The only thing harder than starting a business can be successfully selling one. When it comes to how to sell a family business, well, that may be the toughest sale of them all.
In addition to all the usual complexities involved in selling a small business, a multigenerational business has the added challenge of navigating family dynamics. The family’s interests may have been nicely aligned while running the family enterprise, but those interests can go in wildly different directions during a sale process.
In this article we’ll look at some of the primary reasons why interests diverge when selling a family business. We’ll examine what a sale can mean to the founders (or current owners), subsequent generations, and the business itself. We’ll also offer some advice on how to think about selling a family business and questions to ask before you get started.
Who this article is for: For this article we define “family business” as a business where more than one generation is involved in operations of the business and/or holds an equity stake. The following advice is primarily for family businesses that are considering a sale to an outside buyer (versus a family succession plan, or sale to an insider).
Selling a Family Business = Challenges²
There’s no doubt that family businesses are part of the backbone of our national economy. They have many advantages and can actually outperform their nonfamily-owned counterparts in several ways: They tend to be more resilient during economic downturns, they do a better job of managing debt, and they invest more in their local communities.
That said, family businesses also have outsized struggles when it comes to succession planning, estate planning, and ownership transfer.
To quote Thomas William Deans, third-generation family business owner and author of Every Family’s Business: 12 Common Sense Questions to Protect Your Wealth, “Family businesses are easy to start, difficult to manage, and nearly impossible to exit.”
Passing the family business to the next generation may seem like the obvious decision when the founder or current generation is ready to step down. But the odds of success with this exit strategy are no better than others.
There are plenty of statistics — and even more anecdotal evidence — that illustrate the very real challenge of a family business succession:
- About 40% of family-owned businesses are passed down to the second generation.
- Approximately 13% of family-owned businesses are passed down to the third generation.
- Only 3% of family-owned businesses remain in existence beyond the third generation.
- The average lifespan of a family-owned business is about the same as the average for companies on the S&P 500 Index: 24 years versus 21 years.
A slight majority of founders come to the conclusion that selling the family business is the best exit strategy. This can be for either personal or business reasons, or simply because there is no clear path for an internal buyer or successor to take the reins. But this is easier said than done. While all varieties of exits are difficult to achieve, the combination of a) selling a family business to b) an outside buyer may be the trickiest exit of them all.
In a typical sale scenario, there are two primary constituents impacted by a successful sale: the owner and the business itself. When you’re selling a multigenerational business, there are now three different futures that need to be considered: the future of the business, the owner, and the family.
If selling the business is in alignment with everyone’s respective futures — business, owner, and family — then great. But more often than not it is tough to reach unanimous agreement, as a future without the family business means something different to everyone.
What Selling the Family Business Means for the Founder
Founders in the lower middle market (businesses with annual sales between $2M and $25M) often consider selling the family business as they move into retirement.
They are ready to discontinue both operational and financial involvement in the business. Selling means they can cash out and move on to the next chapter of their life. In a word, selling the business means a well-deserved reward called “freedom.”
While some founders have fully funded their retirement over the years by investing outside of the business, selling can be an integral part of their retirement plan. Giving the business to family members (typically through estate planning) may not be an option.
There are always lingering concerns when you decide to sell your business. If there are no family members involved, business owners may be concerned about how their employees and management team will be treated by a new owner. They may also be concerned if customers will continue to receive the same product or service they’ve come to expect, or whether supplier relationships will remain intact. As long as they find a prospective buyer that is a good fit, the owner is likely ready to cut ties and let the business evolve without them.
However, when there are family members involved in daily operations or the ownership of the business, the waters begin to muddy.
It’s all well and good if the family is in agreement about the sale of the business. But there are many reasons why some family members may not be on board with a sale.
What Selling Means for the Founder’s Children (and Their Children)
It’s not uncommon for small businesses to employ a family member or two. In fact, here at Allan Taylor & Co., about half of the small businesses we work with have kids and/or grandkids of the current owner involved. Family members can be involved in one or more of the following ways:
- Employed by the business, often in leadership roles
- Not employed, but compensated by the business
- As shareholders with equity ownership in the business
In some cases the entire family is fully on board with the sale of the business. In fact, they may look forward to using the sale proceeds to fund their own interests. Like the founder, they may also be ready to move on. Furthermore, they may fully respect the wishes of their parents (or grandparents), and may even agree that the business would grow and thrive under new ownership.
But in many cases the sale of the family business represents uncertainty and personal loss for subsequent generations. They will be saying goodbye to their jobs, paychecks and whatever additional compensation — i.e. dividends, expense reimbursement, and generous benefits — they’ve been receiving from the business.
Even worse, they intuitively know that they won’t command the same level of compensation in the marketplace. A sale means that the family’s goose will be laying golden eggs for someone else.
This can be a source of serious disagreement and tension for the family as a whole. Mom and Dad may even be at odds about how selling the family business will affect their children and grandchildren.
There’s a reason why HBO’s Succession has gotten three seasons of Emmy-award winning television out of one fictional family’s inability to agree on the founder’s exit. The opposing views and motivations amongst family members can be the source of never-ending drama.
For subsequent generations, the prospect of a future without the family business can seem either liberating or terrifying. In fact, it’s entirely possible that the family is divided between these two opposing sentiments.
Amidst all the family dynamics it can be easy to overlook what some would argue is the central issue: What is best for the future of the business?
What Selling Means for the Business
Basil Peters – M&A expert, investor, and author of Early Exits — points out that small business owners often ride the wave too long. They hang onto ownership past a peak that would have provided a lucrative and successful exit for both the owner and the business.
Holding onto a business too long can result in missed opportunities that will not resurface any time soon, or ever again. It can be hard for the average business owner to let go. When it comes to family-owned businesses, letting go can be nearly impossible.
Family businesses are often viewed as a source of collective pride that confers community recognition, status, purpose, and wealth on the entire family. The family can be so consumed by their own interests — and what the loss of the business means to them — that the long-term viability of the enterprise itself gets ignored.
Every business will move beyond its founder at some point, either successfully or unsuccessfully. It’s a fallacy to believe that a family member is better suited to run the business than an outsider. In fact, the opposite is usually true.
Think about it for a minute. What are the chances that one of just a handful of family members is the best-qualified candidate to lead your family’s business into the future? Based on the lengths that most nonfamily firms go to to find and attract top talent, the chances are slim.
What’s best for the future of the business can often include:
- New vision or strategy
- New products or services
- New systems or processes
- Repositioning or rebranding
- Changes to organizational structure
- Geographic expansion or relocation
- Divestiture of underperforming products or services
A strategic or financial buyer — like a private equity firm — often has the resources in terms of both capital and expertise to take a family business to the next level.
Thomas William Deans explains that families often treat the family business like an heirloom – something of great value that must be protected and maintained in the same way as previous generations. While the family continues to honor tradition, the business languishes, stuck in a time warp instead of moving boldly into the future.
Like all adages, there is some truth to the old saying “Shirtsleeves to shirtsleeves in three generations.” Passing a business from generation to generation like an heirloom may feel right for a number of reasons, but it is not a business strategy in and of itself.
A Few Lessons from Mr. Sam’s Heirs
Here in Bentonville, Arkansas, we have a front-row seat to watch what Sam Walton’s heirs are doing with their respective fortunes. Whatever their continued involvement may be as shareholders in the original family business — Walmart Stores, Inc. and Sam’s Club — their focus has been elsewhere for years.
- Sam’s daughter Alice Walton has used her wealth to build a world-class art museum that opened in 2011, and is now working on bringing a vision of holistic health care to fruition.
- Son Jim Walton was at the helm of the family’s banking enterprise for decades and still serves on its board.
- Grandsons Tom and Steuart Walton are transforming northwest Arkansas into the mountain biking capital of the world, an aviation destination with the coolest airport in the country, and a national model for locally grown food.
And these are just a few examples of what the Walton heirs are doing with their wealth! Not surprisingly, they have long moved past the original family business of discount retailing. Meanwhile, the family business continues on in the hands of extremely capable (nonfamily) leadership.
This model is repeated on a smaller scale every day when founders sell the family business. They consider their wealth to be their legacy to the family, not business ownership.
6 Questions To Ask Before Selling a Family Business
There are a few questions you may want to ask yourself, and your family, before deciding to sell the family business:
- What is the business worth to potential buyers? Do the cash flow and financial statements support your desired sale price?
- Do you need liquidity from the sale of your business to fund your retirement? If so, it will have to be sold to either an internal or external buyer at fair market value.
- Does the family need to own the business in order to maintain their current lifestyle and build wealth? If so, you may want to explore ways to sell (not gift) the business to the next generation.
- Is your legacy the business itself, or would distributing sale proceeds to fund the dreams of the next generation be a better inheritance?
- What is best for the future of the business? Is the sustainability of the business the priority, or is generating ongoing wealth for the family the primary goal?
- What are your goals for the future? Is it the ability to enjoy retirement or semi-retirement doing something else? Is it the financial well-being of your children and grandchildren? Is it the long-term viability of the business? List out your top priorities, in order.
Selling a Family Business Requires Honesty, Action and Help
The vast majority of entrepreneurs devote little effort to planning a thoughtful exit from their business. A general need to maintain harmony, coupled perhaps with family dysfunction or denial, can keep conversations about a founder’s exit on the back burner indefinitely.
Family businesses have additional challenges when it comes to selling, or any exit. This is a time for honest conversations about how all stakeholders want the future to unfold. Be sure to hire the right help — i.e. business brokers or investment bankers, estate planning attorney, M&A attorney, accountant, wealth management advisor — to help you work through all of the issues.
As one advisor recently wrote: “Under certain conditions, selling the family business can be the smartest thing you will ever do to succeed as an enterprising family. And it may be the best thing you can do for the business.”
The advisors at Allan Taylor & Co. have years of experience helping with the sale of a family business. Our process starts by understanding the value of the business with an affordable and insightful business valuation. We use the valuation as a framework for asking good questions, listening to your concerns, and moving forward with confidence. Reach out to us today.