Valuation in family succession NZ

When a business passes within a family, the sale price should start from an independent valuation at fair market value, even if the parents then choose to accept less. The valuation establishes what the business is worth; the family then decides, deliberately and in the open, how much of that value to gift. Skipping the first step is where family succession goes wrong, because nobody can measure a gift they never sized.

Here’s why the number matters so much inside a family, and how to set it without wrecking Christmas.

One price, three fairness tests

A family succession price has to satisfy three audiences at once.

The parents need the price to fund the retirement they’re selling the business to pay for. The child buying in can’t service a debt the business doesn’t support. And any siblings outside the business are quietly comparing what their brother paid with what they’ll one day inherit.

Get the number wrong in either direction and someone carries it for years. Christopher Snider’s research, finds that only 30% of family businesses make it from the first generation to the second, and 12% from second to third. Price grievances are one reason the attrition is that brutal.

Separate the price from the gift

Parents often want to sell to a child cheaply. That instinct is fine; the problem is doing it invisibly.

Establish fair market value first, through an independent valuation neither side commissioned alone. If the business is worth $1.8m and the parents sell at $1.2m, the family has made a $600,000 gift with open eyes, and can balance it elsewhere in the estate plan if they want to. Without the valuation, the same discount exists but nobody agreed to it, and the other siblings find out at the worst possible time, usually when the will is read.

Where the rules care about your number

The transfer price attracts outside scrutiny too, and I’d flag three areas to raise with your accountant and lawyer.

Inland Revenue can treat some related-party transfers as if they happened at market value regardless of the price the family used; section GC 1 of the Income Tax Act 2007 does exactly that for trading stock sold below market value. (IRD’s “market value” and the valuer’s “fair market value” are in substance the same test, so one valuation serves both conversations.) Relationship property is the second area: once the shares are the child’s, the Property (Relationships) Act 1976 can put them in play if their marriage or de facto relationship ends, so the price and the ownership structure both deserve legal advice. The third is the estate itself, where an unexplained discount to one child invites a challenge later.

I’m a valuer, so take the tax and legal specifics to the professionals. The common thread is that every one of those conversations goes better with a defensible fair market value on file.

The sweat equity problem

The hardest family case: a child who has worked in the business for 10 or 15 years on modest wages, and now has to buy it.

The valuation question and the fairness question need separating. The business is worth what it’s worth; the years of underpaid work are a claim the child has on the parents, and it can be recognised in the price, in the terms, or in the estate plan. A valuation makes that conversation possible, because normalising the child’s below-market salary shows exactly what their labour has been subsidising, in dollars, on paper.

Terms do the heavy lifting

Family successions rarely settle at full price, cash on settlement day, and they don’t need to.

Vendor finance, where the parents leave money in and the child pays it off from profits. Staged transfers of shares over five or 10 years. An earn-out tied to the business holding its earnings after the parents step back. Each structure moves risk between the generations, and each is easier to negotiate once an agreed independent value sits underneath it, because then the family is arguing about timing and risk, which families survive. 

What the process looks like

A family succession valuation at Fealty is a fixed-fee engagement: financial statements for the last five years, questionnaires on operations and the company, and a report both generations receive. The fee is published on the pricing page before work starts.

The wider pricing logic, standards of value and all, is on: what is a fair price for an internal business sale? And if your succession plan lives inside a shareholders’ agreement, read why buy/sell agreements fail without independent valuation before you sign anything.

Common questions

Can I sell the business to my children at any price I like?

Between the parties, largely yes. The complications are external: tax rules that can deem market value on some transfers, relationship property consequences, and the fairness ledger with your other children. A fair market valuation, done first, makes every one of those manageable.

What if only one child works in the business?

Value the business independently, then deal with the working child’s contribution as its own question, through price, terms, or the estate plan. 

Do the other siblings get to see the valuation?

That’s the family’s call, and there’s a case for transparency. A number from an independent valuer, shared openly, is much harder to resent than a number agreed behind a closed door, whatever it is.

What happens if I die before the handover is complete?

Then your will, the shareholders’ agreement and any staged transfer arrangements collide, and the valuation on file becomes the reference point for untangling them. Keep it current; a valuation from eight years ago helps nobody.

Sources: Income Tax Act 2007, s GC 1; Property (Relationships) Act 1976; C. Snider exit planning research citing the Family Firm Institute, as cited at fealty.co.nz/exit-planning.