In the last issue of ClientLine, we talked about the foundation family businesses need to turn family members into eventual company owners. This issue, we’ll examine three ways business owners and their trusted advisors can work together to achieve this financially, short of buying the company with ready cash (with its various tax implications).
OWNER FINANCING
Also known as the installment plan, you might create an agreement with the help of an attorney to receive a down payment on the sale of your business, with the rest paid in installments. Pros include potentially lower interest on payments for the buyer and a stream of income the seller can use in retirement. Cons include less cash flow for the new owner to operate the company and the chance installment payments to the old owner will stop before full payment.
SINKING FUND
If you have a well-structured buy-sell plan and intend to pass the business on in a specified number of years, you might consider establishing a sinking fund, which becomes a company asset until used to purchase the business. You can schedule regular payments to an interest-bearing account or investment-type fund, with funds growing over time to theoretically fund a future purchase.
LIFE INSURANCE
You may also want to examine the potential of funding a cash-value life insurance policy to use in the future purchase of the business. Like a sinking fund, the life insurance policy becomes a company asset. Unlike a sinking fund, which doesn’t help if the existing owner dies before the fund accumulates sufficient cash, life insurance covers a potential sale, whether unexpected or planned.
GET HELP
Work with your tax professional to understand the tax implications for you and family successors before deciding which funding method to choose.