Money Sense: Smart Ways to Transfer the Family Business

Merrill Lynch Wealth Management suggests three ways to create a meaningful legacy, while generating a healthy retirement income for yourself.

For most business owners, retirement is either a subject they welcome, or the last thing they want to think about. If you are looking forward to that day, you have probably already started preparing to move on from your business. If not, bear in mind that there are very real advantages to beginning to prepare now. Doing so can increase the odds of, and choices for, making a proactive tax-efficient transfer and helping you set your company’s path over the course of time, says Mike Griffin, director of Business Retirement Solutions at Bank of America Merrill Lynch.

Taking the time to plot your company’s future also puts you in a better position to ensure that proceeds from your business have the greatest potential to provide you with strong, steady retirement income.

Ask yourself these questions as you begin to create a transfer plan.

 What is Your Company’s Real Value?

Many privately held companies reflect the people who’ve built them. In some cases, the owner is the business. As you assess your company, Griffin suggests beginning with a simple test: “Ask yourself, ‘If I left the company in the hands of my employees for three months, would it be worth roughly as much when I came back?’” If the answer is no, your heirs are likely to face significant obstacles keeping the business going, and the price an outsider may be willing to pay may be much lower as a result.

But if you conclude that the company is viable without you there to run it, your next step is to get an accurate valuation of its worth, says Joe Astrachan, Eminent Scholar Chair of Family Business at Kennesaw State University in Georgia. That is essential not just for a sale but also in consideration of taxes and to help you gauge how much retirement income you might expect from a transfer. A professional valuation and tax expert can help you look past your emotional attachment to the company and arrive at a realistic number.

What Are Your Retirement Income Needs?

If you are planning on selling your business, Griffin advises that before you start any negotiating, you should determine how much income you will need to support your lifestyle and retirement goals, and what portion of that will come from the sale of the business—as compared with your investments and other assets. Keep in mind, too, that merely matching your current salary in retirement may not be enough if the business has also been paying for things like health insurance, car leases, club memberships and tax preparation—expenses that you will have to start covering yourself.

Even after receiving a lump sum from a sale, many former business owners can stay involved and earn income by serving on the board of directors or consulting. You might even continue helping out in day-to-day operations in a reduced but vital role such as serving clients who are used to working with you.

If you own an office building or other physical assets, another option for generating retirement income is to retain those assets and lease or rent them back to the business. Astrachan recommends that such arrangements be agreed upon beforehand and spelled out clearly in the formal transfer or sale agreement with the new majority owners.

How Can You Structure the Transfer?

If you plan to transfer the business to family members or longtime employees, rather than sell to an outside buyer, weigh these options. Each has its own advantages.

Consider transferring the business as a gift, and drawing an income from the new owners. In late 2017, Congress increased the lifetime gift exemption to $10 million for an individual and $20 million for married couples—that’s adjusted annually for inflation. (It’s worth $11.8 million for individuals and $22.36 million for married couples in 2018.) That gives business owners considerable latitude to transfer a part or all of the company as a gift. You may owe taxes on amounts exceeding the exemption, but once the business is out of your hands, it’s no longer part of your estate, and future growth of the company won’t subject your estate to additional taxes.

You might sell the business by providing financing assistance. You may choose to sell the business to heirs—or an outside buyer—by lending them the money through a note sale, which allows the buyer to pay you back directly. The advantage to you is a steady stream of income from the principal and interest from the loan for an agreed-upon period.

You could execute a partial sale while retaining a portion of business assets and income. You will pay capital gains on any profit from the sale, but you will also get a steady income from rent or lease of office space or other assets.

Whatever choice you make, a smooth transition can be the crowning legacy of the years of care and effort you have poured into your business. It can also leave you with income to support your life’s next act, or in some situations keep you involved in a business you love. And you can have the satisfaction of knowing that your vision has the potential to live on for generations to come.

For more information, contact Merrill Financial Advisors, Ryan Coakley & Thomas Anderson in the Middletown, NY office at 845.695.0164 or email |

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