If you’re contemplating this avenue of succession planning, a number of important factors should be considered.

Motivation for Sale

Your motives for transferring the dealership can influence the terms of the sale. Typical motives include:

• Reducing estate taxes. To minimize estate taxes, the goal is for the owner to receive as little as possible, so lower interest rates and values are preferable.
• Locking in annual retirement income. This objective tends to benefit from higher interest rates and values.
• Motivating children by giving them a piece of the family business.

Selling the dealership to a child may be desirable if its value is so high that traditional gifting techniques are insufficient to minimize taxes. In other words, the dealership is worth more than the amount that can be transferred as a tax-exempt gift or series of gifts. A sale may also be a good choice if the dealer wants to continue receiving an annual income. In that case, the child might purchase the dealership from the parent by paying annual installments.

Stock Considerations

A common way of structuring the sale of a dealership to a child is to create voting and non-voting common stock. The dealer sells the non-voting stock and retains the voting stock, which can be transferred to the child at a later date. This approach allows the dealer to retain control until the child is ready to run the business.

Dealing With the Factory

There are two general approaches to accommodate factory concerns about the transfer of ownership to a child. One is to name the child as successor dealer in the dealership agreement. This approach gives the child no current rights and imposes no current obligations on the factory.

Alternatively, the child can be given or sold stock, evidencing his or her new role as owner/dealer. To achieve this type of acknowledgement with the factory, the child must own 20 percent to 25 percent of the dealership’s stock.

Although the factory typically imposes some restrictions on transfers of ownership of the dealership and its corresponding rights and obligations, it generally won’t raise any objections if the rules are followed and the dealership is successful. Nonetheless, the dealer should be certain to keep the factory informed of any transfers of ownership of 10 percent or more.

What About Real Estate?

Much of a dealership’s value may be found in its location. Dealership real estate is often owned by a separate entity, so dealers must be careful to tie real estate rights to the transfer of the dealership.

Some dealers transfer the dealership to one child and the real estate to another. If you take this approach, be sure to protect the child who owns the dealership, with a long-term lease with an option to buy, for example.

Selling your dealership to your child can be an effective strategy for transferring wealth and accomplishing a variety of goals. Professional advice can help ensure that your goals are met at the lowest possible cost.