Selling a business

Selling to your children without a surprise

The plan has always been to hand it to the family. One of the children has been in the business for years, knows the customers, and is ready. Everybody is happy about it, which is why nobody writes anything down.

I have watched this go well and I have watched it go badly, and the difference was almost never the relationship. It was whether anybody treated it as a transaction.

The version that goes badly usually looks generous at the time. A price picked over dinner, payments that start and then quietly stop, and nothing on paper because asking your own child to sign something felt insulting.

A family sale is not the simpler option

People assume selling within the family removes the hard parts. No broker, no diligence, no stranger going through the records, no negotiation with someone who wants to pay less than you want to receive.

Some of that is true. What replaces it is a level of scrutiny a third-party deal never attracts, because the two sides are not at arm's length and everybody involved knows it.

Transfers between family members are held to a standard

The rule underneath this is straightforward. A sale between related parties is expected to look like a sale between strangers. Fair value, real terms, real payments. When it does not, the difference between what the business was worth and what was actually paid can be treated as a gift rather than a sale, with the reporting and the consequences that follow.

That is the surprise in the title. Not a penalty for doing something wrong, but a recharacterisation of something the family thought was already settled. A transfer everybody described as a sale turns out to have been partly a gift, and the tax position of both generations shifts with it.

A price nobody can defend is not a price. It is a gift with an invoice attached.

The word defend is the useful one. The question is never whether the number felt fair around the kitchen table. It is whether you could show a person who has never met your family how you arrived at it, and have them find it reasonable.

What the exposure looks like

As a range, the gap between a documented family sale and an undocumented one can be modest where the business is small and the price was close to defensible anyway, and substantial where the business carries real value and the price was set by affection. The drivers are the size of the gap between price and value, the entity type, how the payments were structured, and what else has already been transferred between the same people.

Gift reporting thresholds, exemption amounts and rates are set annually and move, sometimes significantly. Anything you were told a few years ago should be checked against the current year before you rely on it.

What this requires

• A valuation from someone independent, prepared close to the transfer rather than reconstructed later.
• A real agreement, with a price, a schedule, an interest rate where payments are deferred, and consequences for missed payments.
• Real payments, made on the dates in the agreement, moving between accounts where they can be traced.
• Documentation that would satisfy somebody who assumes you are related, because they know you are.

That last line is the whole discipline. The relationship is not a secret and it is not a problem. It simply means the paperwork carries more of the weight than it would in a sale to a stranger, where the negotiation itself is evidence that the price was real.

The payments matter more than families expect. An agreement with a schedule that nobody followed is worse than no agreement, because it documents precisely what was supposed to happen and shows that it did not.

Who this is not for

Families where the next generation does not actually want it. This is far more common than anybody admits, and it is the single most expensive thing I see in this area.

The child says yes because the parent has built their whole plan around it, and because saying no at forty to something that was assumed since they were twelve feels like a rejection of the parent rather than of the work. So a structure gets built, a valuation is paid for, payments begin, and three years later the business is being sold anyway, in worse condition, by someone who never wanted to run it.

Ask the question separately and give a real answer permission to exist. Not at a family dinner, and not in a way where the answer arrives in front of the person who has the most riding on it.

It is also not for families where more than one child is involved and nobody has addressed what the others receive. A transfer of the main asset to one child, without a plan for the rest of the estate, produces a dispute later that no tax structure repairs.

And it is not for an owner who cannot afford to sell at a defensible price. If the retirement depends on full value and the child cannot pay full value, a family sale may not be the right answer at all. That is worth knowing before the structure is built rather than after.

When this happens

Over years, usually, rather than on one date. Transfers are frequently staged, ownership moving in steps while the parent remains involved, with payments running alongside. Staging serves the family, since the next generation grows into it, and it serves the numbers, since value moves gradually rather than in one lump.

It also means the clock starts long before anybody feels ready, and each step needs its own valuation, its own documentation and its own reporting. A staged plan that was documented for the first step and informal for the rest is a common and avoidable problem.

The point

This is a planning question, not a preparation question. By filing season the transfer has happened and the evidence is whatever the family created at the time. Charter works with owners and their families in the years while the plan is still being built.

This is general information, not advice on your own situation. Whether any of it applies to you depends on facts this article does not know.