Selling a Business to a Family Member
One of the most common ways to transition a family business is by selling to a family member. This option is often attractive to business owners due to the ease of transition and the option to keep the business in the family. How does one go about selling a business to a family member? Below we discuss several important aspects to consider when selling your business to a family member. For more information see, Transitioning to a New Owner.As well as Transferring your Family Business.
Decide the Right Time
Many family businesses choose not to transfer or sell the business until it is often too late. Selling your business to a family member takes time and planning to ensure a smooth transition. The entire process of transition usually takes several years depending on how you structure it. It is best to start planning now if you wish to sell a business to a family member.
Selling vs Gifting a Family Business
The next important aspect to understand is the differences between selling and gifting a family business. Deciding which is best for you will depend on your exit goals and retirement needs. Selling your business is an attractive option for many business owners rather than gifting. Selling gives more flexibility to the business owner. It also creates buy-in for the family member receiving the business. Selling the business can also free the leaving business owner from further responsibility and decision making. Giving the new owner of the business the ability to really own and run the business. Most attractively, it can provide a great return and/or continued income for the exiting business owner.
Some business owners choose to gift their heir the business rather than selling it. Gifting a business is a good option for individuals who are financially secure and want to give their business away without an expectation of a return. When gifting a business there are many important tax considerations for both parties. Be sure to consult with a quality tax accountant as well as your lawyer.
A combination of selling and gifting is also common. This is called a partial sale. One of the main benefits of a partial sale is the ability to reduce potential estate taxes. Gifting a portion of your business also allows you to maintain control of the business until you are ready to fully exit. This can ease a successor into the business by increasing ownership until the time of sale. It can also make it easier for the heir to purchase the business due to the smaller portion of the business being sold.
Choose an Heir to Own/Manage the Business
Another important aspect to consider is your successor. Sometimes there is a clear successor and other times not. It is important to consider who is the most viable option and who would be the best fit to continue your vision and/or expand the business. In some cases, a family member may not be the best option to continue your legacy and meet your retirement goals. In this case, you may want to consider other potential buyers.
Know what your Business is Worth
Next, many small business owners don’t know what their business is worth. Oftentimes a family business’s value lies in the business owner. When it comes time to sell your business to a family member knowledge is key. The best way to understand what your business is worth and prepare to sell your business to a family member is by obtaining a business valuation.
Obtain a Business Valuation
A professional business valuation will help you understand what the fair market value of your business is today. This can include the value if you sell to a family member as well as selling to an outside buyer. A business valuation can also identify ways to make your business more valuable prior to selling. A business valuation can be especially helpful in family businesses heavily dependent on the owner. Peak Business Valuation loves talking with business owners about how to reduce their owner dependence and increase the value of their business. Schedule your free consultation today to get started!
Reduce Owner Dependence
One of the biggest challenges of selling a business is often the level of dependence the business has on the current owner. Especially in family businesses, this dependence can be significant. So, how do you go about reducing your business’s dependence on you? Here are a few ideas to get started:
- Choose a strong successor or management team
- Delegate decision making and problem-solving
- Document all key information, systems, and processes
- Plan your exit and spend less time in the day-to-day operations
Implementing the above ideas can make the transition to a new owner easier. For more information see Reducing Owner Dependence.
Determine a Selling Price
Once you understand the value of your business, you can then decide how much to sell your business to your heir for. Often selling to an outside buyer can result in a higher return, whereas selling to a family member is often on the lower end. However, the structure of the transaction is an important piece. Be sure that whatever you sell your business for that you understand what your retirement needs and goals are. See Determining a Selling Price for more information.
Structure the Business transaction
There are many ways to structure a business transaction. In most cases, the family member does not have enough cash to pay for the business in full. A such, seller financing is often a large part of selling a business to a family member. It can include a lump sum payment, plus a payment schedule (installments), a balloon payment at the end, or a combination. Transactions between family members tend to take a little longer depending on the financial situation of both parties. Generally, the purchase price is paid out over time with interest. In many cases, the previous owner will stay on for a time earning an income by consulting and transitioning clients. For more information read Structuring a Business Transaction.
Write a Formal Buy/Sell Agreement
The last aspect and one of the most important aspects of selling a business to a family member is a buy/sell agreement. Many family business transactions are merely verbal. This can create problems down the road especially if disagreements happen. A buy/sell agreement is important to successful business transactions and adds clarity. A buy/sell agreement details the terms of the arrangement. This can include the value of the business, the selling price, payment schedule, the continued involvement of the selling party, and other important aspects.
Selling a business to a family member or heir is an important event to plan. It is never too early to start talking about it and planning for it. Laying out clear expectations can help it be more successful. If you plan on selling your business obtaining a business valuation today can help you understand what it is worth. It can also identify opportunities to grow the business to maximize the value prior to selling.
Peak Business Valuation loves helping small business owners plan a sell a business to a family member or heir. We are happy to answer any questions you have about selling a business to a family member. Get started today by scheduling your free consultation below!
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