Selling Your Business to a Family Member

Why a family sale is a different kind of deal

A sale to a stranger has a clear shape. The buyer wants the lowest fair price, the seller wants the highest, and an intermediary sits between them and takes the heat. A family sale has none of that distance. The buyer is someone you taught to ride a bike, and you will be sitting across from them at holidays for decades. Both sides tend to avoid the hard conversation about money, and that avoidance is the most common way these deals go wrong.

A family buyer also has an advantage and a weakness at the same time. They know the business better than any outsider could, including the customers, the staff and the quirks of the equipment. They have often never had to prove they can run it without you, because you were always in the next office. A stranger would be asked to show that on the first day. A son or daughter should be asked the same thing, perhaps more gently, and the answer should be written down somewhere other than your memory.

If you have never talked about it openly, start by asking whether the person wants the business at all. Owners often assume a child wants to inherit something the child has quietly decided to avoid. Better to find that out over coffee this month than after you have turned down two serious outside buyers.

Setting a price the family can live with

The price has to be a number you could defend to a stranger. A discount for family is a gift, and gifts have tax and estate consequences that your accountant and attorney need to look at before anything is signed. If you intend to give part of the value away, say so out loud and put it in the paperwork as a gift. Dressing it up as a low sale price causes trouble later, with the tax authorities and with the other children.

The usual starting point is an independent valuation. Our post on how much your business is worth explains how value is built from earnings, and the same method applies when the buyer shares your last name. An outside number takes the emotion out of the conversation. It stops being what you think versus what your son thinks and becomes what a neutral party concluded from the books.

Expect the family buyer to push back on that number, and expect to feel a little insulted when they do. Younger buyers often compare what you earn on paper with what they know you take out in cash, travel and family expenses, and they decide the business is worth less than your asking price. Owners in the reverse spot sometimes insist on a price that would be fair for a company with a full management team, when the successor is taking over a business that still runs on the owner's relationships. Both of those arguments have some truth in them, and a valuation that handles add-backs and owner dependency cleanly gives you something to point at.

How the money usually gets paid

Most family buyers do not have the cash. A son who has worked for you for fifteen years has a salary, a mortgage and maybe some savings. That leaves three sources. A bank or an SBA lender may finance part of the price, based on the business's earnings. You may finance part of it yourself with a note that the buyer pays back over several years. Or the buyer may bring in an outside investor or a spouse's family.

Owner financing is common in family deals and it works well when it is treated as a loan and not a favor. Put the interest rate, the monthly payment, the term and the consequences of a missed payment in writing. A note that quietly goes unpaid for a year because the buyer is your daughter is the kind of arrangement that turns into resentment. Our guide to seller financing goes through how these notes are normally structured and what security a seller can ask for.

The business has to be able to carry the payments. If the earnings after paying the new owner a fair wage cannot cover the note and the bank loan and still leave room for a bad quarter, the price is too high or the term too short. Run the numbers with a slow month in them. A family deal that only works in a good year puts the whole family on the hook for the next recession.

You should also think about your own income. A note paid out over ten years is your retirement, and it depends on a business you no longer control. Ask what security you hold, whether life insurance on the buyer makes sense, and what you can do if the business starts to slide while you are still owed money.

Can the successor run it without you

Love for the business and the ability to run it are different things, and a family member can have the first without the second. Look at what you do each week that nobody else can do. It might be the pricing, the relationship with your biggest customer, the conversations with the bank, or the final call on hiring and firing. Each of those has to move to the successor before the sale, not after it.

A practical test is to take a long trip. Two or three weeks away with a phone that stays in your pocket will show you more than any meeting. Notice what gets decided without you, what waits for you, and what the staff do when the new boss says something they disagree with. Staff who have known the successor since they were sixteen sometimes find it hard to take direction from them.

Customers matter here too. If the business depends on a few large accounts, introduce the successor properly, and do it while you are still there. Our post on owner dependency covers the habits that make a company easier to hand over, and nearly all of them apply to a family handover as much as a sale to an outside buyer.

The other people in the family

The sale does not happen in a vacuum. If you have three children and only one works in the business, the other two have feelings about what the business is worth and what they will receive. A discounted sale to one child can be read by the others as an early inheritance that was never discussed. Some owners hold a family meeting and explain the plan. Others deal with it through the rest of their estate, leaving other assets to the children outside the business so the totals feel fair. Your attorney will have a view on how to document it either way.

Spouses count as well. A spouse may hold part of the stock, may have signed a personal guarantee, or may simply rely on the business income. A buyer's spouse may be asked to guarantee a bank loan. Talk to both of them early, since they sometimes have objections that nobody voices until the closing table.

Co-owners are a separate case. If a brother or sister already owns part of the company and you want to sell your share to your own child, the existing ownership agreement may give the other owner a right to buy first or a say over who joins. Read it before you promise anything to anybody.

The paperwork that keeps everyone honest

A family sale needs the same documents as any other sale. That means a purchase agreement, a promissory note if you are financing, security for the note, a lease or an assignment of the existing lease, and a transition agreement that says how long you will stay and what you will do. Whether the sale is of assets or of the company's stock changes the tax result and the liability the buyer inherits, and our guide to asset sales and stock sales shows how the two differ.

Be careful about the temptation to skip lawyers because everyone trusts each other. The documents exist for the day trust is under strain, whether from a death, a divorce, a bad year or a disagreement about the direction of the company. Each side should have its own attorney, and it helps if they are not the same firm that has handled the family's affairs for thirty years. Rules about family transfers and gifts vary by state and your attorney confirms what applies to your situation.

You will also want a written plan for the transition. When do you step back from daily decisions? When do you hand over the bank relationship? Do you keep a title, an office or a vote on major spending? Owners who leave these points vague often find themselves second-guessing the buyer from the next room, and the buyer finds it hard to grow into the role.

What to start on this week

Begin with the conversation you have been postponing. Ask the family member whether they want the business, what they think it is worth, and how they would pay for it. Their answers will tell you whether you are planning a sale or a hope.

Next, get an outside valuation and have your accountant explain what a gift or a discount would cost in tax. Write down what only you do in the company and start handing the first piece of it over this quarter, so that you can watch how it goes. Ask your attorney how the other children and any co-owners should be told.

If it turns out the family member cannot take over, or does not want to, you still have a business that can be sold on the open market, and the preparation you did will carry over. At Business Advisors of America we work with owners on both paths, including the ones who start with a family sale in mind and end up choosing an outside buyer after the numbers are on the table.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.