Surveys will tell us that about 25 percent of all business transfers happen between owner and child. Of course, this isn’t an owner’s only option. An owner may choose to sell to a third party, or create an Employee Stock Ownership Plan (ESOP). Alternatively, they could sell to their partners or key employees or even decide not to sell and hire a manager to handle all the details of the operation. However, with nearly 25 percent of all business transfers happening between parent and child, it’s important to discuss why so many people find it appealing. Here are some of the advantages of selling your business to a family member.
A parent-owner can structure the ownership transfer to ensure that they receive the amount of income they need or want during and after their exit. This payment between parent and child is not dependent upon the value of the business, but rather a mutual agreement between parent and child. The deal can be designed to transfer the business ownership over time, but have the owner retain control of the business during the buyout period. That means that the parent can maintain control and oversee the business until they receive all the money they want or need.
“Almost” Guaranteed Success
A transfer of ownership between parent and child usually takes longer, but having someone around who has successfully run the business in the past helps the child-owner in two ways.
- Transferring ownership over several years provides time for the child-owner to be thoroughly trained, build confidence, and prove they can run and grow the business successfully.
- The child-owner has help available if something unexpected happens. The child is never alone and can rely upon the parent’s years of experience if they’re unsure what to do.
Time to Untangle from the Business
Because of the long transition times, parent-owners can gradually unwind from the business and develop other interests and hobbies. This means that parent-owners will have time to prepare themselves for life after the sale of their business. Many owners simply don’t understand the emotional change that happens when selling a business. The normal day-to-day running of a business is gone, and now, retirement hits. However, by selling to a family member, the parent-owner isn’t automatically out of the business. With a child-owner securely running the business, the parent-owner can gradually reduce their hours and adjust to working less, until eventually, retiring altogether.
By transferring a business between parent and child, taxes can be minimized or even eliminated if handled correctly.
If you’re considering selling your business to a family member, we’d love to help. Contact us today for a free, no-obligation, consultation.