If you have spent years working on your business, you want it to be transferred to the right person. And to whom better to succeed you than your own child?
Business succession is a tricky topic these days , because more and more children are no longer interested in the family business. If your offspring is waiting for it, then read here how you can sell your business to your child as favorably as possible.
To begin with, it is essential to realize that there are many emotions involved. This is logical, but not necessarily conducive to transferring the business. Make sure you have a good adviser by your side so that both parties enter and exit the process with a good feeling.
Why a market-based price is so important
When transferring a business to your child, it is crucial to set a market-based price. The price of the shares should match the rate that an independent third party would be willing to pay for them. Setting a market-based price is hugely important for several reasons:
- Tax implications: Using a non-market price can lead to tax problems. The IRS may rule that it is a gift, making gift tax due;
- Financial stability: A market-based price provides financial stability and security for you and your child. You receive a fair price for your business, while your child is not saddled with unrealistic debt;
- Business relationships: Setting a market-based price helps keep the business relationship between family members healthy. It prevents one of the parties from feeling disadvantaged in the deal.
To determine a market-based price, you should preferably hire an independent valuation expert. This professional takes into account several factors, such as the business's financial situation, market conditions and future growth opportunities.
If you actually want to sell your business to your child, you have several options:
[1] Transfer a limited liability company to your child
If you want to transfer a limited liability company to your son or daughter, there are several steps you need to go through:
- Transfer of shares - the transfer of a BV is done by transferring shares. This can only be realized through a notarial deed, so both you and your child must be present at the notary to transfer ownership;
- Financial and fiscal transfer - the transfer of shares entails fiscal consequences, such as transfer tax or income tax. It is smart to hire an adviser for this, so that you do not cause any mistakes with far-reaching consequences;
- Management transfer - the final step is the transfer of management, which can be quite involved. Your child will now have responsibility over the business, for which proper preparation is essential.
Benefits
- Continuity: by selling your business to your child, you ensure continuity and a seamless transition in business operations.
- Emotional value: transferring your business to your son or daughter is undoubtedly accompanied by feelings of pride and satisfaction. You now know for sure that your life's work is in good hands!
- Financial security: selling your business can provide financial security for your retirement as well as for your child.
Disadvantages
- Potential family conflict: we won't assume this, but of course it is an option. Transferring to a child can cause certain discussions or tensions in the family, especially if you have several interested children.
- Limited sales options: by choosing this form of transfer, you exclude other - perhaps more lucrative - sales opportunities.
[2] Transfer your sole proprietorship to your child
If you are about to transfer your sole proprietorship to your child, then you have arrived at an important point in the existence of your business. When you transfer, you transfer everything to your child, including assets, debts and liabilities. For this transaction to be legal, you will need to look closely at the requirements of the Internal Revenue Service. An official business valuation will be involved, and your child will finance the purchase price with their own or outside funds.
Benefits
- Continuity: by selling your business to your child, you ensure continuity and a seamless transition in business operations as well as maintaining your customer base.
- Emotional value: transferring your business to your son or daughter is undoubtedly accompanied by feelings of pride and satisfaction. You now know for sure that your life's work will be continued by your own offspring.
- No complex share transfer: unlike transferring a limited liability company, a sole proprietorship is relatively easier to transfer. You bypass the share transfer and a visit to the notary.
Disadvantages
- Personal liability: a sole proprietorship is not a legal entity, so your child will be charged with personal liability for debts and obligations after the transfer.
- Potential family conflicts: as with a limited liability company and partnership, a sole proprietorship can also create family tensions.
- Limited sales options: by choosing this form of transfer, you exclude other - perhaps more lucrative - sales opportunities.
[3] Parents transfer VOF to child, transforming business form into sole proprietorship
This can be an option, but, of course, VOF on VOF can also be chosen, when your offspring will partner with someone in the business. The advantage of this option is that you can grow together in the process, while the tax benefits are already reserved for your son or daughter. One advantage includes the warm transfer, but of course on paper also the silent transfer.
Benefits
- Continuity: in transferring the sole proprietorship and bv we already mentioned this point, but also with a VOF it just applies again. Customers continue to use their familiar product or service and everything continues as usual.
- Emotional value: parents are often immensely proud when their child continues the family business. What could be better than letting your child be your "other child" to grow and prosper?
- Flexibility: a VOF involves far fewer legal formalities than a PLC. There are also fewer restrictions when transferring ownership and entering into new partnerships.
Disadvantages
- Personal liability: in a partnership, the partners are jointly and severally liable for the debts of the business. When transferring to your child, don't lose sight of the fact that he or she now also becomes liable for any debts and obligations of the business.
- Potential family conflict: do you have several children who are also interested in the business? Then family conflict is imminent if you transfer your business to the chosen one.
- Limited sales options: by choosing to transfer within the family, you exclude other sales opportunities. You also miss out on potential opportunities and an unbelievable selling price.
Selling business to child
You can also look at selling your business to a child in a different way, which is to add sales processes.
- Regular sale is the most obvious option. Your son or daughter takes over everything and pays a market price for it;
- Through phased sales, you transfer the business to your child incrementally (for example, 20% of the shares annually), allowing them to grow in the process and the business;
- Donating the business to your son or daughter is also an option. The Inland Revenue's business succession scheme ensures that the tax payable remains within limits.
