Bringing a Family Member Into Ownership

What to charge, how to fund it, and what to write down first

Dan SettelNov. 11, 2026

The answer: a formula, a real note, and the paper first

A family buy-in is three decisions in one: the price, the way it gets paid, and the paper. The order of operations is agree the formula first, write the agreement second, set the price third, fund it fourth. A price that comes out of a formula can survive a disagreement. A price that comes out of a dinner conversation cannot.

The reason this matters more in a family company than in any other is that the buyer is your child or your sibling. Every commercial buy-in has a mechanism for disagreement: the price gets re-derived, the paperwork gets enforced, a bad year gets repriced. Family buy-ins skip the mechanism and rely on goodwill, and goodwill is not a financing term.

How to read the numbers on this page

Sourced. The gift tax figures are the IRS's: the annual exclusion is $19,000 per donee for 2026, and Form 709 is how transfers subject to federal gift tax are reported. The $32 million gross receipts threshold and the 30 percent adjusted taxable income limit are in IRS Fact Sheet FS-2026-14. The below-market loan rules are in IRS Publication 542.

Ours. The price formula, the six clauses, and the structure of the note are ours. We do not print a minority-stake discount percentage as though it were a published statistic, because the right number depends on the company and any specific percentage we printed would be a number you could quote and we could not defend.

One limit. A valuation is not a price. Whatever number the formula produces, get one independent valuation before you name it to anyone, and read it as a test of the formula rather than as a second price.

The price

Use a multiple of earnings. Not a multiple of revenue, and not a number from memory. The multiple has to be applied to normalized earnings, and normalization is where most owner-built businesses get a bad price: owner compensation above market, one-time expenses in the year, related-party rent that is not market rent, and discretionary spending run through the profit and loss statement. EBITDA adjustments covers how to normalize an owner-built business so the earnings number is real.

Put the multiple in the operating agreement, along with how often it gets re-derived. Two workable approaches: a fixed multiple with a fresh independent valuation every two or three years, or a formula that points at an independent valuation each year and applies a discount for the size of the stake. The reason to write it down is not the money. It is that a formula removes the annual renegotiation, and the annual renegotiation is what damages the relationship.

Discounts for a minority stake, for the buyer not being able to control the company, and for the earnings depending on one person are the ordinary terms of the market for a stake like this. They belong inside the formula. If a family member buys 15 percent and receives no discount for being a minority, the price is wrong, and the person who paid full price will be the first to say so.

Value the company once independently before the first close. A number produced by the people selling is the number that gets litigated.

The gift tax trap in a discounted sale

If a family member buys equity below fair market value and has no obligation to repay the difference, the IRS treats the difference as a gift. The federal gift tax annual exclusion is $19,000 for calendar year 2026 (IRS Revenue Procedure 2025-32), so a below-market sale of company equity above that amount is a taxable gift, and a gift tax return is generally required when gifts to one person in the year total more than that (IRS, Instructions for Form 709, page last reviewed April 30, 2026). Form 709 is used to report transfers subject to federal gift tax and to allocate the lifetime generation-skipping transfer exemption.

Two ways to avoid the problem, and both are better than paying gift tax. Price the sale at fair market value so it is a sale and not a gift, and give the discount through the price. Or structure the difference as a note: the buyer owes it, with terms, so the transfer is a loan rather than a gift, and the annual exclusion does not apply to it.

How to fund it

Seller financing is the normal answer, and the note usually comes either from the company or from you personally. Both versions have rules, and they are different rules.

If the company holds the note, the interest has to be charged at or above the applicable federal rate or the below-market loan rules apply: the forgone interest is imputed, and then treated as a gift, a dividend, a contribution to capital, payment of compensation, or another payment, depending on the substance of the transaction (IRS Publication 542, page last reviewed April 30, 2026). The same publication lists cancellation of a shareholder's debt among the transactions that may be treated as distributions, so if the company forgives the note in year three it has made a distribution. That is a fact about the tax return, not about the family.

The deduction for that interest is not guaranteed either. If your average annual gross receipts for the three preceding years exceed $32 million — so, for a 2026 year, the 2023 to 2025 average — the business interest deduction limitation caps deductible business interest at business interest income plus 30 percent of adjusted taxable income plus floor plan financing interest, with the depreciation, amortization, and depletion add-back restored for tax years beginning after December 31, 2024 (IRS, Fact Sheet FS-2026-14, current as of August 19, 2026).

If you hold the note personally, the buy-in is a claim on you rather than on the company, and that is a personal balance sheet decision. The same analysis applies as with a personal guarantee: the note needs a schedule the business can actually pay, or it is a loan that will not survive the first bad year. See when the business and the house are one balance sheet for the thinking on that.

What to write down before the money moves

Six items, all in the operating agreement or shareholders agreement, all decided now rather than in a crisis later:

The six clauses that decide the next ten years

Price formula and how often it gets re-derived.
Payment terms: amount, frequency, interest rate, and what happens when a payment is missed.
Vesting: what the buyer has actually earned at each point in time.
Transfer restrictions: rights of first refusal and drag along, so a sale by the parent does not leave one relative holding a company nobody else can buy.
Death, disability, and divorce: what happens to the stake in each case.
Leaving: what the stake is worth if the family member resigns, and whether the company can buy it back.

The thing that actually goes wrong

The buy-in completes, and the family member starts paying a note on a business that then misses a year. The note payments become impossible, and the person holding the risk is the one who wrote the note. The family has quietly rebuilt the guarantee problem in reverse. Now the parent is the lender on a business that cannot pay, and the child's stake depends on the parent's patience.

The fix belongs in the structure, not in the relationship. Set the note so a bad year is survivable: a payment that matches what the business can pay in a down year, interest that continues to accrue rather than amortizing hard, and a call option that lets the company or the family buy the stake back at a formula price if the buyer leaves. If the payments only work in a good year, you have written a note that transfers the family's fortunes to the family's patience.

The rule

Price by a written formula, fund it with a note the business can pay in a bad year, and write down the price, the payments, the vesting, and the exit in the agreement before the money moves.

What to do this week

Six jobs. The first one is the decision the other five depend on.

The owner's week

Decide whether this is a gift, a sale, or a loan. That choice determines the tax treatment, the paperwork, and everything else, and it is the one that has consequences.
Normalize the earnings you will price. Owner pay above market, personal expenses in the profit and loss statement, and one-time items all have to come out before you pick a multiple. See EBITDA adjustments.
Get one independent valuation of the company before you name a price to anybody.
Write the formula into the operating agreement, including the re-derivation schedule, so the number is not renegotiated every year.
Have your attorney build the note: rate, term, amortization, and the call option if the buyer leaves.
Check the transfer restriction and death, disability, and divorce clauses in the existing agreement before you add a new owner. Adding a shareholder without these is how the next dispute starts.

Sources

IRS Revenue Procedure 2025-32 is the source of the $19,000 annual gift tax exclusion for calendar year 2026. The IRS's What's new — Estate and gift tax page carries the same figure alongside the $15,000,000 basic exclusion amount for 2026.

IRS Instructions for Form 709 is the source of the rule that Form 709 is used to report transfers subject to federal gift tax and to allocate the lifetime generation-skipping transfer exemption. Last reviewed April 30, 2026.

IRS Publication 542 — S Corporations is the source of the below-market loan rule and of the list of transactions the IRS may treat as distributions, including cancellation of a shareholder's debt. Last reviewed April 30, 2026.

IRS Fact Sheet FS-2026-14 — Business interest expense is the source of the $32 million inflation-adjusted gross receipts amount for 2026 and the 30 percent of adjusted taxable income limit. Current as of August 19, 2026.

What is ours rather than published. The price formula, the six clauses, and the structure of the note are Eagle Rock operating standards.

Frequently Asked Questions

Should we sell to family at a discount?

The market gives a minority stake a discount, and you can put that discount in a formula rather than in a negotiation. What you should not do is sell well below fair market value with no obligation to repay the difference, because the IRS treats the gap as a gift. The annual gift tax exclusion is $19,000 for 2026 (IRS Revenue Procedure 2025-32), and gifts above that generally require a Form 709 filing. Price it right and structure the difference as a note.

Should the company own the note or should I?

If the company owns it, the interest has to be at or above the applicable federal rate or the below-market rules impute it, and if the company cancels the note the canceled amount is a distribution to the shareholder. If you own it, the buy-in is a claim on your personal balance sheet rather than on the company, and the note needs a schedule the business can pay in a bad year. Both work. Mixing them without a decision is how a family ends up owing each other money nobody can collect.

How do we value the company without a fight?

With a formula agreed before there is a number to argue about: a multiple of normalized earnings, applied to a re-derived figure on a fixed schedule, with the minority, control, and key person discounts written in. Then get one independent valuation to test the formula against. A formula turns an annual argument into a calculation, which is worth more to a family than the last few percentage points.

What if the family member leaves the business?

Decide it before they join. Whether the stake is bought back, at what formula price, over what period, and what happens to unpaid note balances when they leave are all questions that are easy to answer in advance and impossible to answer in a dispute. A vesting schedule with a matching buy-back right is the cleanest version: the stake earned over time and returned on the same terms if the buyer walks away.

Key Takeaways

•Agree the price formula before there is a price to argue about, then apply it on a fixed schedule.
•A sale below fair market value with no repayment obligation is a gift. The 2026 annual gift exclusion is $19,000.
•If the company holds the note, charge at or above the applicable federal rate and never cancel the note.
•Structure the note so a bad year is survivable, or the buy-in becomes the family's patience.
•Price, payments, vesting, transfer restrictions, death and disability, and exit all get written down before the money moves.

Put a defensible price on the family business

A finance office normalizes the earnings, values the company, and builds the note and the agreement that make a family buy-in survive the first bad year.

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This article is part of our Family Business Finance: The Five Money Decisions That Break Family Companies guide.