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Stephen English
Stephen A. English President of The Trust Company of Kansas (TCK), has worked in the trust business for over 30 years. After graduating from the University of Minnesota-Duluth in 1970, Steve accepted a position as a trust examiner with the Comptroller of the Currency. In 1976, Steve accepted a position as Vice President and Trust Officer for Home National Bank in Arkansas City, Kansas and then went on to work for Southwest National Bank, Wichita. He resigned from SWNB in 1989, and spent several months setting up The Trust Company of Kansas. TCK was officially chartered on May 21, 1990, and has since grown to manage over $260 million in assets. Steve is a 1978 graduate of the Southwestern Graduate School of Banking at Southern Methodist University, Dallas, Texas. He was a charter board member of the Association of Independent Trust Companies. In 1991, Steve became only the fifth person in the state of Kansas to earn the title of Certified Trust and Financial Advisor, a designation issued by the Institute of Certified Bankers. You may contact Steve by phone at (316) 264-6010.
Banking & Finance
2001-11-01 17:43:00
How do you sell a business to family... fairly?
Question: I am near 70. My wife is 62. We have a son who is 40 and a daughter who is 36. Professional estimates have placed the value of our small business at around $1,000,000. We have tried for several years to find someone to buy it but always end up at a dead end. Our son is active in the business...our daughter is not. Our son wants to buy it but has little borrowing power on his own. We need advice on how to set up the sale and be fair to all parties. What should we do?
Answer:  Planning for the sale and successor management of closely held businesses (small businesses) can be a complex and emotion-laden process.  Typically, the owner has dedicated his life to the creation and growth of his business.  It is natural for him to want the business to continue after his death, both to ensure the financial security of his own family, and to provide a livelihood for loyal employees and their families.  Each case will have unique circumstances, but some common issues to consider are:· What is the owner's cost basis in the business?  His accountant can answer this question.  It will be important to determine how much income tax will be due if the business is sold before the death of the owner.  The creation of significant income tax liability may adversely affect the lifestyle of the owner and his spouse during their retirement years. If the sale of the business can be delayed until after the owner's death, then the heirs (spouse and children) will net more money because of the "step up in tax basis" rules now in effect.  · What is the corporate structure of the business?  If the business is a Sub-S Corporation, a C Corporation or a Limited Liability Company, a fair formula for future sale using industry standards can be created as part of the company's By-Laws.  In the years before the owner's death, the son can gradually assume additional responsibilities, receiving reasonable compensation.  A reasonable salary can also be paid to the owner as he gradually eases out of the day-to-day operation of the business.  The owner can maintain ultimate control, and can determine whether "new" management is adequate.· Does the business owner also own the building in which the business operates?  He may be able to lease the building back to the business, to provide guaranteed income for himself and his spouse.    · Is life insurance an option?  Life insurance on the owner's life should be considered as a way to provide the son with the ability to buy the business after the owner's death.  Whether or not it is a viable option is a function of the owner's health and the cost of the premiums.  Proceeds of life insurance owned by the son on the life of the father have no income tax consequences to the son, but can generate the cash necessary for the son to purchase the business.  If life insurance is not a viable option, then an installment sale contract with the son after the owner's death might be appropriate to provide the heirs with steady income for a period of time.· Does the son have the management ability to successfully run the business?  If the family has doubts, then a sale to a responsible "outsider" would be prudent in order to insure the financial stability of the owner and his spouse.  The income tax benefits of delaying the sale until after the owner's death may not play as important a role as described above when selling to an outsider.· Do the taxable estates of the owner and his spouse total over $2,000,000?  If not, the Federal Estate Tax, known as the "death tax", will be nominal or non-existent when utilizing basic estate planning techniques.  A typical strategy would be to place the business into tax-favored trusts created for the owner and his spouse.  At the death of the owner, the trustee would be responsible for selling the business, utilizing the formula contained in the company's By-Laws.  The trusts could provide specific authorization to sell the business to the son.  The trusts could further provide that when both parents are deceased, the assets would be divided equally by both children (or their respective heirs if either of the children should predecease either parent).Proper planning will insure that all members of this family are treated fairly.  The owner and his spouse will receive a steady income stream during their retirement years.  The daughter will inherit one-half of the assets remaining after the death of her parents.  The son will eventually own an ongoing business created by the efforts of his parents, while being paid fairly for the services rendered to the company in the interim period. 
 
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