Today, perhaps more so than any other time in the history of American business, it is not likely that the owner of a family business will find his children eager to take over the business when it becomes time to pass it on to the next generation. There are many reasons for this. For one, even though owning the family business could guarantee them financial security, money is not everything to young people today.
To many of them, a career is about personal fulfillment, as well as money, and they often think they are more likely to find this fulfillment in a vocation of their own choosing, versus one handed down to them. The fact is, young people simply have more options available to them today because they are better educated. According to U.S. Labor Department, the number of workers aged 25 or older with a bachelor’s degree or higher has just about doubled since the early 1990s.
Or, maybe they’re tired of the dysfunctions that can plaque a family business. Or, maybe they just want to do what the founding owner of the business did – take a chance on an idea of their own and start a new business.
Children’s reluctance to take over the family business can be a boon to family business owners
However, the younger generation’s reluctance to take the reins of the family business can actually be good news for the current owners. The transfer of ownership to the next generation does not always generate a huge financial gain, as the business is often gifted or sold at a below-market value to children. On the other hand, selling a family business to an outside buyer – to either another business or a private equity fund – can be very remunerative. What’s more, several forces are coalescing to make 2021 an especially good time to sell a family business.
First, it’s time to get out while the gettin’ is good, as they say. If federal tax changes proposed by the Biden administration are passed this year, the tax bite on capital gains will increase substantially next year, eating into the proceeds from a business sale.
Second, the market is virtually awash in private equity funding – there is more money than there are deals to spend it on – so business owners have a better chance this year than in past years of getting a good price for their companies. And, selling to a private equity buyer offers sellers more flexibility than selling to an operating company, a so-called “strategic” buyer. For example, company owners can sell a portion of their business to a private equity buyer rather than the whole thing, retaining some ownership that can be cashed in when the private equity group sells the business. This “second bite of the apple” often generates as much revenue as the first bite, because private equity owners usually grow the business considerably in the interim.
Look for a partner, not just a buyer
Whether selling to a strategic buyer or a private equity firm, owners of family businesses need to realize that they are looking for a partner, not just a buyer. Family business owners have often spent their entire lives building the business, either starting it from scratch or growing what their parents or grandparents built before them. The business is a living thing to owners, not just an abstraction, employees are like family and the community it serves is the extended family. And owners care about their legacy – about how the company will be run, how employees will be treated, how key people are rewarded so they stay with the company and it thrives. And maybe the owner also wants to stay with the business for a while, as he or she is not ready to “go to the house.”
Because the best buyer is a “partner,” selling a family business is kind of like finding a spouse – which means you should not marry the first person who smiles at you. You need to “date” buyers a little, find out which ones best mesh with your personal values, which ones will run your company honorably and not sully your legacy – not just which ones will pay the most.
Though money is not everything, it is certainly a key consideration in the sale of a family business, and owners need to realize that when they ask for conditions – such as that buyers will run the business a certain way, or keep certain employees, or keep the company name – that these assurances are not free. Every condition will reduce the sale price because requiring the buyer to do something, or not do something, restricts his ability to run the business as he sees fit, and the more you restrict him, the less he is willing to pay. So, even though selling a family business is an emotional event, sellers should strive to keep their emotions and their sentimentality in check as much as possible – or be willing to pay for it.
Understand why you are selling – and negotiate terms that meet your needs, both emotional and financial
Because more emotions are involved in the same of a family business versus an institutional business, it’s a more complicated sale. That’s why it is important for an owner to spend a lot of time on the front end of the sales process figuring out why he or she really wants to sell, what he or she expects to get out of it – both financially and otherwise – and what is realistic to expect.
These are the questions that need to be answered up front, before any attempt is made to sell a family business:
- Does the owner want to exit the business, or stay on? And if he or she wants to stay, to what degree? How active will he or she want to be? For how long?
- Can the owner be sure that key people in the business – who are usually not family members – will stay if the business is sold? How can they be incentivized to stay?
- Will the buyer need to keep all family members who are now working in the business? At the same salaries and in the same jobs?
- Does the business need to stay in the same location? Keep the same name?
Each of these conditions, and many others, can impact the valuation of the business and therefore should be thoughtfully evaluated. There are lots of different factors to consider when selling a family business that can be quite personal and emotional. It is key that you have a trusted and experienced advisor to help you navigate through the process and make sound decisions. Many people spend decades building family businesses and may only have one chance to monetize all their efforts. It is a big deal.
To sum up: 2021 can be an excellent time to sell family business – the best in many years and for many years to come. Market conditions are right and family dynamics are more favorable to a sale to an outside entity than in the past. The key to a successful sale is being clear on your objectives up front, taking time to find the right buyer/partner and being reasonable in negotiating the terms of the sale so that both seller and buyer get most of what they want.
Written by Duane P. Donner.
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