Buying a Family Owned Business

It is particularly important that buying a family business be considered as an investment, not a purchase, and certainly not a gift.  Making a good investment is based on homework, understanding exactly what you are investing into, risks and a goal for what you want to get as a return on the investment.  

Easier said than done when the business is owned by a parent and emotional issues start to influence business decisions.    Other family members may have expectations as to what their interest in the business is or should be based on long ago events or implied promises.  What the business is worth may be perceived rather than factual.  Plus many years of who helped when money was tight, or someone was ill and many other family issues can sneak into the conversation.   

Thus, if you are planning to sell your business to family or buy from family these steps may help to make the transition less traumatic and more importantly to be – fair to all concerned. As a starting point the owner should let their retirement intentions be known well in advance along with any expectations from the business and future owners such as the need for a retirement income.  

It is highly recommended that the owner obtain a qualified business appraisal to clear the air as to what the business is actually worth, defusing any misconceptions about what might be a fair purchase price. A business appraisal sets a starting point and lets all those concerned know that if they are not interested at this price the owners may consider the open market.

Consider the financing options. If a retirement income is desired will the sellers carry a contract to finance thus obtaining a long term steady income, or do they need lump sum cash out to pay off other debts?   Encourage anyone who may be interested in buying the business to start getting qualified for financing. I have seen a number of deals canceled when the buyer’s loan application is denied upsetting their dreams of owning the family business.

Review tax and estate planning considerations to avoid surprises and unintended consequences.  You may be best served by doing this several years before the intended sale to avoid capital gains or estate taxes. Moreover if the buyer will need bank financing getting the financials and taxes in shape may improve the banks willingness to make the loan.

Starting early will also enable the buyer to gain more experience running the business. The buyers’ management experience will also be important if bank financing is needed.   It is also possible that the intended buyer may change their mind once they test the demands of management.  Some people will recognize they are much better at performing the business functions and that management is not what they do best.

Finally, put it all in writing this is a business deal and family disputes can start over seemingly minor issues. Get an attorney to prepare a purchase agreement spelling out all the details.