- Recent business transaction in New Haven makes headlines for its ultra-low selling price
- Gift and estate taxes still apply even if a business owner tries to hand off a business with generous conditions
- Varying options for how a business transfer can occur
Summary by Dirk Langeveld
Business sales are a common occurrence, but a recent transaction in New Haven went viral for its unusual terms. The longtime owner of a hair salon, seeking to transfer the business to someone “worthy,” sold it to an employee of 15 years for the bargain price of $1.
Under the terms of the deal, Kathy Moura stands to inherit the building and its equipment but will continue to pay rent to the seller, Pio Imperati. This saves Moura the thousands of dollars it would normally take to establish a salon while Imperati continues to earn income from the business and work at the business a few days a week as an independent contractor.
This transaction is essentially a gradual sale, in which a business owner continues to derive income from their venture but turns over the day-to-day operations to someone else. This type of arrangement can also be beneficial to the buyer, since it allows them to assume control of a business without amassing a lot of money to make a purchase and keeps them in close contact with the seller, who can act as a consultant and advisor over time.
In addition to a gradual sale, the U.S. Small Business Administration says business owners also have the options of selling the business outright or forming a lease agreement. An outright sale simply looks for someone to purchase the company, with the owner receiving an immediate payment once the transfer takes place. A lease agreement is usually a temporary transfer of ownership occasioned by a business owners personal circumstances, such as an illness or extended leave of absence, with the parties working out what rights and benefits the new owner will have.
Sales where a business is transferred for a pittance, as in the case of the New Haven salon, are often considered when a family business owner is looking to pass down the company to the net generation. However, this type of transfer can also result in gift and estate tax implications.
In these federal taxes, property conveyed at under the fair market value, including cash-free transactions, the donor is subject to the gift tax for transactions made while they are alive and the estate tax applies to transfers that occur after they pass away. Connecticut has its own gift tax as well.
The gift tax is based on the difference between the purchase amount and the fair market value. There is a $15,000 gift tax exclusion available each year, and the donor can also credit the gift tax amount toward a lifetime exemption.
Other considerations should also be taken into account when transferring a business for less than its fair market value. For example, the donee may agree to pay the gift tax instead of the donor in special circumstances. Consult with an accountant and attorney to determine the best strategy when selling a business under generous financial terms.