While nearly 70% of millennials expect to get an inheritance from loved ones and family, only about 40% are going to receive them. Those who do get property, money, and even family businesses. If you want to transfer business ownership to a family member, the process isn’t too complicated but you need to look out for common problems.
Here are four ways to avoid issues when transferring business ownership.
1. Get It Valued Accurately
When you’re selling a business to a family member, you might not take some of the precautions or make the efforts you would when selling to a stranger. However, you need to know the fair value price of your company no matter who you’re selling it to. One of the major factors when dealing with fair market value is knowing who is buying the company and how much they’re willing to pay.
Ask any financial experts and they’ll tell you that you need to pursue the same valuation process no matter who is buying the business. It’s vital to look at your cash flows, how much your business costs to run, and what you anticipate to make in the future. It’s important to approach this from all sides, considering everything from future product development and even your customer base.
From this information, you’ll probably come up with a range of value for your business. The typical business is valued at around 15 to 20 times the company earns on an annual basis. This means that you could make all of your money back if nothing changed at all from the day you buy it or you could invest in growth and make even more.
If you’re selling to an outside party, you should sell your business at the higher end of the range. If you’re selling to a close family member, then you can go to the lower end of the range or even less, so long as the price seems within reason. If you really need the income, be honest with your family member and work on a compromise so that you can retire.
2. Decide How They’ll Pay
When you’re selling your business, typically the buyer is going to pay for the company upfront or via an agreed upon installment plan. However, when you sell your company to a family member, you can create a different setup for payment. Because of the variety of different cash flows and financial situations, you can consider what they need and what they can do to get the ball rolling.
If children are going to buy a business from their parents, they typically pay for the business from the cash flow of the business itself. It might take a few years or even longer depending on how well the business is doing. If the parents are fine with this setup, it can be ideal for everyone involved.
If you want a guaranteed loan from family members or want to support your heirs, you can give your family a special interest rate. While the standard interest rate at a bank is more than 3%, you can offer interest rates as low as a half of a percent. This ensures that you’re able to negotiate a loan that’s fair to your family without having to lose out on the deal.
If you know that your family members have the skills and resources to turn your business into a serious moneymaker, you can offer a higher interest rate. Talk with them about their plans, what they can afford, and what they anticipate making in the future. You’ll end up with a figure that makes sense for everyone.
3. Giving the Business As a Gift
Most financial advisors will discourage against giving a valuable business as a gift. However, sometimes its necessary to hand over your company for next to nothing. The company can be gifted in the form of shares of the company or it could be as simple as charging a minuscule interest rate.
If your company is valued at under $5 million, according to U.S. law, you could give this company as a gift without it being subjected to capital gains taxes. If you don’t have to owe taxes on a company, it can be an extremely lucrative gift to the heir who receives it.
For couples, this number doubles to over $10 million if they both own the business together. Business owners might not have to pay tax on that gifted amount but the receiver is going to have to deal with the cost base of the business.
If your business is valued at $10 million but you bought it for $5 million, a sold business has a cost base of $10 million. However, if you give it away as a gift, that business is only taxable up to $5 million at the start. Be aware that if the business grows while in the hands of the inheritor, the taxes owed on it could be serious.
4. Get Some Contracts
While you might think that family business can be managed with just a handshake, you need something substantial for yourself and your family members. The owner needs to have a substantial shareholder agreement in place so that everyone knows who gets to vote and what each board member’s responsibilities are. If anyone exists, there needs to be a way to value shares.
When you’ve got a shareholder agreement written, exit discussions are much easier to hold. Everyone will know what they’re owed and how they’ll get it.
Bring in some expert lawyers if needed. Estate planning is complicated so if this business is part of an estate, you’ll have to adjust it as conditions change.
Transfer Business Ownership to a Family Member Soon
If you want to transfer business ownership to a family member, you risk having to deal with taxes or fees. You want to ensure that you can complete this process as simply and as easily as possible. The best way is to do it sooner rather than later.
If you’re going through a divorce and want to get rid of other assets to protect your business, check out our guide for more info.