When Bob (not his real name) called me, I could tell he was tired. He wanted to sell his family business, but he didn’t know how to find the right buyer and make sure he got a fair value for his life’s work.
Bob started his business in 1981 and built it into a thriving niche manufacturer of plumbing components. But at age 74, Bob was ready to sell his business and spend more time with his ailing wife. The business had taken some debt a few years earlier to finance a plant expansion, and Bob didn’t want that hanging over his head. He then said to me what I hear several times a week: “Can you tell me what my business is worth and how quickly can you get it sold? And oh, I don’t want my employees, much less my customers or competitors to know we’re having this conversation.”
So far, so good, I was confident I could find the right buyer and get a good price for the business. But what Bob said next set me back: “By the way, my son is head of sales and my daughter’s husband handles the books, and I want them to be able to stay with the business.”
Oops ….
While most buyers like for there to be a stable, experienced team with the business they are buying, they don’t like having staff forced on them, especially when that staff is family members of the seller. A situation like this will raise suspicion in the mind of the prospective buyer ….. “If this is a good business, why aren’t the family members interested in buying it?” “What if the those family members aren’t good employees, do I have to keep them?”
Having family members in key positions will complicate the sale of your business because a prospective buyer will assume – rightly or wrongly — that the family members would want to buy the business if it was a good business. A prospective buyer will also be leery of a demand, or even suggestion, that the family members have to stay with the business. The prospective buyer will think the owner is protecting weak employees (who just happen to be family members).
I had a client in another state with a very profitable business and the key employee was his 40-year old son. When the owner asked my help to sell the business, I asked why the son wouldn’t buy it, and he gave me the best answer I could expect under the circumstances, he said: “The buyer does not have to keep my son, there are other things he can go do. But, I’m sure a smart buyer will want to keep my son because he knows the business backwards and forward, and he loves being here, but he just doesn’t want the hassle and responsibility of ownership that he’s seen me carry over the past years. My son tells me he is a great employee because he doesn’t have to worry about being the owner.”
These recent real life situations give rise to three pieces of advice if you have family members in key management positions in your business. First, remember the time will come when you want to sell, so be proactive to make your family members indispensable to the profitable operation of the business. How do you do that? You make yourself dispensable. Think in advance, three to five years before you want to sell, and begin to transition yourself away from daily operation of the business so that when the time comes you want to sell the business, you are dispensable but your family members are not. Second, if you think your family members might one day want to buy the business, make sure they have a strong relationship with several bankers because you don’t want to be totally reliant on one financing source. And finally, think proactively about how much you’ll want for the business when you sell it to your family members, then work toward having the business positioned to cash flow the amount necessary to fund a bank loan in that amount. After all, if you and the Mrs. want to finally take that RV trip to the Northwest then settle at the family beach condo, you’ll need the family members to complete an acquisition as would a traditional third-party buyer, and there’s no better way to do that than to be proactive well in advance of your need to sell. It will make the process faster and easier on everyone.
Selling a business is traumatic and can be time consuming. When family members are involved, you can add an emotional component that makes the process even more challenging. Planning in advance will mitigate many of the unique challenges.
{this article was originally published on April 12, 2017}
JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. https://www.amazon.com/Home-Pros-Guide-Selling-Business/dp/1599329239 . He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The principles above are true, but the names and fact patterns are changed to preserve the parties’ identities.
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