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Old 02-05-2013, 02:49 AM   #1
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Sell my business to my son? Innovative

method is needed, partly because of a prior arrangement, and partly because I want him to have it but I still need an income from the business for the immediate future.

Just looking for thoughts ----

My oldest son took over the company in 2006 and ran it until Feb of 2012. Things were becoming hard to deal with, as during that time I just asked for a monthly stipend of less than $2000.

With gross revenues exceeding $20k monthly when I handed it off to him, I got the feeling that I was kind of in his way - so I have an attorney draw up a legal contract and we both signed it Feb 1, 2012...... so he made payments for 4 months, then quit suddenly.

Long story short, I ended up with the company back, and found it was bankrupt upon taking control, had to spend thousands bailing out bouncing checks, bouncing payroll checks, bailing out overdue bills and etc. Now am solidly in the black after 3 months, and the youngest son remained on the payroll with company.

Youngest son is taking hold nicely and has a better head on his shoulders so I am thinking that in a couple years I would like to hand the company off to him ---

Just trying to think of an innovative way to do it ---- without burden of a contract for him as before, commitment but without strings attached to the business as before.

Purchase options, company is worth in neighborhood of $1 mil according to auditors, but I certainly don't intend to ask that for the business from son.

Would something like purchase of an annuity work out for this purpose? I kinda need something in neighborhood of $2 k monthly

More than happy to listen to thoughts, ideas, other options, etc.

God Bless

Bill
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Old 02-05-2013, 06:54 AM   #2
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I certainly wouldn't do anything without legal counsel.
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Old 02-05-2013, 07:01 AM   #3
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$20,000 a month revenues not much for a business worth a million dollars.How long has your son worked in the business,what experience does he have ?
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Old 02-05-2013, 07:11 AM   #4
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I think that after your first experience, I would retain ownership and promote youngest son to running it, with you periodically auditing it. With him knowing the old man is watching him, he may stay disciplined. You can still get a check each month and he could either buy it in a few years, or inherit it later. If you are really lucky, he would grow the business, making it worth more, and want to buy you out by his own initiative.

Good luck, this is a big decision.
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Old 02-05-2013, 07:21 AM   #5
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I know your intentions are fine, but the type of transaction you're talking about should be discussed with your accountant who knows the facts and circumstances of you, the business, and your son. I would have to agree that a business grossing $20k a month would be hard pressed to develop a valuation of $1 million. We normally look to five times adjusted earnings as a ballpark number.

There are a myriad of different ways to structure a buyout. It can be done with gifting and consulting contracts, straight stock purchase, asset sales, goodwill sales, and the list goes on and on. Talk to your accountant and see what he or she has to say. If you do not have a lot of faith in your accountant look for someone who specializes in succession planning.

My family's business has been around for over 100 years and for a retail lumber yard, that is an incredible record. Now the business has the fifth generation working there. For me, I was better suited to be a bean counter, but logical succession planning can be done that benefits the buyer and the seller of any family business.
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Old 02-05-2013, 07:22 AM   #6
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X2 on the help of legal.

That said, why don't you raise your son to general manager with a wage commensurate with making all decisions. Let him run it for some period of time with dollars coming to you, or a % drawing escrow + a stipend for you. Escrow becomes a hedge against future tough times or investment.

Also, lawyer is probably going to tell you to incorporate to limit liability against yourself and your savings.
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Old 02-05-2013, 07:22 AM   #7
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Quote:
Originally Posted by wincrasher View Post
I think that after your first experience, I would retain ownership and promote youngest son to running it, with you periodically auditing it. With him knowing the old man is watching him, he may stay disciplined. You can still get a check each month and he could either buy it in a few years, or inherit it later. If you are really lucky, he would grow the business, making it worth more, and want to buy you out by his own initiative.

Good luck, this is a big decision.
X 2
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Old 02-05-2013, 07:22 AM   #8
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The nature of the business is that most of it is profit. We have difficulty in coming up with enough overhead and other business deductions. It is a Sub "S" corp thus everything feeds through.

I didn't value it - IRS did.

God Bless

Bill
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Old 02-05-2013, 07:27 AM   #9
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I went through a similar situation a couple of years ago with my brother. We sold off an entity of our business. I did the sales contracts and such and we created an LLC with me and my wife as primary owners. We created "shares" for the company were as the value of each share was $.01, was not tied to the valuation of the company but the performance of the owners, and their value was solely for the purpose of voting rights. My wife and I held 51% while my brother, in year one had 1 share. After certain performance goals were achieved, including a payment schedule, my brothers shares rose. Upon final payment, he would then own 49%, at which time we would have relinquished 1 share each and he would be the majority, in which he would vote us out.

Slow or no payments would decrease his ability for ownership based on his own abilities, and performance issues with the company were clearly spelled out as part of ownership, that he had to maintain, like growth, customer satisfaction surveys and obviously profit & Loss.

We had all the proper documentation (and Non Competes) so that in the event there was a court issue, we would prevail. Getting into business with a child is difficult at best, even under the best situations. You being there for a period of time may help set the tone for goals and expectations of the company, but your continued involvement may be your only savior here.
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Old 02-05-2013, 07:27 AM   #10
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Well - as I stated earlier ---- it WAS a Sub "S" corp.

Unfortunately oldest son has created a situation where the outstanding legal and financial risks were so involved that I ended up having to abandon the corporation and now have gone to dba ---- plenty of insurance coverage, however I grieve over the loss.

By the way ----- legal counsel has been a major part in the situation in which the corporation ended up being in.....

God Bless

Bill
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Old 02-05-2013, 07:33 AM   #11
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Sounds like a great business,many people have no idea of how to run a business,have you taught him the fundamentals?I would work him in with a percentage of business as time goes by according to his performance.How many stories have you heard about the kid that was given everything.Make him work as hard as you did.
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Old 02-05-2013, 07:39 AM   #12
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Originally Posted by Sepisllib View Post
Well - as I stated earlier ---- it WAS a Sub "S" corp.

Unfortunately oldest son has created a situation where the outstanding legal and financial risks were so involved that I ended up having to abandon the corporation and now have gone to dba ---- plenty of insurance coverage, however I grieve over the loss.

By the way ----- legal counsel has been a major part in the situation in which the corporation ended up being in.....

God Bless

Bill
Bill,

I'm confused. Why would the IRS be valuing your business? Normally an IRS valuation would only be done from an estate or gifting perspective.

Usually your CPA would be better versed in succession issues than an attorney. With an S corp you have many different possibilities including a recapitalization and then gifting or selling to your son non-voting shares. Non-voting shares do not violate the one class of stock rules for an S corp. Again, there are a multitude of ways to structure the deal. Are you looking only for a straight $2,000 per month? Do you want it as consulting income to continue to contribute to a retirement account? Do you want it as income only subject to capital gains taxes, assuming you are in the lower tax brackets?

There are lots and lots of questions you need to ask yourself and even ask your son.

Ed
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Old 02-05-2013, 07:40 AM   #13
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I question the valuation of $1mil if gross revenue is only $240K per year. This is a valuation of >4 times the gross revenue so if you can get the $1mil my suggestion is take it and run and play with the money on the market or get a dividend stock @5% or some other investment that will get you more than 2.4% ROI.

Re the monthly stipend from the business, Lets see, you want $24K per year off the top, so this is 10% of gross sales, but it would represent a much higher percentage based on Net sales. Can a business this small really support this added cost and keep itself going? I guess you would know this by knowing the margins.

Good luck, but an evaluation of greater than 4 times the annual revenue is questionable to me. Must be a lot of "good will" in that equation or perhaps property value that could be put to better use if liquidated.
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Old 02-05-2013, 10:28 AM   #14
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have a bookkeeper that is paid by, and accountable to, YOU!

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