You put a great deal of yourself into your business. Inevitably, the day will come when you have no choice but to walk away and begin a new chapter of your life. In these eventualities, businesses are often transferred from one family member to another. This article will address 5 of the key factors you’ll want to consider when transferring your business to a family member.
Factor #1: Gifting Can Have Numerous Benefits
Will you be selling your business to a family member or simply gifting that business? Gifting comes with several major advantages. For example, this approach can reduce your real estate taxes. Also, the gifting process can allow you to maintain a level of control if the agreement is written properly.
Many business owners want to sell their business to fund their dream retirement, but don’t know where to start.
I’ve used these 5 Critical Questions to help my clients prepare and start increasing their business value.
Factor #2: The Buy-Sell Agreement
When transferring a business, don’t overlook the importance of the buy-sell agreement, which works to put everything in writing. You may be tempted to forgo a contract since you are dealing with a family member, but this is a mistake, no matter how close you might be with your loved ones. A buy-sell agreement adds clarity to the process, which can help to keep confusion levels low and the chance of success high. When the time comes to transfer your business to a relative, you’ll want an expert to create a document that outlines all relevant details. It should feature everything from the value of the business and the amount being paid for the business to who will be kept on the payroll and what level of involvement you’ll have once the process is finished.
Factor #3: Seller Financing
Seller financing is quite common among sellers, and when relatives are involved it becomes even more common. One option is to consider a private annuity. A private annuity allows for payments to be spread out for many years and can even extend until the end of your life.
Factor #4: Considering the Self-Cancelling Installment Note
In the installment note, it is possible to feature a self-cancelling clause, which can benefit your family in the future. This part of the paperwork will confirm that if you pass away before all the payments are made, the remaining debt can be attached directly to your will. If you are a parent selling a business to a child, then one of the key benefits of an installment note is that it keeps your other children from paying excess income tax on your estate.
Factor #5: Transferring a Business to a Relative and the CRA
You can expect the Canada Revenue Agency to take a second look when you are transferring and selling a business to a family member. The CRA does this to make sure that everything is above board, because many past business owners have acted in an unethical manner. You’ll want to be very sure that every aspect of the sale is done professionally and that you have all your paperwork in order.
A merger and acquisition advisor can help you address the unique particulars that come along with transferring a business to a relative. Every business is different, and every sale is different, too. A professional M&A advisor can help you avoid common mistakes and pitfalls.