4 Tips When Buying Out Relatives in the Family Business

Many times my clients come to me when they have struck a verbal deal to buy out a relative in their family business. Often times a child will look to buy out his parents, although cousins, aunts, and uncles may be the sellers. Once a verbal deal is struck with the basics (purchase price and length of time for payments), it is common to get stuck on a detail you didn’t think about when you agreed to the basic terms. Here 4 tips when buying out relatives in the family business. 

1. Sunset for the Seller. I can’t tell you how many times I’ve had this happen. A father wanted to sell his business to his children, imagining a lovely retirement ahead with hunting/fishing/boating/gambling (you pick the hobby) ahead for him. But when it came time to let go of the reins, it wasn’t so easy. The next generation owner then was stuck between a rock and a hard place; how to take control while keeping the family calm and peaceful. A direct conversation between the buyer and the future retiree is crucial; if the seller may not be willing to give up everything, a consultation agreement or employment arrangement may be a solution.
2. What Exactly am I Buying (and more importantly, what am I NOT buying?). There are two types of basic business sales: a stock purchase and an asset purchase. The form may be determined by your industry or plans for the company. A stock purchase generally carries with it many liabilities/obligations left over by the seller, while an asset purchase agreement provides that only the assets (and not the liabilities) of a company are transferred. A stock purchase is more seamless from an external perspective. An asset purchase, on the other hand, may leave the seller with a business obligation which the new owner should take on. Careful drafting is key.
3. Change of Control. Employees of family businesses and other family members may need some time to get used to the change in ownership and control. The two generations should sit down and discuss how best to present the change to the company’s employees and the rest of the family. This will ensure that employees, service, and the family remain stable throughout the transition.
4. Family in the Family Business. There is always a little more to it when a family business is involved. This is because you have family members who may be owners, employees, and/or influencers in the organization, which may not be commensurate with their actual ownership/involvement. Consideration of the broader family dynamics will ensure smooth sailing when a new leader takes the helm.

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