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Plan for a business owner's retirement, or plan on a risky transition

by Sarah Nishimoto | Contributor
January 30, 2022

Many business owners expect the next generation to take over when they retire or pass away. An owner's retirement places the business at risk during the transition of management and ownership. Many companies fail at this transition due to a lack of planning.

A business owner's retirement plan needs to meet several goals.

One essential goal is continuing the business' operations. What do you want to happen to your business when you retire? If you don't plan ahead, your business could be sold to someone who will run it into the ground. Or, your business could be dissolved with no one to run it at all. Planning for your retirement now will help ensure your business is in good hands when the time comes.

Another objective is keeping the business in the family. Many business owners assume their children will take over the family business. However, your children may not be aware of your wishes, may not want to run the business, or may not be qualified to do so. Discuss your retirement plans with your children and agree on who will manage what to ensure the company will be operated by the right person, whether it's a family member or otherwise.

For many people, another priority is being fair (which may not be equal) to the next generation. Suppose you have multiple heirs to whom you'd like to leave your business. Should you split ownership evenly among them? It might sound contradictory, but providing equal shares is not always the fairest solution. For instance, suppose you have two children. One of them is highly active in the business's day-to-day operations, while the other is not involved. In this case, you may want to name the child involved in the business as your successor while providing an equivalent asset or non-voting ownership interest to the other one.

Meanwhile, planning for disputes and limiting conflict is a key objective. You can use your retirement plan to mitigate potential disputes and limit conflict. Include actions to take in the event of a dispute and outline the plan for your successor to limit confusion when the time comes.

If your intention is for the business to be your primary source of retirement income, you'll need to plan accordingly. You may need more income for retirement than you think. For instance, if your business currently pays for health insurance, subscriptions and club memberships, you'll need to pay for these out of your own pocket upon retirement. For this reason, your retirement income may need to be higher than your current salary.

Your succession plan could be:

Sale (at fair market value to a third party or discount to family)

You may want to sell the business to a third party at fair market value (FMV) — the price your company would sell on the open market. An FMV sale may be the right choice if you don't have a suitable heir to run the business.

Suppose you have a family member who is qualified and motivated to take over the business. In that case, you can sell it to them at a discount if you wish. Be aware that selling below fair market value could be considered a gift according to the IRS. You may be responsible for gift taxes on anything above the exemption amount.

A gift to the next generation

Gifting the business to the next generation is another option. The IRS offers a gift tax exemption up to a certain amount. You'll be responsible for federal gift taxes on any amount over this exemption amount.

Part sale/part gift to next generation

Another option is to conduct a partial sale/partial gift to the next generation. In this case, you would sell a portion and gift a portion of the business. This option may reduce your tax burden depending on your company's value and what percentage is gifted versus sold.

Installment sale to generate retirement income

Your buyer can purchase the business through installment payments. Using an installment sale will generate retirement income that you would otherwise not receive if you gifted your business. In an installment sale, you become the lender for your buyer, who will make regular payments to you with interest.

Your succession plan needs to address both the planned and unplanned retirement of the business owner.

Voluntary retirement

Voluntary retirement generally occurs when the business owner plans to retire at a particular time, usually at a specified age.


Many business owners don't plan for retirement until just a few years before they're ready to retire. However, it's beneficial to plan for your retirement early to ensure all involved will be prepared for the transition when the time comes.

Documentation - buy-sell or shareholder agreement

Review and update your retirement plan regularly to ensure its accuracy at the time of your retirement. A buy-sell agreement (or shareholder agreement for companies with multiple owners) should be part of your retirement plan. This agreement outlines the event, price, timing and terms of ownership transfer.

Training new leadership

Imagine retiring with no plan in place to train new leadership. Suppose your successor is to step in and start making decisions. They're brand new to the company and have no experience working with your staff. This situation can lead to interruptions in customer service, employees becoming frustrated and business operations stalling. Plan ahead and spend several years leading up to your retirement to train new leadership and key employees to take over management of the business for a better transition.

Involuntary retirement

When business owners think of retirement, it's usually voluntary retirement that comes to mind. But sometimes, the unexpected occurs.

Incapacity or death

The most common events causing involuntary retirement are incapacity or death.

Business integrated into an estate plan

Planning for incapacity or death may not be high on your priority list. Still, it's important to prepare for the unexpected. Integrate the company into your estate plan to ensure your business is taken care of.

Suppose you become incapacitated and can't run your business. Without a designated successor, a court-appointed custodian will step in to manage the company in your absence. This custodian may have no experience with your business. The court will eventually decide who (if anyone) will run the company or if it'll be dissolved or sold to a third party. Upon your death, any value left in the business once the probate process is complete (which could take years) will be passed to family members according to state law. Avoid this lengthy and discouraging process by integrating the business into your estate plan.

Immediate management authority

Appoint a successor to be given immediate management authority upon your incapacity or death. They will be legally authorized to make decisions about the company without going through a lengthy court process. This step is crucial for the continuity of business operations with minimal disruptions.

Immediate financial access to business accounts

In addition to immediate management authority, identify the individual given immediate access to business accounts. Even if your family or staff know what needs to be done, they may not be legally authorized to access business bank accounts, bringing operations to a halt.

Management transfer

You can transfer management authority either before or with ownership transfer. You'll need to decide if you want the next generation to take over management of the company or if you'd like existing employees to manage the business's day-to-day operations.

Before or with ownership transfer

You may want to transfer management responsibilities before the actual ownership transfer occurs. You'll have time to train new management, allowing for a smooth transition.

Next generation or existing employees

Suppose there is no suitable heir to take over management of the company. In that case, you may consider transferring management control to an existing employee who understands the business inside and out.

Ownership transfer

There are many decisions to make when it comes to ownership transfer. You can transfer full or partial ownership. You can give over ownership all at once or slowly over time.

Full or partial?

You can transfer full ownership all at once. In this case, you will have no ownership interest left in the company whatsoever. Or, you can choose to transfer a portion of your ownership and maintain an interest in the company. This option allows you to remain active in the business.

Ownership Transfer - Handing over keys to new owner

Now or over time?

Transfer of ownership can be done all at once or over time. Factors to consider here include whether your successor is ready to take over full responsibility and if you want to remain involved in the company for a while. Transferring small portions of ownership over time can also lessen your tax burden depending on whether you're gifting or selling the business.

Gift or sale?

You can sell or gift your business to the next generation. The best option for your situation will depend on several factors. Selling means you'll get the proceeds to use for your retirement income, while gifting will provide no such income stream. Additionally, if your heir(s) purchase the business, they may be more committed to the company's success. If you gift your business, be aware of the gift tax implications. Gifts are tax-exempt up to a certain amount. If your business value exceeds that amount, you'll have to pay gift taxes on the excess value.

Determining value

Before you can sell your business, you'll need to determine a reasonable price. There are multiple ways to determine the value of your business.

Agreed value

Coming up with an agreed-upon value is the simplest way to put a price on your business. However, this method doesn't take into account any increase or decrease in value over time. Your business may be worth more or less by the time you are ready to sell while you're stuck with an arbitrary set price. The agreed-upon price method is helpful for extra small, predictable businesses not likely to change much in value over time.


Appraisals cost a few thousand to tens of thousands of dollars, so this option may not be feasible for a very small business. An appraisal is essential if the business owner's interest in the company is significant enough to warrant a highly accurate business valuation.

Income-based formula

An income-based formula is typically for when the value is not significant enough to warrant an expensive appraisal yet is too large for an agreed-upon value to suffice. Income-based formulas vary by industry but generally estimate the expected value of your business over time.

Establishing terms

Once you've determined the price of your business, it's time to establish the terms of the sale. You and the buyer will need to agree on the terms of the deal, including the price, the interest rate (if applicable), schedule of payment(s), and the date of the final payment.


Interest rates come into play if your buyer will be making regular payments in an installment sale. Although every deal is unique, interest rates commonly fall between 6-10% of the loan amount.


If your buyer is going to be making payments, you'll need to define the repayment schedule. The average term is 5-7 years, although you and the buyer can agree to any time frame you choose.


The buyer usually makes a down payment in an installment sale and signs a promissory note stating they agree to pay the remaining balance back to you in regular payments. Down payments are commonly between 10-25% of the total amount of the loan.

Tax implications

Several factors impact the amount of taxes you'll pay on the sale of your business. Instead of a single asset, the IRS treats each asset within your business as if they're being sold separately. If you've owned each asset for over a year, the proceeds are taxed as long-term capital gains. Any assets owned for less than one year are taxed as ordinary income at a higher tax rate than capital gains. If you're making an installment sale, you can defer taxes until you've received the payments.

Retirement income sources

If you have other investments and assets to contribute to your retirement, calculate the amount you're expecting from these assets in comparison with the amount you'll get from the sale of your business. Taken together, will it be enough to support your desired retirement lifestyle?

The business may be the “nest egg,” which needs to generate retirement income.

Suppose your business needs to generate a majority of your retirement income. In that case, you'll need to know if it's going to provide you with enough income to support your expected retirement lifestyle.

It needs to be financially feasible for business' income stream to support the retirement income payments.

Suppose you're planning to use income from the sale of the business to support your retirement. In that case, you'll need to determine if it's financially feasible for the business income stream to support the retirement income payments.


You can continue to earn additional retirement income through the business even after you've sold it. You can stay on in a minor role, as a consultant, or retain a non-voting interest. All of which will provide additional income streams.

Ownership distributions

You can retain a percentage of ownership in the company, providing ongoing income. This ownership can be with voting or non-voting rights.

Retaining a non-voting interest

If you want to remain a partial owner without being actively involved, you can retain a non-voting interest. You'll receive financial distributions without putting time or energy into the company.

Installment sale

In an installment sale, the buyer makes payments with interest over time. You'll receive regular income from the payments as well as additional income from the interest.

Consultant agreement

You can remain connected to the business and earn some income as a paid consultant. Your consultant agreement may include helping the new owner and keeping the business functions going through the transition.


The transfer of your business to the next generation can be a complex process. Choosing and training a successor, determining your company's value, deciding on the terms of the sale, and ownership transfer are all factors that take careful consideration and planning. The key to a successful transition for all involved is a detailed retirement plan set in place well in advance of your retirement. Planning ahead is one of the best steps you can take to make sure you leave your business in good hands and set yourself up for comfortable retirement.

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at

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