Business Valuation Blog | Understanding Buying / Selling a Company

Retirement can mean many different things to people who come from a multitude of family and career backgrounds. If yours involves owning a small business, there are some consistent mindsets and potential options ahead that are in tune with other proprietors nearing this phase of life. Here are a few to think about:

Keep it in the Family

If you’ve been fortunate enough to have one or more family members working with you over the years, there is the opportunity to sell the business while keeping it close to home. Consider who has the best makeup to take over the company, whether it be a sibling, child, or another relative who has been with you and knows the business inside and out.

Train Existing or New Employees For Replacement

One or more existing employees may have an interest in acquiring the business. If so, it may make sense to consider one or more of them under a buyout option. You may need to finance the acquisition in this case, either through a fixed loan or a percentage of the monthly revenue. If no one is senior enough to take over, consider looking outside for seasoned talent who can quickly learn the ropes and assume the leadership role.

Hire a Business Consultant for an Open Market Sale

There are experienced consultants who know your industry and could take a lot of the pressure off you while marketing your business to competitors and those looking to enter the market. This process may take several months, however, you can put the terms in place you’re comfortable with and negotiate a fair price with the support of reliable third parties.

Part-Time Transitioning

In any of these possible scenarios, it might make sense to consider a phase-out plan over a couple of years or so, in which you remain actively involved in the day-to-day operations on a part-time basis to ensure a smooth ownership transition, especially if you’re involved in the financing of the sale. It’s difficult for many small business owners to say goodbye to their company and the people they have worked with, so this might be a nice way to manage the process.

Transferring ownership of the family business requires care and planning to ensure a smooth change of leadership. One frequently overlooked tool that can assist in the transitioning of the business to family members is a company valuation. Learn how getting the family business appraised can benefit all the relatives and related parties who work for the company.

Why You Should Obtain the Valuation Before Transferring Leadership

Imagine if you transferred the family business over based on a “ballpark” value thrown out by one or more of the current members involved. Older relatives who held leadership positions might be expecting a large payout. Others may have assumed the payout was certain and planned their retirement lifestyle on it. When the valuation of the company is not formally established by a certified independent appraiser when leadership transfers, the grounds might be set for a generational dispute if there is no real agreement or understanding of the true value.

If you engage the services of a business appraiser, the resulting analysis and report would act as an objective neutral framework for the company that would guide all the family members involved. While the appraised value might fall short or potentially be higher than the perceived value, the process of getting the business appraised will take some of the emotions out of the leadership transfer.

Once everyone understands the true worth of the company, you can allocate the fair market value by the number of shareholders, and provide the owners with an idea of their retirement income, and plan for the next steps with the transfer of the business.

The appraisal can also help manage expectations and allow the new leaders to chart a course forward with confidence that they have all the facts needed to succeed. Instead of causing strife, the change of leadership can now strengthen family unity.

Getting Family Business Appraisals for Tax Purposes

Not only is it important to have the company appraised from a personal perspective, but it is also necessary to do so for tax purposes. The IRS requires that businesses not subject to a special provision be valued at "fair market value" for federal tax purposes when the business is transferring family leadership. Fair market value denotes the price that a buyer, not related to the willing seller, would reasonably pay for the business. Since most company owners cannot objectively determine fair market value, a business appraisal will solve this requirement.

If the IRS were to ever examine the business transfer or audit company taxes, the appraisal can prove that the company's value was treated as "fair market" for the purposes of transfer.

If you sell the business to your relatives for less than fair market value, the new owners could be penalized with gift or estate taxes. Selling for fair market value is the best way to avoid this and ensure a smooth transfer of ownership.

Planning Your Business Appraisal

Now that you are aware of how a business appraisal can assist with the transfer of your family’s company, take action by finding a qualified appraiser. It is well worth the time spent to find an appraisal professional who understands your industry and your geographic locations, given that these two variables can directly affect the company's appraised value. A certified business appraiser will also have the experience and credentials needed to support their value conclusions.

Business Valuation Specialists can assist you in this process from beginning to end. We have the qualifications you are looking for and the experience you need to provide an accurate appraisal that will help you through the transition process.