The When, Why and How of Selling the Family Business
by Andrew K. Jenkins
Every entrepreneur at some point feels the desire to pass the business to his or her children. But sometimes those children are not capable and/or willing to lead the business. This article is about what the owner should do in that case.
Why the Family Business Should be Sold
The first step in selling the family business is knowing why it should be sold. The owner should be acutely aware of the next generation’s abilities and desires, and should dispassionately assess their viability as future leaders of the business. Because lack of viability in the next generation is often something to which the business owner is blind (at least partially), outside management and trusted advisors, like attorneys, may need to be involved in this difficult conversation.
If the current owner or owners are the last family members who are willing and/or capable of running the business, it will cease to be a family business. But it may cease to be a business at all if forced upon leaders without the aptitude or desire to run it.
When to Sell the Family Business
After deciding that the business should be sold, the next decision an owner should make is when to sell it. Ideally, it should be sold at the peak of its success with the current generation. The worst scenario is a forced sale of the business under fire sale conditions because the management and leadership who have controlled the business all along are no longer there.
While it may seem obvious to sell the business when its value is at its greatest, it is common for business owners to want to postpone a sale while everything in the business is operating well and everyone is healthy. Their feelings are, “I have run the business for __ years and there is no reason I can’t run it for __ more years.” Keep in mind, also, that selling the business often means the end of the owners’ income streams.
There will obviously need to be some balancing between increasing, or at least maintaining, the value of the business and maximizing the financial impact to the owners. Therefore, to the extent the owners’ health permits, the most advantageous solution would be a time sometime around the collective owners’ retirements.
How to Sell the Family Business
After getting over the first two hurdles, the next step is determining how to sell the business. More importantly, the owners need to decide (generally) the best type of buyer. While identifying a specific buyer is unnecessary, considering the range of buyers is important because different buyers will have different plans for the business.
Without being too detailed, there are two basic kinds of buyers: strategic and financial. A strategic buyer buys a business because there is something (technology, market share, supply chain, etc.) that enhances the buyer’s existing business. A financial buyer buys a business as an investment. This is important because the current composition of the business may dictate the kind of buyer best suited for a successful transaction.
For example, a business whose management is comprised solely of departing family members may not be a good fit for a financial buyer because the buyer is not likely to have the desire to run the business. By the same token, a strategic buyer may be dissuaded by the possibility of having to eliminate a lot of “redundant” positions. Therefore, it is important for the owners to have a very clear vision of the desired outcome of the sale and position the company accordingly.
One More Wrinkle
It is important to note that not all buyers come from outside the business. If there is a core management group in place that can operate the business without any family members, a sale to management or the employees as a whole may be desirable. Such a sale may lead to a higher valuation (assuming financing is available) because new owners’ salaries may be included in the return on investment calculation.
It is important for owners to recognize that the “family business” may not always remain in the family. If they think back to the reasons the business was started, the main reason likely was, “I want to provide my children with the opportunities I never had.” Accordingly, the business was always intended to be an asset. It should be treated like one and not allowed to waste regardless of how much blood, sweat and tears have been invested.
Andrew Jenkins is an associate at Mullin Law, PC. He has a corporate law and real estate practice focusing on closely held businesses. He can be reached at Andrew.Jenkins@mullinlawpc.com.