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When it’s time to sell the family business – including to family – keep tax strategy in mind

Posted in ,   |  March 17, 2021

Sell your business – or part of it – to family and avoid taxes.

Does it sound like a potential path for you?

Then you’ll want to draw on Andrew Knutson’s expertise at the upcoming annual conference of the Prairie Family Business Association.

Knutson is the owner and managing attorney at Thompson Law PLLC in Sioux Falls. He has focused his practice for the past 12 years in the areas of trusts, estate planning, asset protection and business law.

He serves as co-chair of the business law committee for the State Bar, where he coordinates with other attorneys to draft legislation and educate lawyers on developments in business law. He has been selected as a Rising Star by Super Lawyers every year for the past seven years. On the practical business side, Knutson has owned and operated two successful small businesses with his wife.

“We anticipate this being a popular and timely topic for many families,” said Stephanie Larscheid, executive director of the Prairie Family Business Association.

The annual conference will be April 29 and 30 at the Hilton Garden Inn Downtown in Sioux Falls with the option to attend virtually or in person.

We talked with Knutson for a preview of what families can expect from his presentation.

Business transitions happen continually, but are you seeing an uptick of interest or actual movement toward sales of family businesses?

Yes. We are in a favorable tax climate, and interest rates are at historic lows. The last couple of years have been a good time to sell. Also, times of seismic shifts in the way we do business tend to cause activity.

When family businesses are thinking about selling, including to family, what are some of the first steps?

Other than meeting with the proper advisers, a good first step is thinking about what the seller needs or wants for an income long term.  Figuring out the seller’s desired income can be a good place to work back from when the experts are determining how to best structure a sale. There are sales that can be structured with various types of trusts, as part gifts, stock sales versus asset sales, sales involving nonqualified deferred compensation, dividend policies, long-term leases and consulting agreements, just to name a few tools available.

Another first step would be to come to terms with how much control or involvement the seller would like once the business is sold. Maybe the seller wants nothing to do with it. Perhaps the seller would like to maintain voting rights or even voting control, a seat on the board or another advisory role.

Starting with general goals about income and future involvement can go a long way with helping your advisers determine the best structure.

What are some common considerations family businesses miss when they work through the process of selling?

Being scared of a little complexity upfront. Some ideas seem complicated at first but can yield amazing results. Not every deal needs to be complex, and sometimes keeping it simple makes sense, but be open to options. Also, meet with experts – the right experts – prior to structuring the sale and before the handshake deal.

So let’s talk taxes. Big picture, what kind of strategic approach can family businesses take to manage taxation when they sell?

No short answer here! In general, a seller is better off if the sale is a stock – or ownership interest – sale versus an asset sale. A seller might also be better off selling in installments over time or even gifting part of the business, both of which can reduce taxes.

There is also a way to sell to a particular type of trust, which results in the seller owing no capital gains taxes. This is a method I will explain at the conference. The process yields incredible savings but should really only be done where the buyer is a relative or lifelong friend with whom the seller plans to stay in contact.

In family deals, many options are on the table, and we try to balance the savings for the seller with the needs and goals of the buyer.

What do you hope attendees take away from your session at the coming conference?

That there are options for selling your business that not only minimize taxes but also lead to practical benefits for the long-term stability of your family.

Thanks to the conference’s hybrid format, you can access it from anywhere during the event and for the entire month of May. To sign up and learn more, click here.