When it comes time to consider selling your business at retirement age or for any other reason, many business owners look first to family members like spouses or children. Many family businesses carry on over generations this way, allowing the original owner to move on with a new chapter in life without removing the business from family control.
At Utah Business Consultants, we’re here to help if you want to sell a business to a relative as part of your exit planning strategy. There are a few important areas you should consider within this process, however, plus some benefits you should be aware of ahead of time.
Particularly if you’re very close with the family member you’re selling to, it can be temping to simply skip things like a buy-sell contract for the transfer of the business. We’ve seen a number of these transactions over the years, and we’re here to tell you: No matter how much you love this person, don’t skip this step.
A contract makes the entire process easier and simpler to understand – even if there’s no dispute or issue whatsoever. All you need is a basic document detailing things like the value of the business at the time of purchase, employees being retained or let go, any major operational changes, and the level of involvement the new owner will have.
Seller Financing Options
A common form of financing during any business sale is seller financing, which refers to the party making the sale lending money to the buyer to help with the purchase. When selling to a relative, your options open up even further here – for instance, you can use what’s called a private annuity, which allows payments to be spread over a number of years. A private annuity may even extend all the way until the end of your life, if you wish.
Benefits of Gifting
In some cases, you might be better off gifting your business to a relative rather than outright selling it. This might lower the taxes you have to pay (more on these below), and it can also allow you to retain certain parts of control over the business if you don’t want to be detached completely.
In cases where you sell the business, a self-cancelling clause benefits both you and your family. This clause states that if you pass away before all payments have been made toward the business purchase, the debt still left can be attached to your will directly. In cases where parents sell their business to a child, this prevents other children from paying crazy levels of income tax on your estate after you pass.
Know that you’ll undergo a bit of tax scrutiny from the IRS when you sell a business to a family member – unfortunately, some business owners have attempted to game this system in the past. As long as your paperwork is well done and you’ve worked with our business brokers to make sure everything is kosher, you should have no issues here.
For more on transferring a business to a relative, or to learn about any of our business valuation or exit planning services, speak to the pros at Utah Business Consultants today.