the principal and interest payments over an agreed period.

Even after receiving a lump sum from the sale, many former business owners find ways to stay engaged and earn income by joining the board of directors or offering consulting services. You might also continue to assist with daily operations in a reduced but essential role, such as working with long-time clients who are accustomed to your presence.

Executive A Partial Sale: 

You might find that completely severing ties with your business isn't the best option for you. Instead, consider selling a portion of the company while still keeping some business assets and income.

Matching your current salary in retirement might not suffice, especially if the business has been covering expenses like health insurance, car leases, club memberships, and tax preparation—costs you'll need to manage on your own moving forward. Astrachan suggests that these arrangements should be clearly outlined in the formal transfer or sale agreement with the new majority owners. This is equally important if you're passing the business on to family members.

Your advantage: While you may incur capital gains tax on any profits from the sale, you could also benefit from a consistent income through rent or lease agreements for office space or other assets.

Before You Decide:

Take a moment to evaluate your income needs for retirement before making any decisions. Is the value of the business sufficient to support your retirement, in addition to any other savings and investments you may have? Remember, simply matching your current salary in retirement may not be adequate if the business has been covering various expenses—like health insurance, car leases, club memberships, and tax preparation—that you'll now need to handle yourself. “Engaging in a thorough discussion with your financial advisor about your retirement needs is crucial for making an informed choice,” Anderson emphasizes.

Whatever path you choose, ensuring a smooth transition can serve as a remarkable legacy for the years of dedication and hard work you've invested in your business. It can also provide you with the income needed to support your next chapter or, in some cases, allow you to remain involved in a business you cherish. Plus, you can take pride in knowing that your vision has the potential to endure for generations.