Transferring a business to a relative takes more than just a handshake.

 

Many owners dream of passing their business on to a relative. But, keeping it in the family is not as simple as you’d think.

That’s why we’re here to help. From the right valuation, payments, paperwork, authorizations, and more; we know what goes into a successful transfer.

1. The Right Valuation

When it comes to selling, it will always be the owner’s responsibility to determine a fair value price for the company. This is regardless of who it is being sold to.

This means that every owner thinking of selling needs to look at key pieces of data to come up with a valuation. Things like cash flow, debt, customer base, maintenance, payroll, and more need to be considered.

Further, the price will also be based on multiple ranges. Meaning, a business could be valued between fifteen and twenty times earnings. If this is the case, some owners might choose to sell at the low end of the range (especially if it’s to family or they don’t ‘need’ the money.)

2. Payment

In a typical sale, the buyer pays for the company upfront or in installments over a period of time. But when it comes to selling to a relative, money does not tend to change hands right away.

In this instance, the purchase price is usually paid off over time using the business’s cash flow. This could stretch the payment period over a few years, or longer, depending on the company and financial situation of the parents.

3. Loans

It’s also good to note that family members who loan money to other family members are eligible for special interest rates. That’s because, Applicable Federal Rates apply and only charge 0.48 percent annually for a loan that’s less than three years, 1.77 percent for a loan between three and nine years, and 2.74 for a loan that’s nine or more.

So, even if a loan does need to take place, as long as it is negotiated to be at the federal rate, the IRS considers it a business transaction.

4. When It’s Considered a Gift

If you charge a lower interest rate than what’s determined by the applicable federal rate or hand over shares; it’s considered a gift. For owners that are complete financially secure, this may be alright.

But, before giving a gift it’s important to take into consideration its tax implications. In the U.S., you can give up to $5.43 million in assets before capital gains taxes are owed (if it’s a couple that owns the business then it’s $10.86).

This means that although the business owner won’t have to pay tax on the gift amount, they will be liable for the cost base of the business that’s been transferred (when they sell). And, depending on the company’s circumstances, this could be high.

5. Get It in Writing

When it comes to selling, a buy and sale agreement should be created. In this agreement, details like the business valuation, payment schedule, amount paid, payroll, and information about the seller’s involvement should be included.

Doing this will prevent any confusion or potential arguments from forming down the road.

We also recommend owners having a shareholder agreement in place. This agreement helps because it will clearly outline board member responsibilities, who gets to vote, and how shares should be valued in the event of an exit.

Doing this in advance will make it much easier for family’s that are looking to sell as there will be clear outlines on what is expected.

Ultimately, we understand how lengthy and confusing a transfer can be, even if it is to your own family member. That’s why we’re here to help. We can walk you through everything you’ll need to ensure you have a successful sale.

If you’d be interested in learning more, or knowing what services would benefit you, give us a call at 407-328-5001.

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