What has been established about the internal candidate?
An internal buyer has been named. Confirm willingness and proposed role before planning around them. Candidate still needs to decide if ownership duties and money at risk fit their plans.
The selling hub gives wider context. This situation has a named candidate, unlike retirement with no successor. Readiness and funding still need proof even when the parties already work together.
List required duties: technical work, management, financial approvals, customers, qualification, and capital decisions. Assign each with support. Strong performance in one employee role does not cover all the work needed to own and run the firm.
The owner-dependence guide develops handoff. Mark duties candidate can cover, those needing another person, and gaps. Familiarity is not replacement coverage. Keep seller's endpoint visible when deciding resources buyer needs.
How can qualifications and responsibilities be mapped?
Build an internal-successor bridge from duties, credentials, permissions, and resources. Confirm both ability and willingness. This original worksheet supplies neither authority nor an available loan; each area's proof has its own purpose.
| Area | Evidence needed | Seller's continuing role to identify |
|---|---|---|
| Operating leadership | Management duties and available support | Specific decisions requiring temporary assistance |
| Technical capacity | Actual experience, staffing, and work scope | Work the seller will stop or continue |
| Qualifying coverage | Jurisdiction, person, entity relationship, and approvals | Any proposed qualifying duties and conditions |
| Financial management | Records, payroll, collections, and approval plan | Defined access and advice rather than unlimited control |
| Funding | Documented equity, debt, and total uses | Note, guarantee, or other retained exposure |
| Governance | Actual ownership and approval documents | Retained rights or interests actually proposed |
| Premises | Supported use and lease or property arrangement | Any separate landlord obligations |
Define seller's ending and continuing work, with the resources to replace it. An internal sale alone does not replace people or systems on which the business depends.
Which transfer structures and valuation assumptions are being considered?
Distinguish full-price sale, partly deferred sale, gift, and mixed transfer. Price, tax, finance, and retained risk differ. Name the structure before modeling proceeds.
Value the business from supported earnings, assets, and replacement work. Family or employee status gives no automatic price change. Separate business value from a proposed gift and payments.
The IRS gift-tax FAQ explains how less than full payment can create a gift. Exceptions and reporting duties apply. It supplies no personal exemption, value, or lender acceptance here. Have advisers review the terms before inferring tax treatment from family ties.
Separate gift from money paid, with professional value and tax review. Employee and family transfers also differ from an ESOP or inheritance. Another structure's treatment does not follow because the parties know each other.
What must the funding bridge include?
Start with all transaction uses: price, fees, working capital, equipment, and other supported costs. List source, amount, timing, approval, and conditions for each. This reveals both closing funds and cash needed to run the acquired operation instead of assuming the price funds everything.
SBA SOP 50 10 8.1 sets category-specific terms. An Initial Acquisition requires at least 10% equity in defined total project cost, with policy exclusions and conditions. Establish that defined base with lender before applying the percentage; it is not automatically the headline price.
Specified limited equity sources together cannot exceed half of required injection. Eligible seller debt used as equity must be subordinate and on full standby: no principal or interest payments for the entire 7(a) term. Lender must review actual category, sources, and documents before counting it.
What does an illustrative source-and-use bridge show?
Assume hypothetical uses of $800,000, all included in defined project cost here: $680,000 price, $50,000 fees, and $70,000 working capital. Proposed sources are $720,000 bank debt, $40,000 buyer cash, and $40,000 seller debt.
The assumed 10% injection is $80,000. Seller debt of $40,000 supplies half only if eligible. Standby, subordination, source, category, and other conditions still require review. Totals adding up alone do not establish that the lender accepts this use of seller paper or the financing overall.
Seller receives $640,000 of price as closing cash and keeps a $40,000 note. Cash sources of $760,000 match $640,000 cash price plus $120,000 other uses. Standby paper is not spendable closing cash. Keep this distinction visible in both buyer's funding model and seller's proceeds plan.
How should seller-financed consideration be evaluated?
Record principal, interest, dates, security, default, subordination, and terms with counsel and financiers. The cash-at-close guide separates immediate and later proceeds. Match seller's cash needs to payment dates allowed by financing documents.
IRS Publication 537 covers installment rules and limits. Deferred receipts do not defer every tax amount; recapture and other components need review. Obtain actual tax timing rather than assume cash and taxable income follow the same schedule for every part of this transaction.
How should licensing be resolved?
Identify entity, jurisdiction, classification, qualifying person, and post-transfer link. Experience or family ties do not transfer authority. Confirm proposed setup and dates with authority; coverage must fit buyer's firm rather than only seller's current status.
California's entity-change guidance shows entity-specific rules and exceptions. It creates no national license inheritance rule. The master-license continuity guide develops this review. Check actual approvals, coverage, and proposed seller duties rather than generalize one state's guidance to all family or employee transfers.
Match remaining seller duties to finance terms and availability. Parties' agreement differs from authority or lender approval. Resolve actual relationship before using willingness to help as proof of operating coverage.
What continuing seller role is realistic?
Define work, availability, authority, pay, and endpoint. Employment, consulting, qualification, retained equity, and premises lease are distinct roles. Clear boundaries let buyer fund replacement duties and seller assess continued responsibility without promising unlimited help.
The IRS worker guide addresses federal employment-tax factors. A consulting label settles neither every federal nor state worker test. Review real duties, control, and relationship; wording alone cannot replace the facts.
Covered SBA ownership-change policy restricts seller roles and prohibits seller earnouts in covered changes. Have lender review category and arrangement before relying on continued help. Initial Acquisition and Business Expansion consulting limits total 24 months, including extensions; other categories have their own conditions for retained roles.
Buyer needs systems, staff, approvals, and decision channels for seller's defined help to work. Record those resources and advice paths so finite support does not become informal seller control of all decisions.
What tax and legal review supports the transfer?
The IRS business-sale guide explains treatment of assets. Review entity, assets or interests, allocation, basis, and timing. Family status does not choose tax structure. Keep price, gifts, and pay for future work separate instead of giving one combined amount an assumed tax character.
Talk to your CPA and attorney about value, sale, gifts, notes, roles, premises, approvals, and taxes. The asset-versus-stock guide develops structure distinctions. Apply them here; internal transfers can follow different routes.
How should the timeline and confidentiality work?
Set milestones for willingness, readiness, authority, value, funds, approvals, documents, and transition. Dates follow dependencies, not guaranteed duration. Require proof before advancing so friendly timing discussions do not conceal missing funds or qualification.
Use the sale-confidentiality guide for disclosure. Existing employee access covers some records; negotiations and personal funding still need authorization. Limit fields and recipients to purpose instead of treat internal status as unrestricted permission.
Which mistakes does an internal transfer invite?
Check risks: trusted technical skill does not prove funded owner readiness; discounts and notes do not settle all tax or cash questions. This is a review list, not a measured frequency ranking.
Avoid unlimited help, informal governance, and standby paper treated as near-term cash. Record duties, resources, authority, and allowed payment dates so both parties see remaining exposure before signing.
- Confirm the candidate's willingness, duties, and operating support.
- Identify actual authority and the proposed transfer structure.
- Reconcile total uses, funding, gift components, and payment timing.
- Resolve qualifying coverage and finite seller roles.
- Complete CPA, attorney, regulator, and lender review of the documented plan.