7 Things To Consider Before Passing A Business On To A Family Member

Passing a business down to a family member can be an occasion for celebration for the business owner and the family, there are several considerations the business owner has to keep in mind to make this process as streamlined as possible. Some of the most important factors to consider when passing down a business to a family member include: 

How The Sale Will Be Financed

When you sell your business to a third party, you typically get your money upfront or in some type of installment. In many instances when people sell to families, the financing of the sale is not discussed enough.

Do you plan to transfer ownership outright? Is the expectation that you will receive proceeds from the business in lieu of an upfront payment? What happens if payments are not made?

This can lead to further future complications in which the owner does not get their money on time or gets less than the agreed amount. 

It’s vital to get written confirmation on exactly how you will be paid and the timeline of your payments for transparency for the previous owner and the new owner.

Getting the details of the deal clearly written and agreed upon will make the transition for both parties clear before you hand over the keys.

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How Will You Value The Business

Oftentimes, selling to a family member may mean that the seller is not seeking the maximum price or even fair market value. Getting an objective valuation for the business (or the assets) can provide a baseline for what the business is worth even if the parties agree to a reduced price in order to keep the business in the family. 

Engaging a CPA or other financial professional to perform an objective analysis can help take the emotion out of the process and provide a starting point to discuss what is reasonable and viable for both parties.  

How To Minimize Taxes

It’s likely you will want to explore how you can transition to a family member while reducing the total amount of taxes you will pay on the sale of the business. Consulting with a CPA will help identify the best way to structure the sale of business based on the circumstances.

Taking payments in installments is one approach that can benefit both parties. It can reduce the tax liability for the seller and allow a family member to make payments over time using proceeds from the business.

A Certified Financial Advisor can also help provide advice on structuring transitioning the business through a trust or other instruments that are available to families.

It is important to consult an expert when making any decisions to ensure you are compliant with state and federal tax codes. 

Written Contracts And Agreements

It is natural for family members to rely on verbal agreements or other forms of informal agreements between you and a member of your family. That may work for discussions but eventually, it is vital to document the terms and sign a legal agreement. This can reduce misconceptions down the road as well as document the transition for state and federal agencies. 

Not having a legally binding agreement that details the sale of the business in writing and includes signatures from you and the buyer can be a crucial mistake.

The agreement should include how much you’re selling the business for and how you will receive payment from the buyer. It’s recommended to have these documents looked over by a lawyer that has experience with business acquisitions. 

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Personal Relationships

The choice of which family member you sell your business to may cause a strain on your personal relationships within your family. When you’re selling your business to a family member, the entire family will be aware of you selling your business, and your decision on who you’re selling it to may cause disagreements and other issues.

Even if multiple family members are involved in buying the business, one family member will likely become the key decision-maker in day-to-day operations. Making this clear to everyone involved is an important part of the transition.

Try to communicate that this is a business decision while respecting the emotions others may have with this decision. 

Timeline Of Selling The Business

Timing for this sort of transition is often tied to the readiness of a child or other family member to take on the responsibilities of running a business.

If the individual has worked in the business for some time and is already familiar with the day-to-day operations, you may want to spend time talking about the mental shift to becoming the boss.

In just about any sale, a transition period to help a new owner learn the details is a best practice and this still holds true with a member of your family. This can be an overlooked step as a parent can simply assume that their child will know how to handle the more nuanced situations with employees, vendors, or customers. 

Ideally, you can set a timeline to prepare the business, start the process of training your child to step into your role and then take steps to obtain a valuation and create an appropriate agreement. 

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Explore Gifting The Business

In some scenarios, gifting your business may be the best route to transition the business to a family member. If you do not need the proceeds that a sale to a third party would generate, this can be a great route for sellers looking to pass down the business to their children.

By gifting the business to a family member, there can be significant tax savings for the owner. In the U.S., you can gift up to $5.43 million in assets before capital gains taxes are owed.

It’s highly recommended to consult with a lawyer and CPA if you’re exploring gifting the business to a family member as laws change including the amount you can gift.

Selling or gifting a small business to a child can be an emotionally satisfying path for many small business owners. Knowing the next generation will step into managing and growing the business and possibly pass it down to their children is a dream for many entrepreneurs.

With a bit of foresight, planning, and clear communication, you can make this meaningful transition happen.