Selling Your Business To Family – Tips And Considerations
Keeping Things In the Family
After toiling for years to build a successful business, you are proud of your accomplishments but ready to take some time off, or perhaps retire altogether. Because you have so much invested in your company – both financially and emotionally – you hate the idea of seeing strangers behind the counter, or in your favorite office chair, or chatting up your suppliers. Perhaps it has been your dream to create a business your children could enjoy, and maybe even hand down to their children. Some of the greatest private wealth ever created has come about through the multi-generational ownership of business enterprises.
Benefits to Family Ownership
There are many challenges a business owner faces when it’s finally time to move on. By selling to a relative, some of these problems disappear or are greatly lessened. If a buyer comes from your own family, there is no need to actively market the business for sale. Little due diligence is necessary, because you already know everything about that person’s financial situation and business acumen. Financing the sale is easier, and there are tax advantages to transferring ownership to a relative, such as via a private annuity or an installment deal. One might assume the buyer has been intentionally groomed to take over the business, so there is an expectation that the success the company has enjoyed down through the years would continue uninterrupted. Customers and suppliers alike would see a familiar face and feel comfortable that the business has remained in satisfactory hands. Finally, if your personal relationship with the buyer is a good one, they will likely welcome your continued involvement with the business, especially during the critical transition period.
Watch Out for the Drawbacks
Tolstoy famously wrote, “Happy families are all alike; every unhappy family is unhappy in its own way.” There are definite pitfalls to selling your business to relatives, especially if there is tension among the crowd for non-business reasons. The selling price is perhaps the greatest point of contention. It is not unusual for a child or other family member to assume that they will be offered a special discount. If you expect to receive the best possible price, selling to someone else may be your best option. Along the lines of pricing, tax issues can cause problems as well. The IRS always looks more closely at family business transactions than it does in a buy-sell agreement between strangers. This goes back to the “discounted sale” issue mentioned above. Of course, if you can offer documentation that the price you’re being paid reflects the true market value of the business – here is where an independent business appraiser is especially valuable – you should have no difficulty with the government. And in the event you truly want to be rid of the business once and for all – Tahiti is calling, or maybe just some ice fishing up north – you may find yourself dragged back into the everyday workings to help settle a management issue, or to provide guidance to a buyer who is not as prepared to take over as he or she may have originally thought.
Arbitration, Or Just Another Perspective
Expert advisors – an accountant or CPA, an attorney, and a banker – are immensely valuable to the smart business seller. If your plans include a sale to a family member, there is no reason to ban these experts from the negotiation table. First of all, they form the perfect transition team for the incoming generation, acting as a repository for valuable historical information and sound advice moving forward. More importantly, they offer a wise, third party perspective that can help smooth out the rough spots and even nip problems in the bud before things escalate into intra-family warfare. The advice they can give regarding the value of the business, the structure of the sale, and the method in which the transition from old owner to new will take place, is far more valuable than the fees they collect to work on your behalf. Use them wisely and often.