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How do I buy out my parents' share in the family business?


Sometimes purchasing stock from parents makes a lot of sense. Often some kind of credit for "sweat equity" can be worked out, such as a discount for each year worked for the company. The company can sometimes leverage the buy out from one generation to the next, perhaps over a 5 or 10 year period. Getting the company appraised by an outside expert is step #1, and then a fair purchase price can be negotiated, depending on the situation. Of course good professional financial advice is essential for any major decision like this. The advantages to buying stock from parents, in my opinion, are:

a. It transfers the risk from one generation to the next, and usually generates a new kind of motivation within the successors.

b. It funds the retirement of the parents (just in case a 401K plan was not at the top of their list when they were building the company) and allows them to get their own investment out of the company.

c. Parents whose name is no longer on the line with the bank can often retire more peacably, and not worry about their own financial security, even if the company goes south.

d. Siblings who buy out their parents will be funding their parents' estate plan, which may eventually pass to other siblings who chose not to work in the business. This can prevent resentment and litigation later, in case the "Golden Goose" (the family business) was transferred only to the eldest, or only to the sons, or only to those who work there, etc.

Sometimes parents use life insurance or real estate to provide for other heirs, but these assets will never be exactly equal to the value of a growing company. Equal isn't always fair. e. Transferring ownership to those competent successors who make a commitment to work for the company and are willing to purchase it, can contribute to better management decisions in the long run.

Good luck, Dr.Ellen


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