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Buying out Family
Buying Out Family Members
Family-owned businesses, whether it is a proprietorship, corporation, Limited Liability Company or partnership, often face issues such as marriages, divorces, deaths, and new generations of family members eager to be a part of the business. Buying out the family business or Transferring ownership from one family member to another can be common when dealing with these issues. Proper documentation must be in place to help deal with these issues. This way, transfer of ownership can be done without the risk of managerial and financial downfall. Careful documentation of relationships between business owners put the business a better position for success when transferring ownership.
In situations when a family business owner plans to give/hand ownership over to another person(s), such as a next generation family member, particular agreements can be set up to ensure ownership remains in the family. The current owner can set up a system in which he/she gives the individual(s) a certain amount of shares of stock over a period of time. This way ownership is transferred over time through building a strong base for ownership, decreasing the risk of problems. Additions can also be attached to these agreements, such as exiting contracts. Exiting contract prevents the new owner from leaving the business with the shares he/she was given. If the owner decides to leave the business, his/her shares will be taken away and given to the remaining owners. Existing contracts helps to prevent outsiders from gaining ownership of a family business. This contract also decreases risk of business downfall.
When attempting to buyout family members for their share of the family business, there are some steps to be taken in order to do so. First and foremost, family members must be willing to sell their share of ownership to the purchaser. Find out what kind of agreements have been made in regards to ownership when the company was originally established. There may be limitations on shares one can hold, or there may be a pre-existing “Buy-sell agreement” which specifies how ownership may be bought and/or sold. If the “Buy-sell agreement” has already been established, this can quicken the process because the specific steps have been laid out already.
Placing a value on those shares of ownership can be tricky. The easiest way to determine a price for the shares if not already specified is to seek professional advice from an accountant and/or lawyer with expertise in mergers and acquisitions. Typically the value of a business is determined by the value today of expected future benefits (Divorceinfo.com). There can be the possibility of other family members not wanting to sell the shares for the estimated value and may want more. Negotiations will be needed to take place in order to settle on a price, but if a price cannot be settled on, threat of legal action can change minds quickly due to high costs for actual legal action (Brown, 2009).
During divorce, things become fairly cut-throat and people’s greed can begin to show. When spouses who own and operate a family business are going through divorce, ownership or buy outs tend to be focal points of the split up. Under a buyout scenario, the spouse who will be departing the business altogether will receive compensation for his or her half of the ownership. Payment plans are the most logical approach because taxes on a large lump sum will lower the value of the payout greatly (Divorceinfo.com).
Buying family members can be a very tricky process. There are several steps that should be taken to prepare for the possible challenges as well as have preparations made in order to make the process go more smoothly. Whether the family members simply want a monetary amount for the present value of their share, or if there is the need of negotiations it is always recommended to seek professional help from an attorney who has background in business. Some businesses may have pre-arranged “buy-sell” agreements which will deter the overall buyout potentially. Emotions may run high in these situations due to the fact that it is a family issue and sometimes rivalries among siblings could pose potential challenges as well. Divorce is definitely a situation in which emotions will run high. With these challenges it is always important to have high emotional intelligence to allow family to handle their emotions intelligently and not allow their emotions to get in the way of the business. With the help of professionals on the legalities and having high emotional intelligence one should be able to reach an agreeable deal to ultimately buy out the other family member(s).
Poza, Ernesto J. 2009.
Family Business 3E
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