Gifting a company is often used for estate and exit planning. This exit strategy involves the transfer of ownership of a company to another party (often a family member or key employee) without the business owner expecting or receiving financial compensation. This article discusses the advantages and disadvantages of a gifting strategy.
The Advantages of a Gifting Strategy:
- Tax Benefits:
A gifting strategy may reduce the donor’s taxable estate, which could result in significant estate tax savings. In certain jurisdictions, for example, the owner might be able to avoid capital gains taxes that would arise from selling the business. If the company grows in value after the transfer, future appreciation may, furthermore, be excluded from the donor’s taxable estate.
- Smooth Succession Planning:
Gifting the company to someone who is already familiar with the business also allows for a planned and gradual transition of leadership and ownership, ensuring business continuity and reducing possible disruptions in operations.
- Preserving Legacy:
Owners may feel more comfortable gifting the company to a family member, employee, or other trusted individual to preserve the legacy and values of the business. The transfer to someone close to the owner fosters loyalty and commitment from the recipient, who is usually someone deeply invested in the business’s future.
- Maintaining Employee and Client Confidence:
A gift transfer can be seen as a vote of confidence in the recipient’s ability to lead the company, maintaining stability in relationships with the company’s employees, clients, and suppliers.
- Avoiding the Complexity of Selling:
Gifting can eliminate the need for finding a buyer, negotiating a sale, and going through a lengthy sales process. It can also reduce the risk of confidentiality issues in addition to the disruption associated with marketing the company for sale.
- Avoiding Market Volatility:
In cases where the market for selling the business is poor or unpredictable, gifting may ensure that the business continues without having to sell at a reduced value.
The Disadvantages of a Gifting Strategy:
- Potential Tax Liabilities for the Recipient:
In some jurisdictions, the recipient of the gift may incur taxes such as gift taxes, inheritance taxes, or income taxes depending on the structure of the gift. If the business appreciates after the transfer, the recipient may face a significant capital gains tax burden on the future sale of the business.
- Loss of Income:
The outgoing owner may miss out on the financial benefits of selling the business, especially if the business has considerable market value. There may also be a loss of future income streams from the business if the former owner was relying on the business for retirement income.
- Potential for Mismanagement:
The recipient may lack the skills or experience to manage the business successfully, leading to operational failures or financial decline. If the gift is made to a family member, it can be difficult to remove them if they are underperforming, out of fear of damaging personal relationships.
- Family Conflicts:
Gifting the business to one family member might lead to conflicts or resentment from other family members who may feel excluded or entitled to a share of the business. Gifting can, moreover, create long-term issues if family members dispute the decision or challenge the distribution of assets.
- Risk to Former Owner’s Reputation:
If the company performs poorly under new ownership, it could negatively affect the former owner’s reputation, particularly in cases where they remain involved in some capacity or maintain a public association with the business.
- No Immediate Financial Compensation:
Unlike selling the business, gifting provides no immediate financial benefit. The outgoing owner may need to secure other income sources or rely on savings for retirement or personal needs.
- Complex Legal and Financial Planning:
Gifting a business involves navigating complex tax, legal, and estate planning issues to ensure the transfer is managed correctly and does not result in unintended financial consequences. Incorrect structuring could result in unfavorable tax outcomes or unintended liabilities.
So, gifting a company can be a meaningful and efficient exit strategy, particularly for those who prioritize family continuity or tax advantages over immediate financial gain, but it requires careful planning to avoid potential tax liabilities, operational challenges, and family conflicts. Proper legal and financial advice is crucial to ensure a smooth and beneficial transition for both the outgoing owner and the recipient.
About Greater Prairie Business Consulting, Inc.:
Greater Prairie Business Consulting, Inc. is an award-winning, national consulting practice serving entrepreneurs, small to mid-sized privately held and family-owned businesses and middle market companies of any type with revenues between $1 million and $250 million. The firm helps small, mid-sized and middle market companies maximize their performance and exit.
Greater Prairie Business Consulting, Inc. can be reached by calling 1-800-828-7585 or emailing info@gpbusinesssolutions.com.
About the Author:
James J. Talerico, Jr. is an award-winning author, speaker, and a nationally recognized small to mid-sized (SMB) business expert.
With more than thirty- (30) years of diversified business experience, Jim has a solid track record and an A+ BBB rating helping thousands of business owners across the US and in Canada tackle tough business problems to improve the performance of their organizations.
His client success stories have been highlighted in the Wall St. Journal, Dallas Business Journal, Chicago Daily Herald, and on MSNBC’s Your Business. He was named “Texas Business Consulting CEO of the Year,” by CEO Today Magazine, identified as a “Top 10 Management Consulting Entrepreneur to Watch in 2023” by Entrepreneur Magazine, was listed among the “10 Most Visionary Companies to Watch in 2023” by Inc. Magazine, and has also been ranked among the “Top Small Business Consultants” followed on Twitter.
For more than half a decade, Jim was a regular guest on “The Price of Business,” a nationally syndicated radio program on Bloomberg Talk Radio and has also appeared as a subject matter expert on many FOX Radio interviews. He is a regular contributor to several blog sites and has frequently been quoted in publications like the New York Times, Dallas Morning News, Philadelphia Inquirer, The Entrepreneur’s Review, and on INC.com, in addition to numerous, other industry publications, radio broadcasts, business books, and Internet media.
Jim received a Gold “Stevie Award” for “Thought Leader of the Year,” a Gold “Stevie Award” for “Media Hero of the Year During Covid” and a Bronze “Stevie Award” for “Best Entrepreneur” in the Category of “Business and Professional Services” at the American Business Awards ® in New York City. The competition received more than 3,700 nominations and is the premier accolade for business excellence in the US honoring organizations of all sizes and industries. Jim also received an “Outstanding Leadership Award” at the Money 2.0 Conference for his contributions to the financial services industry.
Jim is the author of “8 Steps to Becoming an ETHICS FOCUSED ORGANIZATION,”™ a small business certification program that utilizes a unique eight – (8) step approach for strengthening ethics in any organization. The certification program won the Better Business Bureau’s “Torch Award for Ethics” for the North – Central Texas Region, the International Better Business Bureau’s “ Torch Award for Ethics,” and a Gold “Stevie Award” for “Ethics in Sales” at the International Sales & Customer Service Stevie Awards ®. Participants who complete this certification program are eligible to receive eight – (8) continuing education units from the University of Texas’ Division of Enterprise Development.
Jim received his Certified Business Exit Consultant (CBEC) ® designation from The International Exit Planning Association (IEPA) to help entrepreneurs, small business owners, family businesses, and middle market companies maximize their business exit, and he received his certification in succession planning from the ASPE.
Jim is also a Certified Management Consultant (CMC) ® and an active member of the Institute of Management Consultants.
Check out more business stories here.
