Selling Your Small Business? Here Are 5 Advantages of Passing It Down to Family Having a succession plan for your small business is just as important as your plan to kickstart it — so who do you want to see running it when you're gone? Here's why you should consider selling it to a family member, and how to navigate the generational handoff if you do.
- Only 20-30% of businesses that go to market successfully sell, leaving a gap that family succession could fill.
- Selling to family can preserve the founder's legacy and offer financial benefits like tax exemptions.
- A family handover may result in a smoother transition with greater flexibility and security for all stakeholders.
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Recent studies show that 51% of the current American business market is owned by Baby Boomers, who are set to retire over the next 10 years. However, according to the Exit Planning Institute, the success rate for businesses that go to market and successfully sell is only 20% to 30%. These businesses often begin as a labor of love, with a founder's vision and hard work driving their success. However, there comes a time in every entrepreneur's life when they contemplate an exit strategy for their SMB. Unfortunately, only one-third of small business owners actually have a succession plan in place.
While there are various factors to consider in this process, one often underestimated but critical aspect is the advantages of selling your small business to your family. Engaging in open and honest conversations with your loved ones presents a valuable opportunity to discuss the future direction of your business. Consider these five benefits of selling your small business to a member of your family as you think about your company's next phase.
- Preservation of your legacy: Handing over your business to a family member helps ensure the continuation of your established legacy. It helps assure that the values and visions you've cultivated over the years are upheld, and that everything you've built doesn't disappear when you move onto your next chapter.
- Tax and financial advantages: Succession planning within your family often leads to significant tax savings and financial benefits. There are several tax benefits available, including the gift tax exemption, which means you can gift a certain amount annually per person ($18,000 per person, $36,000 per couple, as of 2024). You can gift shares of your business to reduce the size of your taxable estate. You may also consider taking advantage of income-splitting, which can lower your family's income taxes if you transfer your business interest to your children. Apart from an annual gift tax exemption, there is a lifetime federal gift tax exemption that can be utilized when transferring a business. Keep in mind that this exemption can change annually, but in 2024 the lifetime exclusion is $13.61 million.
- Smooth(er) transition: With a family member already familiar with your work style, personality and the business, this often makes for a smoother transition. This familiarity reduces the learning curve and makes for a more seamless transition. It can also be common to structure the deal so you can retain some level of involvement or ownership, providing a safety net and easing some stress around the process. This approach allows you to monitor the business' progress and assist as needed, even after officially stepping down.
- Greater flexibility: When you pass your business to a family member, you often have more flexibility when it comes to timeline, payment arrangements and roles during the transition, as opposed to a more structured third-party sale. This permits you to gradually phase out of your role, allowing the family member to take on increasing responsibilities over time.
- Sense of security for customers and employees: Chances are that your customers and employees trust you to act in their best interest. By selling to a family member, you are passing the baton to someone you trust — and maybe even someone they've had a chance to meet or interact with — which may provide a sense of security to your employees and customers. This may lead to higher employee retention and improved customer satisfaction.
The role of family in your exit is significant and multifaceted. Navigating family dynamics can often be complex, and selling your business to family can also come with its fair share of challenges. It's critical to address these challenges head-on and have a clear plan for resolution. Consider involving legal and financial advisors to help structure the deal and create a formal agreement that outlines the roles and responsibilities of family members in the business. Establishing clear boundaries and expectations can prevent misunderstandings and disputes down the road. Identifying your successor and completing a successful transition is one of the most critical things you will do as a business owner, and making the right decision could preserve your business for years to come.