As a business owner, you’ve invested years in building your company. You want to see your life’s work continue, but transitioning a business to the next generation involves navigating critical financial, legal, and family issues.
At Johnson Legal, we’ve worked with numerous family business owners in Wilmington and across North Carolina. We understand the intricacies involved when selling or transferring your family business. In this guide, we’ll explore four key buyout strategies to consider for your family-owned company.
One option is to gift all or part of your business interest to family members. This allows you to pass ownership to the next generation during your lifetime.
Gifting interest in your business can provide satisfaction from seeing your children or grandchildren take the reins. It also removes those assets from your taxable estate.
However, gifting does involve navigating legal and tax implications you’ll want to fully understand.
Some business owners opt to gift their entire company outright to the next generation. The main benefit is you don’t need ongoing income from the business.
Gifting your full ownership allows your successors to take full control. However, it relinquishes your influence and risks handing over a business your heirs may not be ready to run. It also uses your entire federal gift tax exclusion amount in one year.
Rather than gifting 100% at once, you can gift percentages of your business each year. The IRS allows you to gift up to the annual gift tax exclusion amount ($18,000 in 2024) without paying gift taxes.
Gifting partial interests lets you transfer pieces of your business while retaining control until successors are prepared. It also maximizes your use of the gift tax exclusion over multiple years.
The downside is the process takes longer. If improperly structured, gifting interests can cause family disharmony if successors feel ownership isn’t transferred fast enough.
Selling your business to the family can keep it in the family while providing you an exit on your terms. Valuation and financing are key considerations.
One exit strategy is to sell your business to a family for a lump-sum cash payment. This provides you immediate liquidity to enjoy retirement.
The buyers then own the business outright moving forward. The main drawback is your heirs need to secure financing to fund the buyout. Capital gains taxes also apply to sales.
Rather than a lump sum, you can carry a note and receive installment payments over an extended period. This allows you to transfer ownership while still receiving income.
The buyers don’t need to fund the full buyout amount upfront. However, make sure to charge adequate interest and have protections in place in case they default.
A leveraged buyout uses debt financing for successors to buy you out over time. Family members take out a loan, use the business assets as collateral, and use the proceeds to purchase your shares.
This strategy provides you with an exit while keeping the business in the family. Downsides include repayment risk and the company carrying significant debt.
Putting your business interests into a trust maintains family ownership while facilitating transfer. The trust holds legal title while beneficiaries receive economic benefits.
With a grantor trust, you set up and fund the trust while living. This lets you transfer business interests out of your estate to beneficiaries.
The trust pays no income tax while you’re alive. When structured properly, heirs receive the stock with a stepped-up cost basis.
A testamentary trust is created at your death per instructions in your will. Your business interests transfer into the trust instead of directly to heirs.
This allows a trustee to manage the assets on the beneficiaries’ behalf. It protects if heirs are minors, lacks financial acumen, or have other issues.
Selling to an ESOP allows you to cash out while rewarding employees. It’s complex but can provide tax benefits.
One exit path is to sell 100% of your company to the ESOP. This lets you completely exit the business and receive your full equity value.
Employees indirectly gain ownership through the ESOP trust. If structured properly, you can defer capital gains taxes.
Rather than a full sale, you can sell a portion of your equity to the ESOP. This allows you to diversify your holdings and receive some liquidity.
The ESOP trust buys the percentage of shares, either with company contributions or debt financing. You retain partial ownership going forward.
Over the life of your business, your personal and financial needs will change. The buyout strategy that once made perfect sense may need re-evaluating as your exit timeline nears.
At Johnson Legal, our business succession planning attorneys have guided numerous Wilmington family business owners through this complex process. We understand the nuances of valuation, taxes, and family dynamics that accompany transitioning your family enterprise.
Whether you’re ready to exit soon or want to put a plan in place for years from now, we can help you successfully develop and implement a strategy tailored to your situation. Don’t leave the future of your family legacy to chance. Contact Johnson Legal to schedule a consultation today.
Shane T. Johnson is the CEO and Managing Partner of Johnson Legal, an estate planning and business law firm in Wilmington, NC. With years of experience in estate and business law, he has zealously represented clients in various legal matters, including small business formation and purchasing, estate planning, probate, domestic violence, and other legal cases.
Shane received his Juris Doctor from the University of Wyoming and is a member of the North Carolina Bar Association. He has received numerous accolades for her work, including being named among the Best Probate Lawyers in Wilmington by Expertise.com.
