If you are retiring and own a business, you have various options. Many people choose to sell the business, but you might also choose to set up a succession plan to pass the business on to somebody else. Whether a member of the family or another person you have been grooming to take over.

Which strategy is right for you? Selling your business or setting up a succession plan is not an easy choice. You need to think through all of the implications to choose the right fit for you, your business, or anyone who might take your business over.

Pros of Selling Your Business

Selling your business can finance your retirement by providing a handy nest egg. It can take a lot of stress from your family. They will know you can afford what you need to live well in retirement. It can also be a weight off of your mind.

You won’t have to worry about the business anymore and can move on with the next chapter in your life.

Cons of Selling Your Business

The biggest downside of selling your business outright is that you won’t have any control over what might happen with it in the future. The new owners can do what they like, including selling out to a major corporation, firing everyone, cutting pay, or destroying your business’ hard-earned reputation.

If you aren’t happy with selling, then it’s time to develop a succession plan.

Options for a Succession Plan

Many people want to pass their business on to their children. However, your children might not be interested in running a business, or might already have business interests that suit their tastes. Passing the business on to a family member who does want it, such as a nephew, niece, or cousin is another option.

Here are some options you might want to consider:

Management Buyout

You have worked hard to build a fantastic business with a good reputation and strong independence. An option to make sure it continues that way is to set up a management buyout. This means you sell the business to the people you have hired to run it for you. Managers will purchase stock and the company will buy the rest. When done properly, a management buyout keeps the business running exactly how it was. Customers and employees will see few changes.

You can also sell part of the business to the employee stock option plan (ESOP), which gives retirement benefits to your employees, and combines well with a management buyout.

Transferring With a Buy-Sell Agreement

This is done to transfer the business to an appointed individual, family or not, at a set price, with a legally binding contract. This is an outright sale, but you can add some conditions and carefully choose the person you are selling to. Also, this is a good option if you want to sell the business to a specific, chosen successor.

Private Annuity

A private annuity means you transfer your portion to buyers or family members, who pay you for the rest of your life. This removes the business as an asset from your estate, and can thus significantly reduce gift or estate taxes. Talk to your tax advisor to make sure you set this up right.

Things to Consider

The first thing to consider is whether anyone in your family is interested in the business. Ask, don’t assume. Your daughter might sell her business to take over the family venture. On the other hand, a family member may have worked in the business their entire life, but have no interest in being in charge.

There are other things you should take into account:

1. The value of your business. Knowing what your business is worth can help you make decisions. For example, if your business has dipped below the lifetime gift limit, but you are confident it will recover, giving it to a family member can be an option.
2. Do you have a successor? Is it a family member? Is it a long-time, valued employee? Can you transfer ownership gradually, essentially partnering with them before you step back? This can reduce the period of vulnerability businesses tend to experience when transferred.
3. Do you want to continue to “keep a hand in?” If this is the case, you may want to avoid outright sales to a stranger so you can continue to keep an eye on things. It’s best to sell to somebody you trust or do a management buy-out.

Preparing for Unplanned Succession

Anything can happen. Even if you’re young and healthy, it’s a good idea to put a succession plan in place. Many healthy businesses have closed because the owner died without making a plan for who was going to take over. That plan might be to instruct your estate to sell. It might be to put the business under the control of an employee and place it in trust while your heirs sort things out.

Keep a finger on the pulse of what your family thinks about the business so you can make proper provision. Bear in mind that estate taxes can be hard to avoid if you die suddenly. Slowly transferring ownership so your remaining share stays below the limit can be a useful tactic, but make sure you talk to your lawyer and tax advisor about it.

If you have a business, you must decide whether to sell it when you retire (or die) or pass it on through a succession plan. This can be complicated, and you should get professional help. At Brenden Kelley Law, we represent small businesses and their owners and can help you design a succession plan that makes your business survive and thrive once you step back. Contact us to schedule an appointment and find out how we can help you.