One of our past clients who owned a surgical supply company was open to the idea of selling his company to his children. The father/business owner decided that he would put the business up for sale at a fair market price, and if his children could afford to buy it then they could do so. Otherwise the company would go to a third party. Though the children tried, they were not able to come up with the capital needed to purchase their father’s company and it was sold to a third party. One of the children was so furious that he stopped speaking to his father. Did the father, as the business’ owner, make the right choice? (We answer that question at the end of this article.)
A business generational transfer, or selling your business to your children or other family members, has its pros and cons. Whether or not the pros outweigh the cons depends on the dynamics of your family. Often the drive behind selling your business to family is emotional rather than practical. While wanting to keep the business and its legacy in the family is noble, selling it should still be a business-focused endeavor. However, because generational transfers do involve family members you can’t ignore the emotional aspect either. Links Financial has acted as a financial liaison in multiple generational transfers – both amicable and ugly – and we recommend considering the following before you make the final decision to sell your business to family.
Is Anyone in Your Family Ready to Run A Business?
This is a question you should ask yourself long before you are ready to sell or transfer ownership of your company. In many cases, business owners assume early on that the baton will eventually pass to their child, niece or nephew, but is the next generation even interested? If they are passionate about something else they may be less likely to invest what is necessary in the family business long-term or be disinterested in having a part in it at all.
Even if the interest is there it doesn’t mean that a generational transfer is the best decision for the business or the family. First and foremost, financial responsibility and maturity must come into play otherwise the business could fail. Secondly, not everyone is cut out to be a CEO. Making high-level, business-minded decisions is very different from being a part of day-to-day activities. If your family member loves being on the ground level it may be best to keep them in management or as a co-CEO, but you also must recognize the need for a true business owner.
Is Your Company Ready to Be Run by A Family Member?
Family members aren’t the only people to consider in a generational transfer. High-ranking or tenured employees may feel slighted if you abruptly announce that you are passing the company on to a young family member rather than promoting from within. What’s worse is if your employees don’t trust or respect the family member you’ve chosen. A sloppy transfer like this could create power struggles or internal conflict that will ultimately have an effect the company’s performance somewhere down the line.
Sell Your Business to Family the Right Way
Family or not, the process of selling a business should still be a well thought out and properly executed transaction. Here are just a few of the things you should have in place before the company is put up for sale:
- Create an exit plan that details the transition.
- Get a business valuation.
- Price your company at fair market value – no family discounts.
If you do choose to sell to family, choose a family member that:
- Has the right business skills and demeanor to run the company.
- Is financially able to buy you out.
- Is respected among your current employees.
- Is passionate about the business and invested in its growth.
However, selling to a third party could be more beneficial to you, your entire family and your current employees. Third parties (other companies, investors, etc.) have more capital available to them and are easily able to finance the purchase of a business – typically with better terms that benefit all stakeholders. Third parties also buy companies strategically, not emotionally, making long-term growth and success more guaranteed.
So, What Should You Do?
All things considered, the father/business owner of the surgical supply company mentioned earlier did make the right choice for his situation. He kept the transaction both fair and professional. The fact that his children could not figure out the financing piece of the transaction is a good indicator that they were either not ready for the responsibility of ownership or lacked some of the skills required to run the company successfully. After all, the father/business owner did not want to sell the company only to continue running it throughout his retirement.
Links Financial can help you decide which course of action is best for the sale of your business. Contact us today to discuss your options.