4 Ways to Transfer Your Business to Family

The first step before executing your ownership transfer is to understand your options. Here are four methods for transferring ownership of a business to a family member for a smooth transition:

1. Sell Your Business

The most popular way to transfer business ownership, even within a family, is to sell it when you retire. To follow this method, allow your chosen successor to buy your business at fair market value.

Your successor can pay you the full price up-front if they have the capital. Otherwise, they can pay it off over time or combine an up-front payment with regular installments to cover the balance. If necessary, they can finance the acquisition through a loan.

You may need to pay capital gains taxes on the sale’s proceeds, but the buyer can acquire your business without owing tax.

2. Give It as a Gift

Handing your business down as a gift is another popular way to transfer ownership. It could be especially meaningful if you transfer ownership to a family member who has worked in the business for years. Many business owners prefer this approach for the simplicity of passing their business down without taking money in return.

This approach has two financial drawbacks:

• Lack of gain: Since your successor receives the business as a gift, you will not gain financially from the transfer. Ensure you have the financial resources to meet your needs after retirement if you want to give your business as a gift.
• Potential taxes: If your business’s valuation exceeds your gift tax exclusion limit, you may have to file an additional return and pay up to 40% in gift taxes.

3. Use an Employee Stock Ownership Plan

An Employee Stock Ownership Plan (ESOP) is an employee benefit you can set up to transfer shares into an ESOP trust. As your employees retire or meet certain other conditions, they gain full ownership rights over these shares and take your place as owners of the company.

This method is less well-known and more complex to execute than the others. An ESOP also requires some extra administrative work to set up and manage. However, it is a smooth way to transfer ownership if you have multiple family members working for you and want them each to have partial ownership. If you have a single successor in mind, you should opt for a different method, as ESOPs transfer shares to all employees who fulfill their criteria.

Consult a reputable business advisor to learn whether an ESOP is right for your business.

4. Set up a Trust

If you have a specific successor or successors in mind but want to maintain ownership of your business during your lifetime, leaving it to them in a trust could be the ideal solution. A trust allows you to select your beneficiaries and apportion ownership to them as you see fit.

While you can make tax-free contributions to a revocable living trust, the trust may be subject to estate taxes up to 40%, depending on the total value of your estate at your death. If you opt for an irrevocable trust, you lose the right to change it after setting it up. An irrevocable trust prevents estate tax from impacting your successor.

Tips for a Smooth Succession

Choosing the right method is only one aspect of a successful ownership transfer. Whichever approach you choose, these five tips will help set up a seamless transition:

• Prepare early: Transferring ownership involves gathering information, making decisions, and executing plans. Doing a thorough job can take time. The sooner you start planning your ownership transfer, the better your chances of setting up a smooth succession. Starting early gives you time to work with a trusted advisor to optimize your business for your exit.
• Choose your successor: Identify and approach the family member or members you want to take over the business. Look for a successor who understands the business or is willing to learn. Ideally, they should be eager to follow in your footsteps, but sometimes it takes some convincing. Assure them of your confidence in them and commitment to preparing them for ownership.
• Communicate your intentions: Minimize family friction by discussing your succession plans before the transfer occurs. This helps everyone to feel respected and avoids catching them off guard. Each family member should understand how they will and will not benefit from your exit. Give them a chance to share their feelings. Respond with empathy if anyone feels hurt, but assert your duty to act for the success of your business.
• Support your successor: Give your successor all the information and experience they need to steer the ship after you move on. This will involve in-depth mentorship and training while entrusting them with increasing responsibility. If you are transferring your ownership at retirement, consider staying on as a consultant, board member, or employee to provide support while they find their feet as the new owner.
• Optimize your business: While you prepare your successor to receive your business, you should also prepare your business to receive its new owner. Get all your financial statements and tax affairs in order. Bring permits, licenses, and all other areas of legal compliance up to date. Aim to address any operational weaknesses and enhance your repeatable business processes to make the transition seamless.

Plan Your Succession With Fort Pitt Capital

If you are planning to transfer ownership of your business to your family, you want to ensure a favorable financial arrangement for you and your family when you exit. Fort Pitt Capital’s certified financial planners will help you plan and execute this transition so you can enjoy peace of mind.

Our team has extensive experience in individual financial planning and business consultation to support you in every aspect of your succession. Enjoy personalized, transparent financial guidance from a team committed to your success.

Contact Fort Pitt Capital to share your succession goals so we can help you achieve them.

The post How to Transfer Ownership of a Family Business appeared first on Fort Pitt Capital Group.

As we discussed in our 2013 newsletter article entitled Bond Buyers Beware, an unfriendly Fed will make fixed income markets a less hospitable place. In anticipation of these changes, we believe it is time to make the following shifts in our asset allocation portfolios:

• First shift:  We have slightly increased our equity allocation, as we believe that stocks offer greater long-term value than bonds.
• Second shift:  We have trimmed our exposure to agency mortgages (Ginnie Maes), due to the negative impact rising interest rates have on longer-dated mortgages.
• Third shift:  We have added a “core” investment grade bond strategy, to act as an anchor in the portfolio. In the event that the economy overheats, we will rotate more assets into this sector for downside protection.
• Fourth shift:  We have added a third investment strategy to our fixed income category. This new category is an unconstrained opportunistic fixed income manager. This manager has the ability to invest freely in higher yielding sectors, including floating rate notes. Floating rate securities are less sensitive to rising rates. Funding for this strategy is coming from trimming High Yield and World Bonds.

The goal of each shift is to reduce overall portfolio sensitivity to moderate increases in interest rates, while adding yield “cushions” and slightly boosting equity exposure. Please don’t hesitate to call your consultant if you have any questions about these changes.

The post Rebalancing Act: Portfolio Moves to Keep Pace With Rising Interest Rates appeared first on Fort Pitt Capital Group.