7 Considerations When Selling a Business to a Family Member or Related Party

Selling your business to a related party can be appealing.

For one, you can retain some level of business control and continue to receive income, buying you time for a smooth exit.

Maintaining family pride and identity is another sound reason to keep your business within your family line. 

However, a family business sale can be marred with nuances that can create issues if not handled with the right mix of tact and forward planning.

Feelings of entitlement, sibling rivalry, emotional attachments, and unskilled family members are some of the challenges you may find yourself up against.

That’s why you should be more tactful when making a family business sale. These seven pointers will help you do just that:

1. Settle for an Income Option that Will Help You Achieve Your Retirement Goal

It’s tough to keep yourself from making unprofitable compromises when family members are involved, but you can do it.   

Focus on your income goals from the sale. 

Calculate how much money you’ll need to retire to decide the best income stream from the sale.

You can review these and more options with your accountant to see which works best for you: 

  • Selling your entire business for a lump sum
  • Making a partial sale and continuing to earn income from the business
  • Remaining connected to the business as a paid consultant
  • Maintaining ownership of some business assets (including intellectual property) and leasing them for income

2. Appoint a Third Party to Help with Dispute Resolution 

When you have more than one potential successor eyeing the ownership of your business, you may have disputes.

Emotional tensions can cause divisions, delay the sale, or render it impossible in some cases. 

Involve a trusted outsider like a lawyer, business advisor, or accountant to provide an objective opinion in case of disputes and keep the sale moving.

3. Choose a Successor Based on Merit

Power struggles can threaten the life and health of your business.

Choosing a successor objectively (based on their willingness and skill to run your business) can help maintain family equity.

Some of your options for maintaining equity are:

  • Letting the successors earn their role by putting them on a trial period where they take on different responsibilities
  • Having a transfer period where you work side by side with the successor to make them understand the ropes of the business

4. Separate Ownership and Management

You’ll most likely want to retain experienced professionals, especially top managers, who have worked with you over the years.

These employees may resent a new (less experienced) owner who tries to run the business differently.

The situation can worsen when there are multiple successors with conflicting agendas. 

Separating ownership and management can solve this problem. You can:

  • Draw up a management and ownership agreement that outlines permitted and restricted activities for owners and managers
  • Establish a strong board of advisors comprising both professional family members and outsiders
  • Create processes and structures that every business member must adhere to for decision making

5. Get A Proper Business Valuation

According to the Australian Taxation Laws, you’re liable for capital gains on the market value of your business if you sell it to a related party at a price below or above the market value. 

Professional business accountants in Adelaide can help you determine how much your business is worth to help save on taxes.

6. Choose the Best Way to Sell the Business 

Apart from selling your business at fair market value, you can consider different methods of selling that can help you save on capital gains tax. 

Some of your options include making an installment sale, selling shares, and stock redemption.

7. Consider the Pros and Cons of Providing Seller Financing

If a family member does not have enough money to pay for the sale in cash, you may have to vendor finance your business.

While loaning to your buyer gives you better bargaining power and increases the chances of selling at your desired price, you face the risk of a payment default.

To ensure that this arrangement works:

  • Have a lawyer draft a formal loan agreement
  • Get the buyer to secure the loan with business assets
  • Do not provide a high loan amount that will reduce buyer commitment

Choose the right accountant to advise if you’re making a wise financial decision. Remember that assets used as collateral can depreciate, making the buyer unable to pay the loan.

The Best Way to Make a Family Business Sale

Perhaps it has cost you decades of hard labour to build your enterprise. You deserve to sell your business effortlessly, profitably, and in a way that guarantees continuity. 

Succession planning is the best way to ensure a smooth sale. 

It takes about 12-36 months to complete a succession plan outlining all considerations for a swift and rewarding transition.

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