For a business owner looking to retire, says Bob Stowe, a successful business transition really comes down to this: finding the right people to take over.
The best people, says Stowe, a financial advisor based in Plano, Texas, are other members of the owners’ family, since “an intra-family succession allows the owner to derive the most value from the business.”
When other family members take over, the owner can usually remain in the business hierarchy for an extended period, still drawing a salary as an advisor—but without any day-to-day responsibilities. Better still, his salary is a tax write-off for the company.
When there’s no one in the owner’s family to take over, the owner must find an outside buyer and hire a professional evaluator to help get the best price. Typically, Stowe says, the other party will want the original owner to stay on just long enough for the new management to establish their credibility with the client base, “and then they want you gone.”
Steve Mathieu, a Manchester, N.H.-based financial and estate planner, agrees that a succession within the family is the most beneficial arrangement, but this can be emotionally charged. “Failing to plan the succession well can divide the family,” he says.
One common and potentially contentious issue is how to divide the estate fairly among two or more children, when only one of them will be taking over the business. One of the easiest ways to do this, Mathieu says, is to use life insurance to transfer an equal amount of assets to all concerned without breaking up or impairing the business. The owner can pass on wealth to one child by selling him the business below market value, and then equalize the inheritance for his other offspring using life insurance.
To help the owner avoid gift, estate and income taxes on the sale of the business, Mathieu says advisors can make use of family limited partnerships (LLCs) and gifting strategies. This is made easier by the new $5 million estate and gift tax exemption.
If the owner has to sell to an outside party, “It’s a whole different ball game,” Mathieu says. The questions then become, “What’s the highest price I can get, and what're the fewest taxes I can pay?”
One approach is making use of employee stock ownership plans to extract money from the business, or to sell it to the employees. Another is to sell out to a major corporation via a stock swap—which allows the business owner to avoid recognizing any capital gains at the outset of the sale to and to defer any taxes, although eventually, when the corporate stock received in the swap is sold off, the former owner would have to recognize the capital gain and pay the tax.

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