By Jeana Goosmann, Goosmann Law Omaha
Planning for your eventual retirement as a business owner doesn’t need to be a daunting, all-at-once event. In fact, one of the most effective strategies for a smooth transition—and a financially smart one—is to gradually transfer ownership to a key employee over several years.
Here’s a proven structure to consider:
Step 1: Initiate the Transition Six Years Before Retirement
Approximately six years before your planned retirement date, sell 24% of your stock directly to the key employee. This sale is typically seller-financed, meaning the employee doesn’t need to secure outside funding. Instead, the employee will use dividends earned from their 24% ownership stake to repay you over the course of 3–4 years.
Step 2: Continue the Transition Two to Three Years Out
If everything is progressing smoothly—both from a business perspective and in the employee’s continued interest and performance—you proceed with selling an additional 25% of your stock, using the same seller-financed, dividend-funded structure. This step further prepares the employee for leadership while providing you with additional retirement income.
Step 3: Finalize the Sale Upon Retirement
When you’re ready to officially retire, you sell the remaining 51% of your stock to the employee, again using a seller-financed structure. Since this is a larger transaction, you may wish to extend the repayment term to ensure affordability and continued business stability.
Why This Approach Works
- Maintain Control Until You’re Ready: You retain majority ownership—and therefore control—until your retirement date.
- Minimize Business Disruption: A gradual transition allows both you and the employee to adjust to changing roles and responsibilities.
- Reduce Tax Burden: Spreading out the transactions over time helps avoid incurring capital gains tax on the entire amount in a single year.
- Fewer Valuations Required: Structuring the transfers in stages can reduce the number of formal business valuations needed.
- Cash Flow Friendly for the Buyer: Seller financing supported by dividend payments enables the employee to make purchases without significant upfront capital.
What You’ll Need to Do
Before any ownership is transferred, we’ll want to:
- Review and potentially revise your organizational documents
- Ensure the structure aligns with your goals and protection
- Consider any buy-sell agreements, valuation methods, and tax planning strategies
If this succession path sounds like a fit for you, we’d be happy to set up a time to walk through the details and next steps. Planning early allows for a smoother transition—and peace of mind for both you and your future successor.