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Selling the Family Business to Provide for Retirement

Oftentimes, the owners of a family business are faced with the decision of whether to sell in order to provide for retirement. Selling a family business alone is a difficult decision. Add to that the complexities of how to sell it, and the sale of a family business becomes even more challenging. Fortunately for you and your business, family firms can be rather appealing to investors. By their very nature, family businesses have a tradition of stable ownership and a focus on long-term strategic planning and on consistently building long-term value.

If you are considering selling your family business in order to provide for your retirement income, work with financial and estate tax advisors in creating a strategy that meets your needs. Here are some important factors to take into consideration.

Your Goals

First and foremost, you need to consider your goals for the sale and for your retirement. Factor in things like income, gifting to family members, and charitable donations, as well as other things you want to do in your retirement, such as purchase a second home or travel. Examining the financial requirements of all these goals will help you put a number to what you need in retirement. It is never to early to start this planning process with your financial advisor.

Your Requirement

With a number in hand, you now know what you require from the sale of your family business. This is your “core capital requirement,” which is the amount you need to meet your financial requirements throughout retirement, including inflation. This figure should be calculated in a conservative manner regarding risk, with a high degree of confidence of 90% or higher. In this way, you will be more likely to have an excess of wealth upon death, and less likely to run out of money as you age. What you have left over can be used for discretionary spending, additional gifting and charity.

Investment Style

In retirement, investments should be implemented to target your required rate of return to fulfill your core capital requirement. When building in a cushion, such as discussed above to ensure you have an excess rather than a deficit, that excess can be invested in a more aggressive manner. A financial advisor should explore a wide variety of investment scenarios to factor in risk and various levels of projected market performance to help ensure your calculated core capital requirement indeed provides for the retirement you want. It’s important to find the right mix of investments that not only help you avoid excessive risk but that also brings you the income that you need. Business owners who are already especially conservative may actually find that they can invest more aggressively even in retirement, and aggressive investors may have to curb their investment style in order to protect their nest eggs.

Market Conditions

When you consider the sale of a business, market conditions are a key factor in projecting how much you can expect to make on the transaction. In a bull market, your business valuation may be substantially higher than in a bear market. However, many family business owners make the mistake of passing up offers in the midst of bull markets, hoping for an even higher offer-only to have a bear market dash those hopes. It is important then, first and foremost, to look back again at that core capital requirement and work toward a sale that provides for that as your priority. If you are able to get more than your core capital requirement, then you will have excess to invest as you wish. However, if you are unable to exceed your goals in the midst of less-than-favorable market conditions, just remember that you likely won’t need more than that core capital requirement anyway.

Business Valuation

The market value of your business is obviously a huge component of what you can actually expect to get for it. When considering selling to provide for your own retirement, you need to look at what the business is making in profit and earning for you personally on an annual basis as well. A financial expert can work with you on using those figures to show you what you will likely get for your business. In good times, you can use your earnings multiplied by a higher number to determine a good price point – and in harder times, even lower earnings are multiplied by lower numbers. For example, in good times, your business might bring in earnings of $8 million per year, which, when using a multiplier of 6 or 7, for example, could produce a price point of $48-56 million. However, in declining times, your business may only earn $6 million per year – and poorer market conditions would likely necessitate a lower multiplier such as 4 or 5, for a price point of $24-30 million. The important thing to consider is simply whether these numbers meet your core capital requirement.

Sale Structure

While some businesses are sold outright for cash, you may be presented with alternative types of offers. Each kind of transaction comes with its own unique set of advantages and disadvantages.

  • Cash Sale – With a cash sale comes immediate funding for the transaction, along with capital gains taxes. The benefit of selling in a bear market is that, even if you don’t make what you hoped from the sale, you stand the chance of your investments earning a portion of that money back for you during your retirement as market conditions improve.
  • Leveraged Recapitalization – In this kind of deal, business owners take on some debt to monetize the illiquid wealth of the business, with the ultimate goal of increasing earnings and reducing the owner’s personal risk. A partner would buy out a portion of your shares and pay you an annual salary for a specified number of years as you continue to play a key role in the business. After the specified number of years, the remaining shares would be sold. This may be an option for family business owners who project a good upswing in earnings and growth for their business over the next several years, after which point your shares would be more valuable.
  • Earn-Out – This type of transactions lets family business owners sell their full interest in exchange for some money upfront plus a share of the business earnings over a specified number of years during which you would play a role in the business as a consultant. Like a leveraged recapitalization deal, how much money this earns the selling business owner depends on how well the business performs during the specified number of years after the initial transaction.

Whatever type of offer you are considering, a financial advisor can calculate worst- and best-case scenarios to help you determine if the offer will meet your core capital requirement with the level of confidence you require.


Transferring wealth to your beneficiaries is something that is best done with planning. In the case of a sale of the family business, should you wish to gift shares of the business to beneficiaries, you would be well advised to do so well in advance before a sale takes place. That is because this kind of gifting is one of illiquid shares, which are less marketable and therefore of a lower value for gift tax purposes, than shares exchanged during a sale. Wealth can also be transferred by means of a trust, such as a grantor retained annuity trust (GRAT) or an intentionally defective grantor trust (IDGT). Deciding which is right for you is a discussion you should have with your financial advisor:

  • In a GRAT, typically held for at least three years for share valuation reasons, the business owners can transfer discounted shares to the trust and sell the business during those three years for the best gifting results.
  • In an IDGT, the business owners make an installment sale of a portion of shares to the trust. The remaining shares are then sold to the trust in exchange for an interest-bearing note. The growth of assets held in the trust may transfer free of transfer tax if the earnings meet certain federal requirements.


If contributing to charity is among your goals for retirement, you have a variety of options available to you.

  • Direct Gifts – Outright donations can gift assets to charitable organizations, providing for a large, up-front tax deduction.
  • Charitable Trusts – Some examples are charitable lead annuity trusts and charitable remainder unitrusts.
  • Private Foundation – A charitable foundation that you establish purely for charitable purposes to administer charitable gifting indefinitely. A private foundation provides the owners with more control over the charitable grants and can encourage family members to participate. Assets in the foundation grow in a tax advantaged environment, and tax deductions for grants are still substantial but are more restricted than with direct gifts. This option comes with higher administrative costs and time requirements but may be right for those looking to establish a philanthropic legacy.
  • Donor Advised Fund - A donor advised fund is very similar to a private foundation with a few key differences. Private foundations involve substantial start up costs and administrative expenses, such as yearly filing of an information tax return. But, one of the most important difference is that donor advised funds receive more favorable tax tre ATM ent than private foundations. Donor advised funds also offer the ability to recommend grants to charitable organizations anonymously, if desired.

However you structure the sale of your business, the importance of utilizing a team of seasoned experts cannot be stressed enough. For more on selling a family business, see our article, Selling the Family Business in the Second Generation [internal link].

Sources: “Business Sales and Legacy Decisions: The opportunities and challenges in making the trade-offs” by Gregory D. Singer & Brian D. Wodar at;;;

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