Scores of baby boomer business owners will exit their businesses in the coming decade. If you’re one of them and dream of passing your business on to family, here’s our best advice: Don’t wait. It is never too early to engage experienced advisors and start business exit planning.
If keeping the business in the family is your intention, there is much to consider. Only about one-third of family businesses are successfully passed on to the second generation, just 12% to the third generation, and a mere 3% make it to the fourth, according to the International Exit Planning Association.
The sooner you start planning your exit, the more options you will have — whether that’s selling, taking on a financial partner such as a private equity group, establishing an ESOP, executing a management buyout, gifting/selling to a family member, or some combination of strategies. The key is working with your advisors to do a thorough analysis to make the best choice for you, your family and the business.
If that exit-planning analysis leads to transferring ownership to family, consider these vital planning steps:
1. Establish your objectives
You must measure your financial readiness to exit. Start by determining the annual after-tax income you will need to retire. Then, inventory personal assets earmarked to generate retirement income. Once you know your business’s value (see step #2), conduct a value gap analysis to compare its current value to what the business will need to be worth for you to exit. This will determine if an intra-family transfer is the correct exit option.
As part of goal setting, you will also need to:
- Define fairness regarding the distribution of the family’s wealth, including the business, among your children.
- Decide which child or children will eventually take over.
- Decide when to leave the business and transfer control.
2. Determine the company’s value
You will need to know the fair market value of the business to execute any strategies for transferring it to family members. For instance, if gifting shares to a child, you must know how much those shares are worth.
3. Continue increasing business value
If the business is healthy and continues to grow, it will be there for the next generation and hopefully beyond. One strategy is creating an incentive program to keep key managers, employees and future family leaders engaged for a successful transition.
4. Design a strategy for gifting your business interests
Take advantage of gifting opportunities, including the annual federal gift-tax exclusion. In 2025, a business owner can give $19,000 worth of stock or cash to each child, each child’s spouse and each grandchild. The 2025 lifetime gift and estate tax exemption is currently $13,990,000 or $27,980,000 for married couples. These tax rules help transfer assets efficiently to the next generation.
5. Create a business continuity plan
A continuity plan ensures the business continues to run smoothly if you become incapacitated. The plan should detail everything the designated interim leader of your organization would need to know, including information about key vendors, customers, decision makers, operational procedures, safe codes, spare keys and bank accounts.
6. Conduct wealth preservation and fairness planning
This is where you take care of the children who will not be active in the business. For most business owners, their business is their largest asset. That being the case, how do you equalize the estate? This step involves collaborating with experts to create a fairness plan for the entire family through estate and gift-tax planning.
7. Communicate your plans to the family
Once you decide on what your business succession plan will look like, and how you want to execute it, communicate this to all family members to get their input. You then may have to adjust.
Communication within the family is the key to success.
Business exit planning, including succession planning, requires family business owners to obtain counsel from an array of financial, legal, accounting and insurance professionals. To get started today, contact us.
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