If you’re like most owners, you’ve invested much of yourself into your business. Inevitably, you’ll need to walk away one day to embark on the next chapter of your life. Business owners often transfer the reins to a family member. Here are five key factors to weigh if you hope to transfer ownership to a family member.
Know the Benefits of Gifting
Do you intend to sell a business to a family member, or to give it as a gift? Gifting offers several advantages, such as a reduction in real estate taxes. The gifting process also allows you to retain some control if you properly word the agreement.
The Purchase Agreement
When selling to a family member, it’s easy to rely on verbal agreements, a handshake, and trust. Don’t overlook the role of the buy-sell agreement, which lays out specific expectations and protects both parties. This document adds significant clarity, reducing the risk of conflict, stress, and later misunderstandings. When you’re ready to transfer the business, get legal help to draft a document that clearly lays out all relevant details. The document must include details about the value of the business, the amount paid, who will be kept on the payroll, the owner’s future level of involvement, and who takes on which liabilities.
Seller financing is prevalent and can increase the pool of available buyers. When selling to a family member, seller financing is omnipresent. One option is a private annuity, which allows you to spread payments over many years, potentially even extending until the end of your life. An accountant, M&A advisor, and lawyer can help you assess your seller financing options, and weigh which approaches might work best for you and your family member.
The Self-Cancelling Installment Note
Installment notes can include a self-cancellation clause that benefits your family member in the future. This clause indicates that if you die before all payments are made, the remaining debt can attach directly to your will. This is a great option for parents selling to children since it prevents other children from paying hefty income taxes on your estate.
The Role of the IRS When Selling to a Relative
Taxation is enough to leave anyone stressed and overwhelmed. When you sell to a family member, the IRS will likely carefully inspect the transaction. It does ensure that everything is as it appears to be since some owners use purported sales to escape taxes and other liabilities. The sale must be done according to the law, with a clear paper trail. Your lawyer or accountant can help you ensure you’ve completed the right paperwork and appropriately structured the transaction.
A business broker can help you manage the unique challenges that selling to a relative presents. Each business is unique. So too is every sale. No advice applies to everyone. The right professional advisory team can give you personalized advice that helps you avoid common mistakes that can cost you time, money, and sanity.