Transfer of Ownership to a Business-Active Child
All business owners will need to answer these three questions at some point:
What is my desired date of departure or exit?
How much $$$$ will I need for my goals and for life after the business?
To whom will I sell my business?
For many business owners, the preferred answer to the third question is a sale or transfer to my child, or children, that are active in the business. In such cases, the owner would have legacy or values-based goals that would be realized with a transfer of the business to their children. And, it’s not uncommon for these goals to be as important to the owner as their financial goals.
First steps in deciding if this is your best option for exit would include the following:
Does my child want to be an owner? It can be surprising for an owner to discover that their business-active child has no desire to own “the family business”.
Is my child capable or have the temperament for business ownership? Owning a business is quite different than having even a significant leadership role in the business. And, as parents, we can be very generous in the evaluation of our children so it is wise to obtain an expert assessment.
Should my child pay for the business interest? Would I want them to pay for all or some of the business? Do I want them to experience the financial challenges that often occur in the early years of owning a business?
Is minimizing the overall estate, gift, and income tax burden important to me?
Am I concerned about the “fair distribution” of my entire estate to all my children including those not active in the business?
How soon do I want to transfer meaningful ownership interest to my business-active child?
Quantify available assets and resources to accomplish financial goals:
Estimate the value of the business.
Project future net cash flow of business available for planning.
Value and income from non-business assets.
Calculate any gap between the current value and what will be needed post-exit.
Following are the most common methods for transferring a business interest to a business-active child:
Sale of stock
Gift of stock
Bonus of stock
Each of these methods has advantages and disadvantages, but a good place to start is having your Wealth and Tax Advisors conduct an analysis of the tax consequences of each scenario for your specific situation.