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A big portion of your retirement plan is probably dependent on selling your business. With a carefully crafted business transition plan, you can help meet your retirement goals and successfully transfer your business. Even if you are not depending on your business for retirement, you may be planning for the ultimate transition it to family members. A business transition plan may include a buy-sell agreement with your co-owners that outlines the terms of the sale, including triggering events and how and when the sale price will be paid. If you plan to have family members take over the business, the buy-sell agreement should be a “bona fide” agreement. In all family transfer situations, a professional valuation or appraisal is highly recommended to establish an independent fair market value of the business. If you are going to sell your business interest at retirement you may be concerned about: 

  • Determining how and when the purchase price will be paid.

  • Minimizing tax consequences.

  • Improving the creditworthiness of the business.

  • Leaving the business in good financial shape for the future owners.

  • Being sure the purchaser will have the funds to complete the buy-out.

If your plan is for family members to take over the business, you may also be wondering:

  • How long do I stay on for a successful transition?

  • Are they familiar enough with the business and ready to take over management?

  • What about my children who are not involved in the business?

Sales between family members are often subject to more scrutiny by the IRS. More specifically, the IRS may question the sale price or valuation method used. If the price is determined to be higher or lower than “fair market value,” the sale may be re-characterized as a part sale, part gift transaction, resulting in potential gift tax liability or inclusion of a portion of the sale price in the seller’s gross estate.


If you have established an agreement between yourself and your co-owners, one major concern is to be sure the purchaser will have the funds to complete the buy-out. There are a number of ways to fund a buy-out at retirement (there are different concerns for a buy-out triggered at death or disability).


When there is time to plan, the use of a Sinking Fund (some of us call this a savings account) can be a way to accumulate money for the ultimate buy-out. A Sinking Fund is when the buyer sets dollars aside to accumulate to the purchase price in advance of the sale. These funds are often held in an interest-bearing account and, depending on the time frame, the sinking fund may or may not have accumulated the funds needed by the time the purchase takes place. If the party interested in purchasing your business doesn’t have the cash available to fund a lump sum purchase, they may be able to borrow funds from a lender to complete the purchase. There are challenges to borrowing funds from a third party lender – you don’t know what the interest rate will be at the time retirement occurs, it’s impossible to know whether the lenders will make the loan to you, and finally, will the business be able to absorb the new debt and continue to be a viable business entity? A classic method is to pay the purchase price over time in the form of an installment buy out An added benefit of allowing the purchase to be spread over time allows you to spread any gain on the sale over the payment period.


An installment sale is a “seller-financed,” deferred-payment financing arrangement.

The buyer gives the seller a promissory note and then makes payments towards the purchase price over two or more years. The parties to the agreement have a significant amount of flexibility in determining the terms of the note, including the interest rate, the amount of each payment or the duration of the note. Payment can even be deferred until after retirement when the seller may be in a lower income tax bracket. The buyer must continue to make payments of principal and interest to the seller or the seller’s estate until the full price is paid. Ownership of the business passes to the buyer immediately when the installment note is executed. This can serve to “freeze the value of the business” – any subsequent appreciation for the business is removed from the seller’s estate. Should the seller’s death occur before all payments are received, only the balance due on the note is included in the value of their estate.


The benefits of gifting a business to family members are two-fold. First, gifting lets you shift the business interests to those of your choice. You control both the timing and the size of the gifts. Second, gifting can reduce the value of your interest in the business, both for purposes of future estate tax liability or a future sale. Valuation discounts may be used to further reduce the value of the transfers.


Estate Equalization using life insurance can help ensure all of your heirs are treated fairly and equitably.

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