Money Sense: Smart Ways to Transfer the Family Business

These tips from Bank of America can help you create a meaningful legacy while generating a healthy retirement income.

For most business owners, retirement is a subject they welcome or the last thing they want to consider. If you are looking forward to that day, you have probably already started preparing to move on from your business. Indeed, selling your business — or gifting it to the next generation — may be central to your retirement plan.

Assuming your company has the systems to operate without your direct participation, your first step is to assess its worth accurately. A professional valuation and tax expert can help you look past your emotional attachment to the company and gauge its value.

Prior to making any move, consider your income needs in retirement. Keep in mind that merely matching your current salary may not be enough if the business has also been paying for things like health insurance, car leases, club memberships, and tax preparation—expenses you may have to start covering. Conversation with your financial advisor is critical to making the right decision.

With all that information, consider these three options for transferring or selling the business to family members, friends, longtime employees, or another interested buyer.

Transfer the business as a gift. Say you want to pass the business down to a child or grandchild. The lifetime federal gift tax exemption gives business owners considerable latitude to transfer part or all of the company as a gift. The exemption can change annually.

You may owe federal gift taxes on amounts exceeding the exemption. Still, once the business is out of your hands, it is no longer part of your estate, and the company’s future growth will not subject your estate to additional transfer taxes. You may also be able to supplement your retirement income by continuing to work for the new owners.

Assist the buyer with financing. What if you want to sell the business to a family member or an employee who does not have enough assets to complete the transaction? To get around that, you could lend the buyer the money for the sale in exchange for a promissory note, which allows the buyer to pay you back directly. You and the buyer determine what terms work for all parties involved. The buyer benefits from the opportunity to own a business, and you receive a steady stream of income from the principal and interest that the buyer pays for an agreed-upon period.

Even after 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 with day-to-day operations in a reduced but vital role, such as serving long-time clients who are used to working with you.

Execute a partial sale. If you do not want to cut ties with your business entirely, another option is to sell part of the company while retaining a portion of business assets and income. You will want to indicate the arrangement with the new majority owners in the formal transfer or sale agreement. That also should be the case if you are turning the business over or selling it to other family members. You may pay capital gains tax on any profit from the sale, but you may also get a steady income from renting or leasing 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. And you can have the satisfaction of knowing that your vision has the potential to live on for generations to come.

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making financial decisions.

This material does not consider your investment objectives, financial situations, or needs. It is not intended as a recommendation, offer, or solicitation to purchase or sell any security, financial instrument, or strategy. Before acting on any information in this material, you should consider whether it suits your particular circumstances and, if necessary, seek professional advice. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.

Merrill Lynch, Pierce, Fenner & Smith Incorporated (also referred to as “MLPF&S” or “Merrill”) makes available certain investment products sponsored, managed, distributed or provided by companies that are affiliates of Bank of America Corporation (“BofA Corp.”). MLPF&S is a registered broker-dealer, registered investment adviser, Member SIPC, and a wholly owned subsidiary of BofA Corp.

For more information, contact Merrill Wealth Advisor Lorri Jackson of the Henderson office at (702)547-2913 or Lorri_Jackson@ml.com

This article originally appeared in the Summer 2024 issue of CHOICES Magazine