Buying a Family Business: Value, Leases, Insurance

Buying a family business means doing the checks that a competitive sale would have done for you: set the price with an independent valuation, put every handshake arrangement (lease, pay, customer terms) in writing, test the numbers against tax records, and check that the family's insurance fits the company you will own. A Small Business Administration (SBA) loan for a change of ownership generally needs an independent valuation anyway, and a close relationship between buyer and seller rules out the lender's small-deal shortcut. This guide is for buyers from outside the family, for relatives and managers buying out a family owner, and for anyone using an SBA loan.

The short answer

Price: with no arm's length bidding, valuation needs extra care. Federal estate tax regulations define fair market value as a willing buyer, willing seller price, and a sale below value can raise gift tax questions, so ask your tax advisor before you settle on a family price.
Lender: for an SBA change of ownership loan, the lender obtains an independent valuation from a credentialed appraiser (it can do its own only at $350,000 or less, and not when buyer and seller are closely related), and any price above that valuation has to be covered by more equity. The seller's numbers must reconcile with their tax records.
Informal arrangements: a handshake lease, family members on payroll and personal costs run through the company all need to be written down or normalized before you can trust the earnings.
Insurance: policies may be in a parent's name, vehicles may be personal, and small claims may have been paid privately, so loss runs can look cleaner than the real history.
People: write down who decides what. Under SBA rules, a seller in a full sale generally cannot stay on as an employee.

How do you price a family business without a market test?

In an open sale, competing buyers help set the price. In a family sale there often is no one else bidding, so the price can drift toward what feels fair instead of what the business is worth. Both directions cause trouble: a price that is too high strains your debt service, and a price that is too low can raise tax questions.

Federal estate tax regulations use fair market value as the yardstick: the price a willing buyer and a willing seller would agree on, with neither forced to deal and both knowing the facts. For a business, that looks at the value of its assets, including goodwill, and what it earns. Separate gift tax rules say that if a family member sells for much less than that value, the difference can be treated as a gift. A seller note at a below-market interest rate can also have tax effects. Whether your price is a gift is a question for your tax advisor, not a rule of thumb.

If you are not related to the seller, the gift tax point above likely matters less to you, but the lender valuation rules and the informal arrangements still apply. Ask your accountant which part applies to you.

If you use an SBA 7(a) loan, the lender controls part of this. For a change of ownership, the business valuation must be prepared for the lender by a credentialed independent appraiser, must support the purchase price, and any price above the valuation must be covered by additional equity. The lender can do its own valuation when the purchase price is $350,000 or less, but not when there is a close relationship between buyer and seller. The rulebook does not define "close relationship", so a relative should plan on an independent valuation. For how value is usually built, see how small businesses are valued.

Family sellers often offer to carry part of the price in a note. Under SBA rules, seller debt counts toward your required equity only if it is on full standby, meaning no principal or interest payments for the full term of the loan, and it is one of the limited sources that together may cover no more than half of the required injection. Confirm the details with your lender. See seller financing and earnouts explained.

Which family arrangements should be put in writing?

Family businesses run on trust, which is a strength until a lender, an auditor or a new owner needs a document. This table lists the arrangements that most often turn up, and what to do about each.

Informal family arrangements and what to do about them
Arrangement	Why it matters in a sale	What to ask for
Building owned by the family and rented to the business on a handshake	Rent may be above or below market, and a lender will look at the lease. When leasehold improvements, fixtures or attached equipment are a large part of the loan (SBA sets the test at the lesser of $500,000 or 30% of loan proceeds), the lender must get the written lease and expects its term, counting only renewal options the borrower controls, to be at least as long as the loan, or must document its efforts.	A written lease with a term and rent you and your lender can accept, reviewed by your counsel
Relatives on payroll	Pay may not match the work, and some may not work in the business at all. Earnings analysis adjusts for this, in either direction.	A list of every relative, role, hours and pay, and a decision on who stays
Personal costs run through the company	Vehicles, phones and travel inflate expenses, and buyers must separate them to see true earnings. An SBA quality of earnings review names related-party transactions and above or below market owner pay.	A schedule of personal items and which ones will stop at closing
Handshake customer and vendor terms	There may be no written terms to assign or to carry insurance requirements, so you can lose them at transfer.	Written confirmation of key terms from major customers and vendors
Loose books	An SBA lender must verify the financial data used in the valuation against the seller's tax transcripts. Numbers that do not reconcile create a lending problem.	Financial statements that reconcile to tax returns, plus a cash proof where a quality of earnings report is required

Some SBA deals require a full quality of earnings report, which applies at a purchase price of $3 million or more. Below that, ask whether an accountant will do the same kind of work voluntarily. See what a quality of earnings report is and questions to ask a seller before you buy.

How do key family employees and family dynamics change the deal?

The aunt who runs the office, the cousin who knows every customer and the parent who still shows up daily may be the real business. Treat them as key employees: decide who stays, in what role and on what terms, and write it down. SBA now defines a "key employee" to include a person employed by the business who has the experience, qualifications or license to run it, and lenders screen those people. See what to do when key employees leave.

Your lender decides which category your deal falls into. Three situations come up most often:

If the seller wants to stay: in a full change of ownership (SBA calls it an initial acquisition), the seller may not remain as an officer, director, stockholder or employee. The business may hire the seller as a consultant for up to 24 months in total for loans numbered on or after October 1, 2026. See what that means for insurance.
If you already work in the business: an existing owner buyout is open to current owners or employees who have actively worked in the business for at least 24 months in a row. Someone who has not can buy less than 50% of the equity and cannot become the largest owner. Otherwise the initial acquisition standards apply.
If a parent keeps a stake: partial changes of ownership follow different seller rules, so confirm with your lender.

Family dynamics are not a legal topic, but they decide whether the deal works. Agree early on who makes which decisions after closing, how siblings who are not buying will be treated, and what the seller's role will be, then ask counsel how to document it. A neutral advisor can help the family talk about money without the conversation turning into a family dispute.

Is the family's insurance set up for the company you are buying?

Family businesses often insure the family first and the company second. Ask for the declarations pages, full policies and loss runs early, and check these points.

Insurance records to check in a family business
Item	What you may find	What to check
Named insured	The policy names a parent or an older entity, not the company you are buying	Who is named on each policy and whether you are buying that entity. See wrong named insured after an acquisition
Vehicles and drivers	Titles in a family member's name, personal vehicles used for work, relatives as drivers	Titles, driver lists and whether the right policy responds. See vehicles titled to the seller
Building and contents	The building owned personally and insured under the owner's own arrangement	Who must insure the building under the lease, and the insured interest of each party. A building owner's policy usually does not cover the company's equipment, inventory, improvements or lost income, so confirm the company has its own property and business income coverage. See lease and real estate in the seller's name
Payroll and workers' compensation	Relatives paid informally or left off payroll reports	Whether payroll reported to the carrier matches real payroll. Under-reported payroll can mean an audit bill and questions about the application. Whether relatives, owners and officers must, may or may not be covered depends on state law and the policy, so ask your broker how your state treats them.
Claims history	Small losses paid out of pocket, so loss runs look cleaner than the real record	Ask for an incident log and for any claims the family chose not to report. Ask deal counsel whether any unreported incident needs notice to the seller's carrier, and answer new applications fully. If an employee was hurt, ask your broker how a privately paid injury should be handled with the workers' compensation carrier. See was the seller underinsured

A hypothetical example. An adult child buys the family's distribution company from a parent for $2,000,000. The warehouse is owned by the parents personally and rented to the company for $8,000 a month on a handshake. The property policy lists the parent as the named insured, and two relatives drive company vans that are insured under personal auto policies. A forklift accident two years ago was paid privately, so it is not on the loss runs.

After the review, the buyer:

asks the broker which policies belong in the new company's name (the company's own contents and operations)
asks for a written lease with a rent and a long term both sides accept, and settles in it who insures the parents' building
checks with the lender whether its lease term test applies
moves the vans to a commercial auto policy
uses the incident log to give underwriters an honest history
has counsel ask whether the accident should now be reported to the old carrier

Gaps like these can turn up in family-run companies, and each is easier to fix before closing than after a claim. Any new terms depend on carrier underwriting.

What should you do before you sign?

Ask your lender, accountant and tax advisor about an independent valuation and how the price and any seller note are treated, before the family agrees on a number.
Sign a written lease and written terms for every related-party arrangement, reviewed by your attorney.
Reconcile the books to tax returns and normalize family payroll and personal costs.
Gather the insurance records in the first week of diligence: declarations pages, full policies with endorsements, five years of loss runs and an incident log. The list is in what documents you need for an insurance review.
Ask your broker for quotes for the company as you will run it, so your model carries real costs. A quote is not coverage, and terms depend on carrier underwriting.
Agree the roles of the seller and key relatives in writing, within your lender's rules.

The wider pre-closing list is at insurance checklist for buying a business. Morrow can review the inherited policies against the company as it will actually operate, flag gaps and request quotes.

Keep reading

Frequently asked questions

Can I buy a family business at a discount?

Families often want to, and the price is negotiable, but a price below value can raise tax questions, including whether part of it is a gift, so ask your tax advisor first. If you use an SBA loan, the lender needs an independent valuation, and any price above it must be covered by additional equity.

Does the seller have to leave after I buy?

Not always, but SBA rules matter. In a full change of ownership the seller generally cannot stay as an officer, director, stockholder or employee, and may be hired as a consultant for up to 24 months for loans numbered on or after October 1, 2026. Partial buyouts differ. Ask your lender.

Do I need a written lease if the family owns the building?

You should have one. A written lease protects both sides. A handshake arrangement can leave you without a right to stay in the building and may complicate the loan, because some SBA loans require the lender to review a written lease. Ask your attorney and lender what yours must say.

Will the family's insurance policies work for me?

Possibly, but check the named insured, the vehicles, the covered locations and the reported payroll first. Policies that were set up around a family often name an individual or an older entity and may not match the company you are buying. A broker can review them against the business as you will run it.

Can a relative who works in the business use an SBA loan to buy it?

An Existing Owner Buyout is open to current owners or employees who have actively participated for at least 24 consecutive months. Someone who has not can acquire only less than 50% and cannot become the largest owner in that category. Your lender confirms which category fits.

How do I handle relatives who are not part of the buyout?

Agree roles in writing early, and ask deal counsel how to document them. A neutral advisor can help the family talk about money. Your lender's rules limit who can stay involved after closing, so check them before you promise anyone a job or a stake.

References

Just bought a business? Get your insurance reviewed.

Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.

Request a review Check a contract

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This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.

Buying a Family Business: Price, Leases and Records