How To Sell A Small Family Business – Family businesses are the backbone of the U.S. economy, but only about 30 percent survive into the second generation, according to the Small Business Association.
Small businesses can be difficult to maintain. Often, founders let emotions, family dynamics, and concerns about equity drive their business decisions.
How To Sell A Small Family Business
While these factors are important, they can lead entrepreneurs to make choices that are not optimal for the future of their business or their financial portfolios. “What’s in the best interest of the company has to be the first priority, because the company can only be what supports your family and your employees,” said Baker Crowe, senior vice president of private wealth management.
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The main decision to make is to keep the family business. If you pass it on to the next generation, how can you effectively pass the resource on to your successors? Or if you are going to sell, what kind of buyer will you be looking for? No matter what the exact plan is, emotions are bound to come up.
To avoid getting emotional, the first step might be to talk to family members about the future of the business and then weigh each option to determine the best path forward. Here are three common ways to divest a business and key considerations:
If a family member is interested in running your business, you might like the idea of passing it on as a real treat. This strategy only works if you don’t mind paying taxes on that gift. The IRS requires a third-party appraisal by a qualified appraiser. If the business is worth more than a certain amount, the business owner will likely pay gift or estate taxes. The exact amount depends on the structure of the transfer, so check with your banker and lawyer about your options. For example, married couples may decide to give a split gift, which increases the amount of your donation.
Another popular option is to set up a grantor-retained annuity trust (GRAT). By placing the business in a trust, owners can tailor the way the business is passed on to the family and strategize to minimize tax liability on the transfer. The IRS has strict guidelines for these trusts, so check with your attorney and accountant to see if the strategy will work for your business.
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Even if you are ready to retire, you may not have the financial resources to stop your business and the income it generates. A happy medium between giving the business to your children and selling it to a third party may be to sell it to your children. Family members retain control while you receive additional pension money.
There are some caveats. First, can they afford to buy it? If not, you could take out a promissory note — essentially a “promissory note” — and they could pay you back over time, Crow says. However, this only works if the company generates enough cash flow to cover this payment and still provides enough revenue for the new owners. “Do you want your future security to depend on their ability to run a business and pay you back?” asks the crow. If the answer is no, they will need to find external financing, such as a bank loan.
If your family is already involved in the business as employees, you may also consider creating an employee stock option plan (ESOP) that gives them a percentage of their salary as equity or company stock.
Selling a business to a seller can result in a large capital gain. You can consider setting up a Charitable Trust (CRT) to reduce your tax burden. With this strategy, you would put the business into a trust and your children would buy it from there. You and your spouse can receive lifetime income from the trust, either as a fixed annual amount or as a percentage of its total assets. The downside to this strategy is that after you and your spouse die, the remainder of the trust automatically goes to a charity of your choice, not your heirs, so no capital gains tax is due when it’s initially established. up.
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From a financial perspective, you can get a higher price by selling your business to an unknown buyer, such as a competitor, private equity investors, or even unknown employees. This is a good option if you don’t have children interested in taking over, or if you have reliable employees who want to buy it. It could also be a useful strategy for keeping the family calm. “When you have four children and only one of them works for the company, it’s very difficult to be honest because the interests of the other children may not be aligned with the interests of the company,” says Crowe.
Before embarking on this path, it’s important to have a good idea of the value of your business and a realistic expectation of your family’s future financial needs. This is a good time to get your lawyer, accountant and wealth advisor involved as they can help you determine if you can get what you need or if you should stay longer and grow the business.
Whether you give away or sell your business, and whether it stays in the family or not, can have a big impact on your family’s long-term financial security. “It’s not an easy or quick decision,” says Crow. “You should have a business succession plan in place many, many years in advance.”
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In Part 1 of our SELLING YOUR SMALL BUSINESS series, Michael Birch and Stephen May discussed what you should do before selling your small business.
Here are the three most important steps to take before selling your small business under May:
When playing any card game, what is the first thing you do after the dealer deals you? You look at your cards and arrange them in an order that will hopefully lead to a winning hand. You can’t play well if you don’t know how you’re going to play that hand. Unfortunately, too many entrepreneurs wait for an unsolicited offer and then immediately start playing. It takes time and thought to see all the possible moves you can make with your hand.
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Here are three questions every owner should ask themselves before selling their business:
The entrepreneur usually assumes that he is ready to sell. However, until they go through this process, it is difficult to articulate the challenges ahead. Without a doubt, selling a business will be one of the most difficult things an owner will have to go through.
In family life, we all live with things we barely get used to: a squeaky door, a burned-out light bulb, a hole in the wall, a loose handrail. In business, we have things arranged in a way that works for us, but not for the buyer. We are so used to the way things are that we don’t see them as a problem.
Examples: no employee contracts, customer taking 50% of revenue, weak relationships, outdated business documents, undocumented processes, old inventory, etc.
Street Food Cart. Small Family Business. Hot Dog Kiosk And Pastry Shop Stock Vector
Not addressing these issues in your business before going on the market is the equivalent of remodeling your house at an open house, yet that’s often what we do when we try to sell a business without preparing it for sale. Thereby,