Selling your business to family
THIS is just one of many lessons entrepreneurs should learn before selling a business to their children. Here are four more tips for a smooth transition:
The right valuation
While selling a business to a family member is not the same thing as selling to an outside buyer, in both cases the owner must determine the fair value price of the company. But what fair value means can vary depending on the buyer.
The actual valuation process should be the same for everyone, said Dean Deutz, a private wealth consultant with RBC Wealth Management in Minneapolis. You should look at cash flows, debt, potential customer base and more. The difference comes in the valuation number you use.
The price is typically based on a multiple range. A business could be valued at between 15 and 20 times earnings, for instance. If you sell to an outsider, you’ll take the high end of the range. When you sell to a family member, you usually take the low end, Deutz said.
Connect with a skilled advisor But taking the low end only works if you don’t need the income from the sale, he added. Some people will want to charge their children the higher amount because they need the money for retirement.
How to pay
Typically, when a business owner sells, the buyer will pay for the company upfront or in installments over a period of time. But when a family member buys a business, money tends not to change hands right away. Generally, the children will pay the
purchase price over a number of years out of the cash flow of the business. It could be three years, or a lot longer— depending on company cash flows and t he financial situation of the parents.
Giving a gift
If you charge a lower rate or hand over shares of the company for nothing, it’s considered a gift. While de Gaspé Beaubien advised against this route, business owners who are financially secured may want to hand over the company to their children for nothing in return.
Tax considerations may also factor into the decision of whether to sell or gift.
Get it in writing
Family business is often conducted with a handshake, but verbal agreements can cause problems. An owner should have a shareholder agreement in place outlining who gets to vote, board member responsibilities and how shares should be valued in the event of an exit.