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Planning for your exit from the family business

On Behalf of | Mar 17, 2023 | Business and Commercial Litigation

Your family business has been a source of pride for many generations before you, and you have carried on its traditions while also expanding it into the future. As satisfied as you are with the contributions you have made as the current owner of the enterprise, you do know that one day you would like to retire. This is where business succession planning becomes important.

What is a business succession plan?

A business succession plan is a plan for the future ownership of the business once you no longer play an active role in it. It is a written plan where you outline who will continue to own and operate the business when you exit the business either due to retirement, incapacitation or death.

There are a variety of ways a business succession plan can accomplish the goal of transferring ownership of the enterprise.

Gifting the business

Gifting, as the term implies, means your interest in the business is given outright to the next owner, rather than sold. This is a popular option when a business actively involves multiple generations and the senior owner wishes to hand the business down to a relative, to keep it in the family.

Gifting is generally only an option if there is no need for sales profits due to sufficient business and personal wealth. Note that there may be gift taxes owed on the transfer of a business through gifting.

Placing ownership in a grantor retained annuity trust (GRAT)

A GRAT is a type of trust that allows individuals to transfer wealth, such as a business, to the person of their choosing while avoiding the federal gift tax. The senior owner places their share of the business in the trust, and then receives a regular annuity payment out of trust assets. Then, when the senior owner passes away, the assets in the trust are passed on to the trust beneficiaries.

Transferring through a buy-sell agreement

A buy-sell agreement is a legal contract where one party agrees to sell their ownership interest to another party when a certain event occurs, such as retirement, incapacitation or death. The buy-sell agreement will detail how much other interest holders will be paid for their share of the business.

These are only some options available for business succession. Business succession, especially with a family business, can be very personal. It is important to plan well ahead of your anticipated departure, so that all interest holders know what to expect, and so your business is prepared if the unexpected happens.