Selling a family business presents a unique set of challenges.
The business is typically the primary source of income for the founder, and for children who work in the business. Other family members may not be involved in the business, but have ownership. If the founder chooses to sell the business, the process can trigger strong emotions, and put a strain on relationships.
An experienced business broker can help the founder navigate the sale process. A broker can address the difficult family issues that the founder faces, and move the process through to a successful conclusion.
It’s important to consider the business sale from the founder’s point of view.
Issues for the Founder
Baby boomers with successful businesses are retiring in large numbers, and many of those firms are family businesses. Some founders don’t have an exit plan or a business succession plan, and they face a number of issues:
- A majority of the owner’s net worth is tied up in the business. Successfully closing a business sale allows the founder to fund retirement.
- The founder may have a strong personal relationship with employees who have worked at the business for years. Will these employees remain with the company after the sale?
- Perhaps most important, can the owner sell the business to family members who are willing to continue managing the business? What about family members who have ownership, but are not involved in business operations?
In many cases, the second or third generation does not want to be involved in the business. UBS points out that: “77% of Millennials think becoming a business owner is too risky, compared to 55% of Gen Xers and 43% of Boomers. Millennials also feel that the stress level of owning a business is too high (83%).”
Family members who are not involved in the business may confront the founder about the sale. If these relatives have ownership, or expect to receive proceeds from the sale, they may demand to know about the founder’s future plans.
Before emotions run too high, consult with a business broker about your family business.
Business Broker’s Role
A broker operates as a trusted advisor throughout the entire sales process. The broker performs these specific tasks:
- Understand the seller’s motivations, and address any issues that may delay or prevent a sale.
- Prescreen buyers to determine if they have sufficient financing to purchase the business.
- Use metrics and online valuation tools to determine the business price.
- Analyze the sales of similar companies, industry trends, and market factors.
- Manage the due diligence process, so that documents are provided and reviewed in a timely manner.
Your broker will put together marketing materials to promote your company to potential buyers. An experienced broker can make a compelling case to a purchaser, which increases the likelihood of a sale.
A broker negotiates the final sale price on your behalf, and will ensure that all of the necessary documents are signed at closing.
There are several issues that you must consider to prepare for a sale.
Planning for a Sale
Every company, including a family business, must take steps to prepare for a sale. Forbes lists a number of important issues:
- Accounting: Work with an accountant to ensure that you have a complete set of financial statements for the past three to five years.
- Contracts: Review all contracts with vendors and suppliers, and ask your attorney to make any required changes or updates. You must disclose these agreements if you start the due diligence process with a buyer. The same applies to lease agreements.
- Employee agreements: If you have written agreements with key employees, review the documents with your attorney. The terms may impact whether or not key employees stay with the firm after a sale. A buyer may want to offer additional compensation, to encourage managers to stay with the business.
Selling A Family Business
Your business broker can help you take the steps needed to prepare for a sale. When you start to discuss a sale, think about the factors that make your business attractive.
Businesses that offer these benefits are attractive to buyers:
- Brand awareness in the market: According to Forbes, “Digital marketing experts estimate that most Americans are exposed to around 4,000 to 10,000 ads each day.” If customers know about (and like) your brand, they are more likely to buy your product.
- Financial results: Track record of sales, positive cash inflows, and net profits. A business with recurring revenue streams is particularly valuable.
- Turnkey business: These businesses provide a roadmap for every key task the new owner must perform. If you can create a track record of success and thoroughly document your processes, you’ll own a more valuable asset.
- A better customer experience: A 2018 study by Tempkin Group notes that 73% of companies with “above average” customer experience maturity perform better financially than their competitors. Make the buying process easy for your customers, and they’ll keep coming back.
Create a procedures manual to document every routine task in your business.
The manual describes your procedures for sending an invoice, ordering materials, and how you reimburse employees for travel expenses. The document explains who completes each task, and how often.
Using a manual eliminates staff confusion about how tasks should be completed, and the document also serves as a training tool for new employees.
With careful planning, you and your business broker can successfully market your company to buyers. However, the founder’s most difficult task is managing family-
The founder must consider some difficult questions.
Are the family members in your business actively involved and producing results?
It’s a tough- but necessary- question to ask. If a family employee does not truly add value to the organization, a buyer will not be willing to keep the family member after a purchase.
If you’re considering selling the business to a family member, does that individual have the experience and work ethic to operate the company? The answer is critically important, if a portion of your sales payout depends on future company earnings.
Your business may be your largest asset, and a venture that has taken decades to grow. It’s in your best interest to have some tough discussions with family members in order to sell your valuable asset.
The professionals at Raincatcher have years of experience advising business owners. They understand your industry, and how you’re positioned in the market. Raincatcher’s staff will assess the buyer’s interest, and determine if the purchase is strategic or financial.
When you hire an expert, you can make a more informed decision about your business sale. Work with Raincatcher, so you can sell your business and have peace of mind.