Four ways to transfer a family business
Determining the proper transfer technique requires a comprehensive analysis of the business’s balance sheet, cash flow, and the current estate plan.
September 30, 2013
Owners of small businesses have a unique set of estate-planning needs and circumstances. Much has been written over the years about small family businesses being forced to sell or close as the result of the death of the majority owner of the business. Purportedly, the estate taxes due at the time of death are so substantial that the business is forced to liquidate in order to pay them.
The reality is that, in my 30-plus years of advising small business owners, I have never seen this circumstance occur. There are cases, I am sure, where this happens, but the more important issue in my experience is the need for an efficient transfer of the business to the next generation and the minimization of estate taxes.
Determining the financial ability of one generation to transfer a family business to the next generation requires a comprehensive analysis of the transfer’s balance sheet, cash flow, and current estate plan. (It’s important to note that I define a small family business as one with sales of less than $100 million; typically that figure is more in the range of $5 million to $50 million.)
Here are some things to consider when analyzing the various alternatives available for the transfer of a family business:
Ways to transfer businesses
Now let’s look at some techniques used to transfer family businesses. Techniques 1 and 2 below are appropriate when the client prefers to keep it simple and/or the value of the business is more modest.
More complex techniques
Techniques 3 and 4 are more appropriate when the client is not concerned with complexity, the value of the business is more significant, and estate tax savings are of great concern to the client. Because these two methods will require more sophisticated planning involving tax professionals (CPA and estate attorney), the cost benefit must be analyzed.
As you can see, there are several ways the small business owner can solve his or her family business transfer concerns. The key is to assemble the proper advisory team and develop a plan that ensures the most efficient transfer possible.
Michael A. Tedone CPA/PFS, is a partner with Connecticut Wealth Management LLC. He has more than 30 years of professional experience in the areas of wealth management and estate planning.
The AICPA’s PFP Section provides information, tools, advocacy, and guidance to CPAs who specialize in providing tax, retirement, estate, risk management, and investment advice to individuals and their closely held entities. All AICPA members are eligible to join the PFP Section. CPAs who want to demonstrate their expertise in this subject matter can apply to become a CPA/PFS credential holder.