May 2018
By Gary Pittsford, CFP®
President and CEO, Castle Wealth Advisors, LLC

Many business owners today are thinking about their retirement options and which plan is best for them, their family and their business.

There are important aspects in picking the best succession plan for your company especially if the buyers are going to be children, in-laws, or key managers. All business owners want to maintain the net worth that they have accumulated over the years but they also want the succession plan to work.

Over the past 45 years we have learned that about 25% to 30% of the current owners will sell to one or more family members. About 30% to 40% will sell to key managers, and another 15% to 20% will sell to another store owner in their industry.

Selling to Family and/or Key Managers

If you are selling the business to a family member or key manager you have a lot of options pertaining to future retirement income, reducing income taxes on the sale, protecting your net worth, and protecting the company and all of your employees.

A good starting point is to think about which one or two individuals are going to take over control of the company. If it is one person then they will obviously have more than 51% at some point in the future. If it is two individuals then we need to decide if they are going to be 50%/50% equal owners or will one person have 51% of the voting stock and the second person have 49%? Also, the ownership could be 60%/40% or 70%/30%.

Another important decision to make at the beginning of this process pertains to owning the property. If you own the real estate that the company is located in then you have more options to work with. Having a long term lease and receiving rent for the next 10 to 15 years is always one good source of retirement income. If you own the real estate then perhaps that property will remain in your name or trust and continue to be part of your family’s net worth.

Many owners are not quite sure which key manager or which child should take over. Because of that uncertainty we sometimes recommend that the current owner let the potential buyers take more control over the next one to three years. Let them make some of the big decisions and let them work with the employees, the vendors, and attend the national conventions. Let’s see how the children and/or key managers do over the next one to three years and then we can make a final decision about who will control the company in the future.

Selling to Another Business Owner

If selling your company to another business owner in your industry is your best option, then there are several important ideas to consider.

First, the buyer will probably pay all cash in one or two years. Also, the purchase price may be higher than selling to your children. Typically, in this situation, the buyer will have economies of scale and the ability to reduce expenses by purchasing your company.

Months before you agree to sell the company, review all of your selling options with your advisory team which would normally be a business attorney, your outside CPA, and a financial advisor. All of these individuals should have lots of experience in selling hundreds of privately-held family businesses.

You need to review with your advisory team, how to reduce income taxes on this sale. You need to discuss all of the legal documents that are involved in selling a business. Once the sale is made how much cash will you have left after paying taxes? If those funds are invested, how much income will you receive annually? At this point in time, understanding all of your options for selling your company are very important.

Retirement Income Security

For many business owners it is a very tough decision to give up voting control of their company and possibly reduce their income substantially.

This is where tax planning and structuring the sale becomes very important. The owner wants to minimize as much tax as possible, but a business transaction with the next generation or key employees must be designed to work. Sometimes if the current owner gets all of the tax breaks and the children or key employees get none, then they may not be able to make all of the payments. At the same time it is not fair for the children or key employees to get all of the tax breaks and the current owner is forced to pay higher taxes. Somewhere in the middle is where we must land so that the seller gets some of the tax breaks and the buyers can maintain a profitable company. Since these buyers do not have a large down payment, there is normally a promissory note involved that is paid for over several years. The collateral for this promissory note must be carefully considered.

Often the seller will continue to be on the board of directors or have a consulting agreement and be paid for those services as part of the transaction.

When selling to children or key employees, combining the best two or three retirement income options in order to minimize taxes and maximize the retirement income for the owner is very important.Structuring the term sheet or letter of intent is one of your important objectives. By working with your team of advisors, you will know what the income taxes will be for the sale and what your future income will be going forward.

Planning the sale or transition of your business over three to five years and working with your advisors is always preferable. You will have a better chance for maximizing the value of the company, minimizing income taxes and protecting your net worth.

Sometimes a current owner will still get a reduced salary for working part time. They can be paid to be chairman of the board of the company. As I said before, perhaps they will continue to receive rental income because of a new 10 year lease agreement signed by all parties. We sometimes use consulting agreements, non-competition agreements or an agreement to sell goodwill.

The goal is to combine the best two or three retirement income options in order to minimize income taxes and maximize the amount of cash flow for retirement.

There are many different options for an owner to look at in order to sell their business and protect their retirement income. Picking the best combination of the options available to you is very important for the success of this transition that you are thinking about. For more ideas call or e-mail our senior partners.

Gary Pittsford, CFP®, is President and CEO of Castle Wealth Advisors, LLC. Castle specializes in helping families and closely held business owners with valuations, succession planning, estate and income tax analysis and retirement income security. Castle’s senior partners work with clients throughout the country in making logical decisions that help them fulfill their personal and business financial goals. For more information visit, call 1-888-849-9559 or e-mail Gary directly at .