Is 2019 the year you prepare to retire and sell your business? If so, you’re not alone. The non-profit group Project Equity finds that 2.34 million business—nearly half of privately held businesses with employees—are owned by Baby Boomers, and yet 85 percent do not have a formal exit plan in place.
Many owners of family businesses expect to pass their business to the next generation, which makes sense: After all, there is no better legacy than handing down a thriving business to your offspring. If that’s something you’re considering, here are steps you must take now to prepare to hand off the business when you’re ready.
Talk to your family.
Many business owners just assume that the next generation knows the business is coming to them—and it can be a shock if children make other plans. (Fresh off a holiday viewing of “It’s a Wonderful Life,” it’s clear to see how that can go wrong as in the case of the Bailey Building and Loan!)  It’s important to let your heirs know that you plan to pass on the business—andmake sure they are interested and as passionate about the business as you are. You want to confirm the business’ future is secure by identifying the rightpeople—qualified and capable—to assume control.
Meet with your team of advisors.
Ideally, you already have a strong team in place, including a business insurance provider, accountant, attorney, and financial planner. Each of these entities can play a key role in helping you prepare the business for transferring to the nextgeneration. Meeting with them can help you assess your options financially and emotionally, and they can also help you strategize ways to minimize your taxliability throughout the process.
Create your succession timeline.
Exiting a business is likely a process, not an event. That means that you’ll want to put together a clear plan with milestones to make the eventual hand-off smooth. That includes working with your heirs to teach them about the business so they can take over; establishing a board to help with decisions as needed; informing employees and clients of your plans well in advance, and gradually decreasing your involvement. The plan should include your goals once the transition is “complete”…for example, will you stay on in an advisory capacity or hand over the reins entirely? There’s no one right answer as it depends on your situation and relationship with your children.
Decide if you will sell the business or give it as a gift.
Before making this decision, you’ll want to be clear on your own retirement income and make sure that you will be comfortable, without an infusion of cash from your business. Business owners who are financially secure may want to gift the business, rather than sell it to the next generation. Both routes may have tax implications so be sure to check with your accountant about the ramifications.
Either way, you will want to seek a professional appraisal. While you might sell it at a reduced price to your family—rather than an assessed fair market value as you would to an outsider—having your business appraised can still give you a place from which to begin negotiations and can also highlight any potential pitfalls, such as a loss of income if the owner is an inextricable part of the company’s success.
If you decide to sell the business, you can loan money to a family member at a more favorable term without incurring tax penalties by charging an interest rate equal to the “Applicable Federal Rate” (AFR). As the lender, you will report as taxable income the interest you receive. Although rates change monthly, the current rates can be found here as a ballpark.
Have a back-up plan.
We all know what happens to the “best-laid plans.” Perhaps a health crisis forces you to retire earlier than you had planned, or you find that your children either aren’t prepared or have life circumstances such as a move or family needs which render them unable to takeover the business as intended. Work with your advisors to discuss other potential avenues, such as an employee sale or selling the business outright. It might not be your first choice, but as you have been from the start—you have to make the best decision for the future of the business. While ideally that is a family member as owner, sometimes an alternate plan is the right course of action for the health of the business—and your family relationships.