Passing the torch: Considerations for a successful generational business transfer

According to ITR Economics, an estimated 12 million out of 77 million U.S. baby boomers are privately held business owners. As ownership of businesses for those born between 1946-1964 is passed down to the next generation, an estimated $10 trillion worth of business assets is expected to be transferred in the coming years.

Whether planning as the predecessor or the next generation, having the right processes — and partners — in place will set up the transition for success.

Develop a strategic plan

A successful generational business transfer takes plenty of time and careful planning. Starting the planning process well in advance of the change in leadership can give a family time to define what the future of the company looks like.

Start by determining what technology, human resources and capital requirements the company needs to be successful in the short and long term. Be sure the current owner’s and future owner’s visions are communicated. If both visions are not in alignment, have conversations on what the future for the business may look like. Balancing long-standing business practices with new changes can result in a sustainable and successful business.

Start integrating the future business leader into day-to day business operations before transitioning. Establishing a clear transfer of duties and mapping out a timeline can help with a smooth hand-off process.

Get finances in order

The importance of preparing business finances well in advance of a generational transfer can’t be overstated. The current business owner may consider setting up a grantor retained annuity trust for their successor. An estate planning attorney can assist in setup of this trust, which earns annual income for the beneficiary receiving the funds with minimal or no gift tax liability upon expiration. Grantor retained annuity trusts usually have a duration of two to three years with payments calculated using a monthly interest rate the IRS sets.

Family members may consider transferring their business to the successor through an installment sale. The IRS defines an installment sale as a sale of property where at least one payment is received after the tax year in which the sale occurs. For example, the current owner could obtain 15 percent of the purchase price per year for 10 years, transferring shares to the new owner upon payment.

An installment sale could result in a tax benefit for the seller as the overall tax liability is spread out over time, rather than all at once during the business transfer.

Once settled on the preferred financial path to conduct the transfer, be sure to evaluate the company’s cash flow and other financial projections. Review all assets and estate planning documents to understand the financial implications of the business transfer. List the projected expenses, liabilities and potential taxes owed, and then identify sources of liquidity to pay them. No matter the route, a family should continue the conversation surrounding transferring funds to ensure all parties are aware and educated when the time comes to hand off the ownership baton.

Work with financial partners

If not already in place, look to assemble a team of trusted advisors including a CPA, attorney, banker and wealth advisor. This team of professionals can work through the financial aspects of any generational business transfer. A business banker can explain the mechanics of how some of the financing and transfer of ownership might work in different situations. This can include tax, trust and estate matters. A banker can provide guidance on the most financially beneficial path forward for a family business.

Passing on a business is a major family event and can involve potentially difficult conversations and decisions. While it may be a complex process, through proper planning, it also has the potential to be an opportunity to achieve new growth and elevate long-standing family business goals.

Jacob Logan is the senior vice president and relationship manager for the Las Vegas Enterprise Bank &Trust office.

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