Summary
- Some reasons owners choose to sell the family business include retirement, market price, diversification, lack of a clear successor, and liquidity needs.
- Preparation is key to getting a higher valuation and sales price.
- Tax planning and estate planning should be top of mind for family business owners to help preserve wealth.
- Unbiased can connect you to a financial advisor who can answer all your questions about selling a family business.
Why do people sell a family business?
There are a number of reasons to sell a family business.
Retirement: You may want to sell the family business when you’re looking for a lifestyle change or retirement. Selling the business can help you simplify your life and finances without the demands of running a business.
Favorable market conditions: You might consider selling the family business for the right price. If your brand is strong and your business commands a strong valuation, it might be the right time to sell.
Family dynamics: Lack of a clear successor or disagreements among family members may cause you to consider a sale. You can equitably distribute wealth when the business is sold.
Diversification: Much of your net worth might be tied up in a family business. Selling and investing your money in different areas can help reduce your workload while providing a more diverse portfolio.
Changing market conditions: If you’re not able to change with the market to stay competitive, you may choose to sell the family business. It could be the need to update technology, change processes or products, or adjust to hiring needs.
What steps do you need to take when selling a family business?
While selling a business looks different for everyone, you might see the following steps.
Step 1: Build a team
Selling the family business means you’ll want expertise from advisors in a number of different areas. You should look at business advisors, accountants, attorneys, financial advisors, and other experts.
Your tax advisor should be able to strategize with you to reduce your tax exposure. A mergers and acquisitions (M&A) attorney can help you look at ownership and liquidity options. A financial advisor can help you prepare for the next steps in life.
Step 2: Prepare
Pay an advisor to help you see the company’s risks and value. Identify areas where your company demonstrates the most value. Make sure financial statements are audited and accurate.
You’ll also want to explore your business exit options. You may want to consider selling to a third party, a management buyout, an employee stock ownership program (ESOP), or an IPO.
Step 3: Get a valuation
Have a clear understanding of what your business is worth before putting it on the open market. A valuation shows what the future earnings potential of the company is, what its assets and liabilities amount to, or a multiplier of the seller’s discretionary income report. Working with experts who have done this with family businesses before can help streamline the process.
Step 4: Develop a transition plan
A transition plan ensures operations will continue without you there. Be sure to outline processes, introduce the new owner to employees and vendors, and communicate what your role will be and how you’ll eventually step away during transition.
Step 5: Prepare for taxes and post-sale finances
A financial advisor can provide guidance for what life looks like after you’ve sold your business. Enlisting their help before you sell your business can help you be the most efficient with your taxes and ensure you have adequate funds for your next venture.
How can you reduce tax when selling a family business?
Tax planning should be at the front of your mind as you sell your business. Reducing taxes may involve one or more of the following strategies:
Installment sale: By taking installment payments over time, you also pay capital gains over time. This can help keep you in a lower tax bracket and pay taxes more efficiently.
Asset sale vs. stock sale: In an asset sale, the buyer pays for the individual pieces of the company, or assets. In a stock sale, the buyer obtains ownership of the company through the purchase of company shares. There may be a more favorable tax treatment for the seller in a stock sale because capital gains come from the sale of stock, which is often lower than being taxed as ordinary income.
Charitable giving: Capital gains are reduced by the amount of a charitable gift from your business. If you donate shares of the business before being sold, you may be eligible for an income tax deduction from the stock’s fair market value. The shares held by the charity aren’t subject to capital gains tax.
Qualified small business stock exclusion (QSBS): If you qualify, you may be able to avoid paying taxes altogether on the sale of your business. There are a number of conditions, such as a C-corporation requirement, acquisition after September 27, 2010, assets less than $50 million, not a holding company, shares held for longer than five years, and not a business involving personal services, such as banking, investing, or insurance.
Plan for state taxes: The state you live in matters when your business is sold. Some states have a high capital gains tax rate, while others have none. Relocating years before the sale of your business could potentially save you a bundle on taxes.
What else do you need to consider when selling a business?
Tax implications and deal structure: How you structure the sale can impact how much you’ll pay in capital gains. Consult with a financial advisor on how selling the business over time or as an asset sale vs. a stock sale will affect your taxes.
Clean financials: The closer the business is to being ready for a sale, the more value you can get from it. Clean financials create the grounds for an easier, high-value sale. Buyers will look closely at everything, including compensation for family members, personal expenses, and other one-time expenses.
Transition planning: Consider what you want your role to be after the sale. Are you able to guide the company through the transition phase to the new owner? Clearly defining your role can help the deal be more successful.
Protecting your proceeds: You’ll want to ensure more of your wealth is passed on to heirs by reducing tax exposure. One strategy involves creating a trust, such as a GRAT (grantor-retained annuity trust), to freeze the value of gifted equity in the business before selling it.
Family dynamics: Selling the family business is an emotional process. The different ideas and roles of stakeholders can complicate things. Some family members may want to stay with the company. Setting up family governance ahead of time can help. Clear communication and early preparation are key.
Bottom line
Selling the family business is a complex process, not to mention an emotional one. It’s helpful to have the right people in your corner. Unbiased can match you with an advisor who can answer all your questions when the time is right to sell the family business.