Passing The Torch: Considerations for a Successful Generational Business Transfer


According to ITR Economics, out of the 77 million baby boomers (those born between 1946-1964) in the U.S., an estimated 12 million are privately held business owners. As ownership of their businesses is passed down to the next generation, an estimated $10 trillion worth of business assets is expected to be transferred.

Whether you are the predecessor or the next generation, it is important to have the right processes — and partners — in place to set your transition up for success.

Develop a Strategic Plan
A successful generational business transfer takes plenty of time and careful planning. Starting the planning process well in advance of the change in leadership can give your family time to define what you want for the future of your company.

Start by determining what technology, human resources and capital requirements the company needs to be successful in the short and long term. Be sure that the current owner’s and future owner’s visions are communicated. If both visions are not in alignment, have conversations on what the future for the business may look like. Balancing long-standing business practices with new changes can result in a sustainable and successful business.

Start integrating the future business leader into day-to day business operations before transitioning. Establishing a clear transfer of duties and mapping out a timeline can help with a smooth hand-off process.

Get Your Finances in Order
It’s important to prepare business finances well in advance of a generational transfer. The current business owner may consider setting up a grantor retained annuity trust for their successor. You can work with your estate planning attorney to set up this trust that earns annual income, and upon expiration the beneficiary receives the funds with minimal or no gift tax liability. Grantor retained annuity trusts usually have a duration of two to three years with payments calculated using a monthly interest rate set by the IRS

Family members may also consider transferring their business to the successor through an installment sale. The IRS defines an installment sale as a sale of property where you’ll receive at least one payment after the tax year in which the sale occurs. For example, the current owner could obtain 15% of the purchase price per year for 10 years, transferring shares to the new owner upon payment. An installment sale could result in a tax benefit for the seller as the overall tax liability is spread out over time, rather than all at once during the business transfer.

Once you’ve settled on the financial path you’ll take to conduct the transer, be sure to evaluate the company's cash flow and other financial projections. Review all assets and estate planning documents to understand the financial implications of the business transfer. List the projected expenses, liabilities, and potential taxes owed, and then identify sources of liquidity to pay them. No matter which route you take, your family should continue the conversation surrounding transferring funds to ensure all parties are aware and educated when the time comes to hand off the ownership baton.

Work With Your Financial Partners
If you don’t already have one, assemble a team of trusted advisors including a CPA, attorney, banker and wealth advisor. This team of professionals can work through the financial aspects of a generational business transfer. A business banker can explain the mechanics of how some of the financing and transfer of ownership might work in different situations. This can include tax, trust and estate matters. Your banker can provide guidance on the most financially beneficial path forward for your family business.

Passing on a business is a major family event and can involve potentially difficult conversations and decisions. While it may be a complex process, through proper planning, it also has the potential to be an opportunity to achieve new growth and elevate long-standing family business goals.