Even after receiving a lump sum from a sale, many former business owners can stay involved and earn income by serving on the board of directors or consulting. You might even continue helping out in day-to-day operations in a reduced but vital role such as serving clients who've been with the company for years and are used to working with you.
If you own an office building or other physical assets, another option for generating retirement income is to retain those assets and lease or rent them back to the business. Astrachan recommends that such arrangements be agreed upon beforehand and spelled out clearly in the formal transfer or sale agreement with the new majority owners. That also should be the case if you're turning the business over or selling it to other family members.
How can you structure the transfer?
If you plan to transfer the business to family members or longtime employees rather than sell to an outside buyer, weigh these options. Each has its own advantages.
Consider transferring the business as a gift and drawing an income from the new owners. The lifetime federal gift tax exemption can change annually. The latest information can be found in our Annual Limits Guide. This gives business owners considerable latitude to transfer part or all of the company as a gift. You may owe federal gift taxes on amounts exceeding the exemption, but once the business is out of your hands, it's no longer part of your estate, and future growth of the company won't subject your estate to additional transfer taxes.
You might sell the business by providing financing assistance. You may choose to sell the business to heirs — or an outside buyer—by lending them the money through sale in exchange for a promissory note, which allows the buyer to pay you back directly. The advantage to you is a steady stream of income from the principal and interest from the loan for an agreed-upon period.
You could execute a partial sale while retaining a portion of business assets and income. You may pay capital gains tax on any profit from the sale, but you'll also get a steady income from rent or lease of office space or other assets.
Whatever choice you make, a smooth transition can be the crowning legacy of the years of care and effort you've poured into your business. It also can leave you with income to support your life's next act or in some situations keep you involved in a business you love. And you can have the satisfaction of knowing that your vision has the potential to live on for generations to come.