HOW TO SELL YOUR COMPANY TO A FAMILY MEMBER WITHOUT LOSING YOUR SHIRT

Passing the business on to a relative can be relatively easily if you follow these steps.

Is selling or otherwise passing a small business to a family member a pitfall free experience? Of course not, says Bill Worthington, an assistant professor in Baylor University's Hankamer School of Business. But that doesn't keep it from being a positive one for most such entrepreneurs.

"There's a whole different dynamic to consider and deal with when your successor is a family member," he explains. "Both parties know the other's weaknesses, for example, and that can cause hesitation on the part of the incumbent or aggression on the part of the successor."

Worthington says succession is a process not an event and usually takes years to put into place. Still, as long as all involved are properly prepared, it can be a boon for everyone involved. One important reason, according to Worthington: Quite often the relative successor "has grown up with and has been exposed to the rhythm and language of the family business and that's hard to replace or replicate."

Scott Estill, J.D., a partner at Littleton, Colorado based Estill & Long LLC, agrees that "generally this can be a very good idea," but adds that it depends on the type of business and even the people involved. For instance, for Estill to pass his law practice to his kids "would be much more difficult than [it would be to pass] a retail location to them due to the personal nature of my services.

"But if the business is appropriate and the kids are willing to take on the challenge," he adds, "there can be many benefits from a tax perspective."

Incorporation and Estate Planning

As Estill explains, "The parents can get the business out of their estate through planning, whether it be annual gifting amounts currently $14,000 per year per person, or the use of entities such as limited partnerships for minority ownership valuation discount issues."

Such efforts, he adds, "can be combined with other estate planning vehicles to allow a proper transfer at death and also provide security and income for the parents while they are in their retirement years."

Seek Appraisals

Before small business owners come to any of those decisions, though, Estill advises that their companies be valued by an outside appraiser. "Once that is done planning can begin."

Case in point: If the business is to be sold, "the capital gains can be estimated so the owner knows what his or her tax hit will be," Estill says, adding that "a comparison can be made to a sale with inside family members as the tax ramifications should be much less with planning.

"If there was a direct sale the same capital gains issues would need to be analyzed," he continues. When a family member is involved there are other options such as the ones mentioned earlier that revolve around getting ownership to the children in the most tax advantageous way possible.

"Once all of the sales options are present," Estill says, "the owner should be able to see how to maximize value from a tax perspective and how the ownership could be structured to accomplish his or her goals."

Hire Professional Help

No matter what you decide to do in such a situation, or how you decide to do it, Estill recommends enlisting professional assistance early in the process which means hiring "a business appraiser for valuation purposes, a CPA or tax attorney for tax considerations of the sale or transfer, and a business or estate planning attorney to draw up whatever documents are needed."

Worthington also suggests small business owners not go it alone in these kinds of circumstances although he adds that in his experience "there tends to be too strong of a leaning on estate planners and attorneys and advisors. Most of them are very good at what they do, of course, but they're not necessarily very good at being strategists for your business."

As such, his advice is to "step back and consider from a strategy standpoint if this is the wisest thing for you to do. Once you've decided that you can bring in the technicians to execute your plan. But if you allow them to come in and use the latest, greatest loophole they can find to drive your strategy well, it may not be the best thing for you, your family, or your business."

5 LEGAL PROTECTIONS FOR YOUR FAMILY BUSINESS

Many family crises are unavoidable and unpredictable. But you don't have to be unprepared. Here are five legal maneuvers that can help protect your family business through a crisis.

1. Confidentiality Agreements

Require every employee, family and non-family, to sign a non-disclosure agreement. This helps family members maintain secrecy and privacy about the business' affairs, and prevents bad mouthing outside the business. It also prevents in-laws and other outsiders from using family information in a lawsuit.

2. International Asset Trusts

If you live in a community property state (20 percent of states), one spouse is entitled to half the other's assets in the event of divorce. The best way to protect the business from a split is establishing an international asset protection trust for each of the spouse's assets. When structured properly, this type of trust offers a high degree of protection from lawsuits and creditors says Art Boelter, a family business and tax attorney in Seattle. Then appoint only one spouse the trustee. The other spouse must sign off on this.

3. Dividends

Many family businesses lend money to family members through loans to shareholders. However, in the case of insolvency, a creditor can go after these family members' personal assets to recover their money. "Consider re-characterizing that loan as a [shareholder] dividend," which is more like a payout than a loan, says Boelter. "You might have to pay tax on it, but it's a low rate." Creditors cannot sue family members for dividend payments.

4. Last-to-Die Life Insurance

If the family business owner's estate is subject to estate taxes it's wise to have a last-to-die insurance policy which helps cover any unexpected estate taxes the heirs have to pay. Premiums are often very low. For more information on estate planning, go to www.NFIB.com/business-resources/sell-my-business.

5. Fraud Prevention

The best way to protect your family business from fraud is following simple internal procedures, says Boelter. Require multiple signatures on checks, don't allow your controller to sign the biggest checks, and have more than one person review monthly bank statements. Make sure your banker knows these rules and procedures so he or she can identify foul play.

5 ESSENTIAL PARTS OF A SMALL BUSINESS OWNER'S ESTATE PLAN

Let's say that you and your spouse want to go away for the weekend, and you have young children at home. What do you do? You call someone you trust to stay with the kids and then leave this person with a detailed list of important numbers, people and contacts. You leave a mini plan of action, just in case.

If you are a small business owner and you die, what happens? If you haven't left a similar plan of action, called an estate plan, the lives of your loved ones will be thrown into turmoil.

Without an estate plan all sorts of problems can arise when you die:

• Your business might have to be shut down if no one knows how to run it, what to do, who your important contacts are, what accounts you have and so forth.
  
  
• Everything you own will have to be probated by the legal system. Your loved ones will have to hire attorneys, and a nice chunk of your estate will end up paying legal fees and court costs.
  
  
• Since probate is a public process what you owned and owe will be public knowledge, and your loved ones will not see any money for up to a year until the probate is over.
  

You can avoid all of these unenviable fates if you take time now to create an estate plan for you and your small business. An estate plan is nothing more than your plan of action for how you want your assets distributed should you pass away. It utilizes various tools to effectuate your desires as quickly and inexpensively as possible.

The main parts of your estate plan include:

1. A Will or a Living Trust

Both are documents that transfer what you own to whom you want your possessions to go to when you die. But that is where the similarities end. Although a will does allow you to decide who gets what, using one still means that your assets will go though probate.

It's better for the small business owner to get a living trust. A living trust is similar to a corporation. It's a separate legal entity that you create and control. It details what you want to have happen to your assets. Because the trust owns your assets it leaves nothing to probate when you pass away.

A living trust has several advantages over a will:

• It's private.
  
  
• It allows you to bypass probate altogether.
  
  
• It transfers your assets immediately upon your death.
  
  
• It saves in legal fees, court costs and estate taxes.
  

2. Life Insurance

Why are you in business for yourself? One major reason is probably to take care of your family, financially speaking. However, not all small businesses are cash cows, and many contain no value once the owner is gone. In that case, how will your family survive?

Life insurance, especially term life insurance, is the answer. It is inexpensive, and having it means that your loved ones will have enough money to buy a home, pay for a wedding, go to college or whatever they need.

3. IRS Tax Breaks

An estate tax, also known as the death tax, still exists. It can cost up to 50 percent of the business' value and is due nine months after you pass away. However, various IRS sections allow your beneficiaries to redeem your stock without major tax penalties or defer taxes past the nine month deadline. Check with your CPA.

4. Buy-Sell Agreements

If several people own your business a buy-sell agreement is necessary. Without one, your beneficiaries may get stuck owning a business they don't want and can't sell. Your partners may get stuck with partners they didn't expect. A buy-sell agreement mandates that upon certain conditions, like the death of a shareholder or partner, parties to the agreement must sell their shares to the other parties at a fair market price.

5. Succession Plan

If your business is a sole proprietorship, you need a plan in place so that your heirs know how to run things without you or how to sell the business. What the business owns, owes, important contacts and bank account information must be laid out in a clear way. If you want a particular family member to run the business or to own it, you need to discuss this with that person and teach him or her what they need to know.

One final note: It's wise to see an estate planning attorney to help you with this process.

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