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Strategy to Transfer Ownership of Machine Shop

the average Joe

Aluminum
Joined
Nov 16, 2022
I have a complicated issue that is beyond my skillsets.

I've been working at a small mom and pop machine shop for about 23 years. The owners(husband and wife) are like family to me, and we've verbally agreed that I'll take over ownership of the shop when they are no longer able to keep it going. They are in their late 70's early 80's, so that time might be coming up soon.

The shop is a 10k square foot building with 4 cnc mills, a cnc lathe, two manual lathes, five knee mills and two surface grinders. So, a decent sized average shop. it's been in business for over 40 years, and had a long standing established client list that all pay well and relatively quick.

The problem is that the owner would like to keep working there right up until the final days, which I can understand. However, that complicates the transfer of the business. I would like to work out some kind of mutually beneficial and fair way to enable them to transfer the business to me, but also maintain their autonomy and oversight in some capacity as well as needed revenue from the shop.

Has anyone here done something similar? I was imagining some kind of living trust or something of that sort but I have no idea.
 
Sounds like an LLC partnership may be your best option, however state laws complicate a direct answer if you hope to avoid inheritance tax on any un paid portion of their share of the partnership.

A trust can also be a safe and affective alternative, again, check state laws.

Before my dad passed, way before, he and all of the other members of the business entered all of the business assets, properties etc. Into a BUSINESS trust so that whoever remained in the business could continue to operate it without worry about owing anything to other members or living relatives which can ordinarily be a problem with a will or LIVING trust. This also allowed him to be in control 'til the day he died, but allowed me full control at that moment.

These types of trusts differs from state to state, and the tax portion is federal with state to state variations.

No document can keep others from challenging you in court after their passing, but well researched and well written ones make it harder for them to cost you more than a little time. TAKE TIME NOW TO MAKE YOUR AGREEMENT STRONG! Make sure to include any accounts involved. The sooner the better.

Also it may be better to register the trust or LLC in another state ( noticed you're from CA) as some states are much better than others. (We here in South Dakota have the best trust laws in the USA, just ask a lawyer! ) even if the business and assets are in California, a trust can be setup and registered in other states. Check out states laws as to which best suits your needs.
 
There are at least 5 kinds of trusts, probably more. Each with its own benefits and drawbacks. And in South Dakota a trust can be truly perpetual if so desired as well.
 
Dad actually wrote ours himself ( the state supplies much of the required wording for legality) and only added his own bylaws to that for the trusts.

I have been legally challenged but not been to court yet, however my lawyer said they look good and solid with all the necessary wording, they just wished for a few minor changes like: where fores, where as, there fores etc. But admitted all of it was proper, legal, and complete.

But as I said dad studied those laws for months!

Your time might be better invested elsewhere, everyone has a different situation.

Ours is much more complex than what you're talking about though...... MUCH!
 
You have two separate situations you need to solve, business transfer and estate planning. You need a lawyer that specializes in that area. Actually, two lawyers are necessary. You need an attorney to represent you on the business purchase, and the owner needs a lawyer to help sell the business. If the owner is smart, he will utilize the sale to help with the estate planning.

IMO, you should buy the business outright, and have the owner finance it. That way you drive the train, and if it jumps the tracks its on you. I expect almost all assets are fully depreciated. That means the owner will be paying income tax as ordinary income on most of the proceeds. By paying for the shop in installments, the owners tax rate will be lower.

I expect your biggest hurdle will be valuing the assets. Value on a typical machine shop with no intellectual property is auction price of the machines, less auctioneer fees and other auction costs. Long term contracts may add some value, but long standing customers without contracts may leave as soon as the current owner leaves. You may consider keeping the current owner as a commissioned salesman.
 
It seems there are a lot of differing opinions here ( as expected, and the whole point of a forum! ) As president and member of multiple trusts and an LLC, let me answer a couple questions here.

(1) certain trusts require annual tax forms and state filings, these can be accomplished by any member of the trust.

Other trust types require only the initial filing and any other information you want filed later is added at will but not required.

(2) since he doesn't want to sell the business outright, a BUSINESS trust will allow him ownership and control as long as the majority of the members of the trust allow him to. And if you both have an agreed purchase plan at some point it can be simply added to the trust documents.

(3) no attorney needed, especially after creation. The paperwork is easy and straight forward. If your trust requires annual reports they're easy to file and fill in most states. And adding any additional documents you want to file with the state later is easy and low cost.

(4) An LLC does require an annual report, and does have an annual fee, but does limit liability of each member. This protects each member of a business from any lawsuits or bills any other member or the LLC might face. (So if the a member or the business gets sued they can't take a penny of your personal assets) The actual LLC needs not have any actual property listed and often the LLC can be created as having only cash as it's only asset, in SD the minimum cash asset value is $100.00.

Having the trusts and LLC set up this way prevented me and the business from being liable for dad's extensive medical bills after his untimely death.

Dad and I began working with and on trusts 14 years ago and have spoken to many about how others are set up and operated.
There are limitless ways of actually operating a trust since a trust is similar to a corporation and allows the members to make the rules of how "business" is carried out and whome has which duties.

I strongly suggest you search for yourself about them before calling a lawyer, it'll save you a lot of money. Once you are informed about what they are and how they work you'll be far more prepared to answer questions and demand certain features.
 
Thanks so much everybody! I was definitely planning on hiring my own lawyer, whatever the circumstances of the business transaction are. My main concern is making sure that whatever happens is fair to everyone, while also making sure I don't get hosed or threaten my personal assets.
 
Used to be a monthly column In Modern Machine Shop called
"Blackman on taxes" IIRC he had a few ways of doing this.
 
I sold my business two years ago to an employee and his financial partner(who was a customer of mine). Wrote me a check for the land and building. A week later wrote a check for everything else.

They formed some kind of LLC. I am now an hourly employee. I have more money in the bank now than I ever did in the 42 years I started and owned the business.

No lawyers on my side of the deal. I don't know about their side.
 
Given that Average Joe lives in Uzbekistan, he needs legal consult for that country. Ha ha. State law controls this situation so any advice from outside the state of Uzbekistan is suspect. Somebody else said this - one attorney for their estate planning, one for your business deal.

OK fine, just research it on the internet and do whatever everyone says. That'll save you a TON of money.
 
.and will cost something like $2000 a year if professionally administered.
John is right about the expense of filing trust tax returns. Ours costs around $1,200 a year. And Turbo Tax can not do the 30 some page trust tax return. In fact, it takes some searching to find an accountant who knows how to do trust tax returns.

My wife and I have a charitable trust. That's an ultra legal way to avoid capital gains taxes. Charitable trusts are the way non-profits like universities and medical institutions support themselves.
 
One problem is the old man getting old but not dying[no offense to any old men]
The shop cannot be an asset or it will be taken to pay for nursing home etc. 3 year lookback at least.
So it feels like a trust is probably the way to go, however it will work

Keep in mind that it may not work out due to differing opinions on a lot of things, and that is ok too, rather than being in a bad situation
 








 
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