The famous management consultant Peter Drucker once said, “The task of leadership is to create an alignment of strengths, making our weaknesses irrelevant.” As you prepare for the future transfer of your business, you should address the vision and objectives you hope to achieve as well as address any weaknesses that may hamper a successful transfer.
What are the Advantages of Business Transfers?
When it comes to financial security, there are distinct advantages to business transfers. These include the ability to fund your retirement while maintaining control, the time element and potential for tax optimization, the importance of leaving a personal and business legacy, and your business’s health and longevity. As you formulate your vision and objectives for a successful transfer to the next generation of leaders, consider these six primary advantages of business transfers:
- Funding retirement income. By structuring the transfer and maximizing business value, business owners can provide themselves with the retirement income they want and need after the sale is complete. A healthy cash flow is a critical element of a successful insider transfer as it is likely to be the chief source of your sale proceeds—and your income into retirement. Consider the amount of income you want and need from the sale of your business. A process should be in place both before and during a business transfer that continually cultivates your business’s growth.
- Maintaining control. With insider transfers, owners can apply strategies that enable them to maintain operational control until they receive the entire sale price of their business. Until the transfer is complete you can gradually reduce your day-to-day responsibilities and build up your personal assets through cash distributions before your exit.
- The time element. Generally, the longer it takes for the transfer of a business to complete, the less risk is incurred. By transferring a business to key employees or members of management, owners are commonly afforded extra time for planning their eventual exit. This extra time can be spent building business value, overcoming shortfalls, building your successor’s ownership skills, and developing new interests outside of the business while you continue to collect a salary and maintain control over the business until the transfer is complete. A typical insider transfer takes between 5-10 years, depending upon the business’s readiness for transfer, the owner’s goals, and the successor’s capabilities.
- Tax optimization. To optimize tax consequences, the additional time needed during an insider transfer means business owners may enjoy unique tax benefits that legally minimize or even outright avoid some income tax from the transfer. A considerable amount of planning is required with insider transfers to avoid cash flow from being taxed twice: once when the insider pays taxes before paying you for the purchase of the company, and again when you pay taxes on the proceeds. There may be additional benefits to transferring to family members. Your tax advisor can help you design strategies for your unique situation.
- Leaving a legacy. Transferring to insiders provides the best opportunity for fulfilling a business owner’s values-based goals. Such goals may include a specific mission, the company’s culture, or corporate charitable intentions and can enable you to reap the satisfaction that your traditions and values will continue to benefit your family, employees, customers, and the community for years to come.
- Business health and longevity. Insider transfers and incentives can motivate management to stay with and grow the company, improving not only human capital but also the business value. Insiders are already familiar with your values and are uniquely prequalified for leadership through on-the-job training and observation of your work ethic, leadership style, management skills, and processes. What’s more, they know your customers, vendors, and community.
Whether initiating a family transfer or a business insider transfer, these six advantages of business transfers may help you formulate what your eventual business succession may look like. When planning a business transfer, you should carefully consider your goals and objectives throughout the process. For a successful outcome, these objectives should be met in advance of transferring your control of the business.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.