The Pros and Cons of Selling a Business to Family Members

Article Author: Garry Stephensen
Position: Managing Director
Read time: 5 mins

When it comes time to sell your business, you might consider selling your life's work to a family member. This can be an extremely appealing option. After all, you'll be passing on your legacy to someone with shared values that you both know and trust. There may also be greater flexibility around the tax efficient manner in which the transfer of sale takes place and a longer more gradual payout period. These possibilities open up due to the familiarity and trust between the buyer and seller.

But fools rush in! There are also potential drawbacks to selling a business to your relatives. Carefully weigh the pros and cons before making a decision.

The Pros and Cons of Selling a Business to Family Members

The Pros of selling a business to family

A key advantage of selling your business to a family member is the ability to maintain control and maintain a legacy within the family long after you retire…perhaps even long after you're gone.
If the business has been in the family for generations and you want to see this continue, selling to a family member may seem like a forgone conclusion.
With the additional trust and familiarity of family members, you will have greater flexibility around the terms of the sale. Consider the following:

Transferring business assets in the most tax efficient manner possible
A lower upfront sale price, with a longer consulting agreement or a more gradual payout period.
Performance based metrics
Shared assets or leases between parties
Negotiations may be more straightforward with a family member, avoiding lengthy due diligence.
You might be willing to offer more lenient payment terms or financing options, facilitating the sale.
Keeps the business within the family, ensuring the legacy and values are maintained.
Customers, employees, and suppliers may feel reassured by the continuity.
You likely know the buyer well, which can build trust and make the process feel less transactional.
The buyer may already have a deep understanding of the business, reducing transition time.

Familiarity and trust not only open possibilities, but also the sale process go more smoothly, typically with less accounting fees and legal fees.

As seen in the Financial Review and the Courier Mail.

The Cons of selling a business to family

Consider the potential downsides to selling a business to relatives. One concern is the risk of conflicts of interest or nepotism:

The buyer may receive preferential treatment over non-family employees or clients. This can create tension within the company and may lead to resentment among non-family members.
Reduced objectivity! Emotional ties might cloud judgment, leading to undervaluing the business or ignoring potential risks. You might hesitate to enforce payment or performance clauses if issues arise. Increased potential for complacency is introduced to the equation. For example, a family member may not feel the same pressure to perform as an external employee, potentially leading to business stagnation.
Other relatives who feel that they were overlooked may develop bitter feelings towards the family member who purchased the business. If you have multiple offspring and only one is purchasing the business, will your other offspring view this purchase as having given away some of the value of the overall inheritance? And will they expect more than an even split of your estate in the future to compensate accordingly?
There may be complications in legal and financial matters that blue the lines between personal and professional relationships. This can make it harder to enforce contracts or address legal disputes.

As with any business dealings, there is always the potential for damaging personal relationships if the sale does not go as planned or if there are disagreements during the transition period.

Finally, there may be a lack of objectivity and outside perspective when selling to a family member, as the seller may be more inclined to overlook certain issues or challenges. If the sale value of the business was ever called into question by the ATO from the perspective of Capital Gains or pension, it is more difficult to establish an objective valuation of the sale price when sold to relatives. Due to this concern, it is a good idea to involve a neutral party (such as a business broker or accountant) to provide a written valuation that can justify the sale price.

6 Tips for success

If you do decide to sell your business to relatives, there are steps you can take to increase the chances of a successful transition.

Clearly define roles and responsibilities for all parties involved. Clearly document timeframes, prices, values and any other important information. This can help to avoid misunderstandings or disputes down the line.
Use a neutral third party to establish a fair price for the business. You can hire an independent appraiser, accountant or business broker.
Use a legal professional to handle the sale. This will help protect both the buyer and seller's interests, ensuring that all necessary documents are properly completed.
Set up a plan for succession and future decision-making to ensure a smooth transition of power and prevent any future conflicts.
Maintain confidentiality. Although you're dealing with family, confidentiality is just as important for buyer and seller.
Consider the feelings of your wider family. How will they view the sale? Dignify them by sharing non-confidential information ahead of time, rather than them finding out after the fact or from a third party. If there has been divorce in the family, consider the business' tax and legal implications relating to the divorce.
Provide the family member/s involved with training or mentoring to prepare them for ownership, just as you would an employee that you were training to fill the role as manager.
Even if you sell to a family member, obtain an independent valuation to understand the true worth of your business. This valuation will help you understand how to calculate EBITDA and add-backs to value the business properly.
If selling your business with a lease in place, ensure that lease is formally signed, any term options have been formally accepted or declined for there to be clarity around the future of the premises.

Carefully consider the pros and cons of selling to family. Use the 6 tips above to ensure a successful transition. By clearly defining roles, establishing a fair price, using neutral professionals and setting up a plan for succession, owners can increase the chances of a smooth and successful sale.
Need help or advice? We'd love to chat. Discuss your business sale with our experienced brokers.