Important Points for Selling to a Family Member
Eventually, every business owner will have to turn over control of their business to someone else. There are many options for how this can play out. They range from selling the business to a prospective buyer or selling to a competitor to turning your business over to a family member. You must start thinking about these options years before you end up in a situation where you must sell.
Working with a Business Broker or M&A Advisor is one way to determine what sales options are optimal for you based on your specific situation. Let’s explore some variables you’ll want to consider when you transfer your business to a family member.
There are some significant advantages to transferring your business to a family member. No doubt topping the list of benefits of going this route is the fact that the transfer can be considered a gift. One advantage of this approach is that you’ll reduce your real estate taxes. Depending upon how the agreement is written, you also may be able to maintain some control over the business. For many business owners, this factor can be a significant advantage.
Selling financing is one issue you’ll want to explore when transferring your business to a family member. Seller financing is a common practice in buying and selling businesses in general. This type of financing is even more common where transfers to relatives are concerned.
Seller financing opens up the versatile option of implementing a private annuity. A private annuity can serve to spread payments out over a long period. This could be a win-win situation for both you and your relative. You would receive a long-term income stream due to ongoing payments. This decision may make ownership more financially realistic for your relative.
A buy-sell agreement is an invaluable tool that protects everyone involved. Keep in mind that if you sell your business to a relative, this in no way negates the need for a buy-sell agreement. Legal agreements must be firmly in place even when dealing with your most trusted family members.
This contract clearly outlines all aspects of the arrangement. Your buy-sell agreement should include critical information, including the value of the business, the amount being paid, information on which employees will be retained, the current business owner’s level of future involvement, and much more.
Working with Professionals
A range of potentially powerful benefits is ultimately associated with transferring a business to a relative. While it is true that you can expect the IRS to evaluate the sale closely, this should not dissuade you from considering this option. Business Brokers and M&A Advisors are experts at buying and selling businesses and understand the specifics of transferring a business to relatives. Working with professionals early in the selling process can help you gain tremendous insight into the best way to proceed.
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