February 2018
By Gary Pittsford, CFP®

President and CEO, Castle Wealth Advisors, LLC

If you are planning to sell your closely-held family business to a member of your family, outlined below are a few starting points to consider.

Sometimes parents want to sell their company to their children, and sometimes cousins or uncles buy out other family members. The IRS normally assumes that families pick a low number when it’s time to sell their business to a family member, and that is why having an outside valuation prepared, not only helps with the transition process, but also helps protect you from the IRS by having an independent outside valuation prepared. Our firm, Castle Valuation Group, LLC can prepare that valuation and it usually requires that we review the last 3 years financial statements and tax returns.

Step One – Business Valuation
The valuation report not only gives you the value for 100% of the company, but it also gives you the discounted value for minority shares, which would be less than 50% ownership. The valuation should also provide you with the estimated usable cash flow that the company has to work with. That usable cash flow is needed in order for the buyers to make sure that they have enough cash to pay the sellers, and also there needs to be enough cash to pay income taxes. Our firm, Castle Valuation Group, can help you with this valuation.

Step Two - Education
We usually recommend that you spend 3 to 5 years educating the next generation on every aspect of the business. Sometimes the children are excellent with customers, managing employees, advertising, and ordering inventory. However, it’s important that they understand all of the financial aspects of running the business and they need to be involved in all of the business accounting meetings and legal meetings. It’s also a good idea for the next generation to go to any meetings that you have with your banker pertaining to lines of credit or term loans.

Assuming that the next generation is in the process of being educated in running all aspects of the business, then next we need to develop a timeline.

Step Three - Timeline
Most business owners should develop a 3 to 5 year transition plan. The leadership of the company can be moved to the next generation within 1 or 2 years. For example, the current business owner could become chairman of the board, and the son or daughter could become president, vice president, or chief operating officer. It’s important for the employees to know that the next generation is taking over the leadership of the company. That should also be broadcast to vendors, attorneys, accountants, bankers and other companies that are important to this family business. You also want to let your purchasing cooperative know that you are going to start the transition process. They must approve the new owners.

The timeline for transitioning the stock ownership usually takes more than 2 to 3 years. For example, your children taking over the company could acquire new titles and new leadership responsibilities immediately, but the transitioning of the stock ownership might take 5 to 10 years.

Step Four – Retirement Security
We normally work with the owners to make sure that there is plenty of retirement income security when the business is sold. Many parents gift some stock to their children and then the children will buy the remaining stock either by getting a bank loan or signing a promissory note and making payments to their parents over the next 10 years. Before this type of transaction takes place it’s important that the parents have all legal documents in place to protect the company, which would include triple net leases on any real estate, and stock redemption agreements, that should be signed by all stockholders. Reviewing all of these ideas is something that we always do with each business owner and their attorney that we work with.

Step Five - Your Advisor Team
Once you have given some thought to this selling/transition process, it’s good to review all of your ideas with your attorney, accountant and financial advisor.

Your accountant will need to be involved in preparing any gift tax returns that are needed and help you prepare the income taxes when you ultimately sell the business. Your attorney should be consulted about preparing wills and trusts, stock redemption agreements for all stockholders, real estate leases, if needed, and other legal documents necessary to sell or gift the stock in your family business.

The financial advisor that you choose should help you with calculating possible retirement income after the business is sold and help you prepare new asset allocation models for all of your personal assets and retirement assets. We usually suggest that you work with someone who is a Registered Investment Advisor with the SEC and who functions as a fiduciary. It is also a good idea to work with a firm that is fee-only, rather than working with a firm that sells products and receives commissions. The assets that you receive from the sale of your business is very important to you and your family. Protecting your net worth for your retirement years, and your family, are important goals. If you have questions in this area, our firm Castle Investment Advisors, LLC which is registered with the SEC, can answer your questions and show you ideas that may help you and your family.

Step Six – Business Transition Plan
It is normally a good idea to have a blueprint put together which would contain a timeline for the transition, estimated income taxes for this transaction, amortization schedule for any payments that are required, and a partial list of documents that are needed for this type of transition of a family-held business. Castle Wealth Advisors, LLC has worked with hundreds of business owners in preparing these detailed Business Transition Plans.

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 www.Castle3.com, call 1-888-849-9559 or e-mail Gary directly at .