Related-Party Transactions
How do related party transactions affect a business valuation?
Rent paid to the owner's own building. Sweetheart vendors the owner also owns. Family on payroll at friendly rates.
What to ask for
Suspecting a flag is not the same as verifying one. These are the documents and signals that turn a hunch into a decision.
- A written list of every vendor, customer, landlord, and employee related to or owned by the seller.
- Rent compared against market comparables you pull yourself.
- Family compensation compared against the market rate for the role actually performed.
- Any vendor with no competitive quote behind it.
The question to ask the seller
“Are any vendors, customers, landlords, or employees related to you or owned by you? Are those terms at market?”
Ask it in those words. A seller who answers straight is telling you something. A seller who dances is telling you more.
Related-party terms rarely survive the sale at the same price. Every one of them has to be rebuilt at market before you know what the business earns, and that rebuild almost always moves the number down.
Re-price every related-party line at market, rebuild the profit number, and negotiate from that. Do it before you talk price, not after.
Re-price every related-party item at market and rebuild the profit number before you talk price.
Travels with
Flags that show up together.
Screening one of these usually turns up the others. They share a cause more often than they share a coincidence.
Every deal you read gets safer.
The flags live in the community, applied to real deals every week. Membership is complimentary.
770+ searchers inside"...came out as a professional searcher." - Ryan P. Whitehead