PEMBROKE, Mass. — You’ve owned your Laundromat business for 35 years. You’re at the age when most of your friends have retired. You have family health issues that occupy quite a bit of time. Finally, you have a son or daughter who would like to take over the business.
How do you go about making a successful transfer of ownership? It is not like a sale of a business, in that you will not be totally removed.
The first consideration, as I described in Part 1, is offering full disclosure. Your son who wants to take over the business must be made to understand that it is a seven-day-a-week activity and that some mechanical expertise is mandatory.
Secondly, you have to feel confident that your son is up to the challenge and has demonstrated the ability to work hard, pay attention to details, show prudence in his financial dealing, and persevere over the long haul.
However, once a transfer is made, one must consider the alternative of things not going well.
What happens if your son has trouble running your enterprise? He doesn’t buy insurance on time, and a midnight fire burns everything to the ground. Your $1,500 monthly payments stop. What will you do? You have no business to go back to because there’s only blackened cinders. Would you manage?
Without the payments, would you have to sell your house and move into a small apartment or senior housing? Would this bother you and your spouse? Would you go around for the rest of your life, blaming your son for ruining your life? Think hard, and answer no to continue making the transfer.
Make it clear to your child that he is getting a great deal. He is taking over a turn-key business and will be able to draw a living from day one. And he doesn’t have to put out any money up front. Point out to your son that he is taking on a huge obligation, namely that he agrees to partially fund his father for the next 15 years. Suggest that if the business fails, he will still have the parental obligation. That might mean that the son takes a second job at Walmart.
The tax ramifications of such a transfer is favorable. It’s called an installment sale transaction. If you had sold the business for, say, $170,000, that lump sum payment would put you in the maximum capital gains category and up your remaining income by a few tax brackets, most likely. You might be at the 33% or 35% bracket. But a 15-year payout of $18,000 a year would minimize the capital gains liability and probably wouldn’t alter your overall tax bracket. You might save $10,000 or $20,000 in taxes.
Incidentally, when you sell over time, the selling price increases. It is a simple case of calculating the present value of the money combined with the risk of default. So, you are not gouging your son when you ask him to pay 60% more over time.
Draw up and sign an agreement. Nothing fancy—one or two pages will do. It states the terms of the transfer, with the proviso that the seller can take over the business when the buyer misses a month of payments. If you want, hire a lawyer. But even a non-legal note is binding, in that the seller can go after the son’s other assets if there’s non-compliance.
But that’s the last thing you want to happen. The real terms of the transfer are written in blood. The father, realizing his energy has peaked, wishes to bestow on his son a going business. In turn, the son (or daughter) realizing that his father has made this venture his life’s work, takes on the obligation of helping to support his father for 15 years.
If there are multiple children, you must figure how your sale of your business will affect the estate distribution after you are gone. Also, consider the possibility of you and your spouse dying early, before the full payment is realized. Consult your lawyer.
Done correctly, transferring a Laundromat business is a win-win situation for everyone. Maybe it will be your choice.
Miss Part 1? You can read it HERE.