Selling the Family Business

Family Meeting of the Minds

Family Feelings

Selling a family business can be one of the most important decisions family owners face in their lifetimes. In addition to finding the ideal buyer who will continue growing the business with minimal disruptions for employees and customers, family considerations can make the process more complicated emotionally.

Statistics show that up to 30% of family-owned businesses do not survive into a third generation. Sensitive family dynamics often prevent family members from openly discussing who will take over the business when the time comes. Formal succession plans are rare, and family members often rely on unspoken assumptions for the future. However, as decades pass and new generations appear, some family members may not really desire to work in the business. Others may want to continue their current roles or expand their responsibilities.

Failing to address differing agendas and objectives among the main players can lead to bitter family quarrels. Disagreements within family businesses are common. (If you've experienced this, you're not alone!) One study found at least 40% of family businesses reported conflicts over the preceding 12 months (usually over different visions or varying competence levels among family members). While non-family businesses often have boundaries and structures to handle such conflicts, these boundaries are less common among relatives. Preparing to sell the business can bring long-simmering internal conflicts out in the open.

While the sale of each family business is unique, there are several steps family owners can take to make the process easier.

PLANNING AHEAD

Business owners are often so consumed by the daily challenges of building their business that it can be difficult to think about how they will transition the enterprise when the time comes. Even if there are other family members who could eventually take charge, owners should begin planning for those transitions as far in advance as possible. Solid preparation provides more time to consider multiple scenarios, including a partial or full sale. Being on the same page internally will make the sale process go more smoothly.

Tax and estate consequences are a major consideration in selling a family-owned company. Financial advisors can help determine the best way to structure potential transactions to minimize taxes on the sale while maximizing returns. They can also provide guidance on how to reduce estate taxes for the sellers and their heirs. For example, if family members contribute capital to the company, that investment is treated differently from a parent providing stock as a gift. Similarly, selling to a family member will have different estate consequences than selling to an outside buyer.

Reviewing your corporate governance procedures can also be helpful in preparing for a sale. Family businesses often function under less formal processes than other enterprises. Consider ways to better document your procedures, your client relationships, and similar data that potential buyers want to review.

Choosing the Right Timing

The best-case scenario is that family members communicate early and often about their aspirations for the business and their ideal timeline. Owners can make preparations well in advance of their eventual retirement or in the event of an unforeseen medical emergency that would force them to step down.

Timing is also affected when family members would like to continue working in the business but are not yet ready to serve as executive-level leaders. The family must decide whether they want to hire an outside executive to keep the business going while retaining ownership and letting family members mature. Or they may decide this is the best time to sell all or part of the business. They may pursue a mixture of both strategies. For example, if one sibling wants to keep running the company after the managing owner exits and another wants to sell, they could bring in an outside investor. The third party would provide funds to buy out the second sibling (in exchange for an ownership stake) while the first sibling works alongside the new investors to continue growing the business.

Reaching family consensus

Once the principals have agreed on the need and timetable to sell the business, it is advantageous to hold a meeting to discuss the options. The meeting should include not only the current owners but also any family members who work in key positions within the business. Those who work in the business will have a different perspective than passive owners. Getting the necessary decision-makers on board early will help in determining the best path to take.

Encourage everyone at the meeting to be open and honest about their feelings about a company sale and their expectations from the process. Often parents and children bring different viewpoints to the situation, or siblings may disagree over the proper steps forward. It is better to bring those opinions out in the open up front; otherwise, hidden agendas may bring conflict during the sale process. Many potential deals have been derailed when repressed family pressures arise after an offer is on the table.

Possible agenda items include:

  • Does the next generation have the interest or skills required to manage the business? Do the main players have a need to cash out? Does the business need capital or added strategic executives to continue growing?
  • What valuation do we expect for the business? Family members who are not close to the industry may have unrealistic expectations about what the potential sale price. Gaining a realistic picture of what your business is really worth will help set common expectations for all the players.
  • What are your must-haves for the sale? Do you want a buyer who will maintain your brand? Must they keep your current employees? Will they support the same charities you currently do? Identifying your non-negotiable conditions goes a long way toward ensuring an optimal outcome.
  • Encourage everyone to be patient while the sales process plays out. Once the decision is made, most owners will be ready to sell and move forward with the decided path. However, it takes time to find the best fit in a buyer and the right conditions to meet your goals.

It may take multiple meetings for family members to reach consensus, and to see their business through the lens of a buyer. Getting everything out in the open at the beginning helps stakeholders find the best solution for all parties, and keep the peace at the next family dinner.

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