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Transferring your Family Business

Transferring your Family Business

Transferring your family business is often a large process for small business owners. Having an effective succession plan in place helps avoid many of the potential pitfalls in the transition. Whether you are ready to retire or plan to be a part of the business until you pass on, it is important to have a plan in place. Doing so will limit your tax liability and help you retire comfortably. Below we will briefly discuss estate tax planning and then several ways you can transfer your family business to your heirs.

Peak Business Valuation is happy to help you transfer your family business. Get started with a business valuation by scheduling a free consultation! We look forward to speaking with you!

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Estate Tax Planning

When a business owner passes away, their business interest becomes part of their estate. Depending on the total estate, taxes can be as high as 40%. For a small business, this can often be devasting as it makes up a majority of their estate. To pay the taxes, there are basically two options, (1) sell the business to raise cash to pay the tax or (2) contribute their own funds to keep the business.

While many businesses are worth less than the estate tax exemption, it is still important to make a plan to cover the potential tax payment. See our article on Estate Tax Planning for more information.

Transferring Ownership to a Spouse

If you decide to transfer your business to a spouse whether upon death or during your lifetime there are several implications. One of the key benefits of transferring to a spouse is that no estate tax is due at death because of the marital deduction. This applies if the spouse is a U.S. citizen. However, the estate tax may be due when the spouse passes away depending on the business’s value and the current estate tax laws.

Gifting Ownership in the Business

Knowing the value of your business can help you and your advisors create an effective succession plan. This may include giving away a part of the business while you as the owner are still alive. Transferring your business interest by gift has several benefits and stipulations. Gifts of a certain size are not subject to gift tax. Consult with your legal advisor on the current gift tax exemption limits.

To determine if you must pay gift tax and if so, how much, you need to know the value of the gift. Anytime a business interest is transferred by a gift, a valuation is conducted. This helps document the gift tax value and reduces the risk of the IRS challenging the value of the gift if audited.

Selling Shares of Ownership to Heirs

A business owner may decide rather than gift ownership to transfer shares of ownership to their heirs. This can help the successors have more buy-in to the business. Having a vested interest in the business can help it be more successful.  

There are essentially two ways to sell shares of ownership to your successors. Either a lump sum payment or staying partially connected with a monthly income. Selling your business is an effective strategy if a business owner needs cash for retirement. Seller financing is the most common way to sell ownership to a family member. Often this is beneficial to both parties as the buyer often does not have the cash up front and the seller continues to receive income on a regular basis. This option allows the seller to stay on as a paid consultant. As such you can help guide the heir to ensure their success at running the business

Dividing Inheritance among Heirs

Dividing your estate is often a large source of contention, especially for family-owned businesses. It is more complex to divide an inheritance which includes a business.

For instance, suppose you have two children. In your estate, you own $500,000 in investments, a business worth $1.5 million, and a house worth $300,000. One of your children wishes to follow in your footsteps and run the family business. While the other child does not want anything to do with it. It is fair to give your business to one and the rest of your estate to the other. While that is for you to decide, understanding the value of your business can help split your estate in the best interest of all parties.


Planning for issues in advance can avoid many potential problems with succession planning. By knowing the value of all your assets including your business, you can divide your estate equitably. This may mean making alternative arrangements. One option may include giving passive shares of your business with dividend rights to non-active children. Another option would be to draft a buy/sell agreement that allows shareholders to be bought out with future profits. Once you decide how you are going to transfer your family business, the next step is drafting a buy/sell agreement.

Peak Business Valuation would love to help in the transition process of your small business. We are happy to answer any questions you have! Please reach out by scheduling a free consultation!


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