2021 Is A Great Year to Sell A Family Business
Be Sure to Do It Right
More than any other time in American business history, it is unlikely that a family business owner will find his children eager to take over the business when it becomes time to pass it on. Although owning a 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 and money, and they often think they are more likely to find this fulfillment in a vocation of their choosing versus one handed down to them. Young people 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. Perhaps they want to do what the founding owner of the company did and 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 be good news for the current owners. The transfer of ownership to the next generation does not always generate a substantial financial gain, as the company is often gifted or sold at a below-market value to children. On the other hand, selling a family business to an outside buyer can be very lucrative. Moreover, several forces are coalescing to make 2021 a perfect time to sell a family business.
First, it's time to get out while the getting is good, as they say. Suppose federal tax changes proposed by the Biden administration are passed this year. In that case, 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 available than there are quality deals. Selling opportunities are better this year than in past years. And, selling to a private equity buyer offers sellers more flexibility than selling to an operating company, a so-called "strategic" buyer. Company owners can sell a portion instead of the entirety of their business to a private equity buyer, retaining some ownership that can be cashed in when the private equity group subsequently sells the company. 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 company, 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. Owners care about their legacy, how the company will be run, how employees will be treated, and how critical people are rewarded, so they stay with the company and thrive.
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 values, which ones will run your company honorably and not sully your legacy – not just which ones will pay the most.
Owners need to consider the cost of their demands for specific conditions, such as buyers must run the business a certain way, keep certain employees, or keep the company name. Such assurances are not free. Every condition will reduce the sale price because you limit the buyer's ability to run the business as he sees fit. 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 keep their emotions and 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.
It's a more complicated sale because more emotions are involved in a family business than an institutional company. That's why an owner needs to spend a lot of time on the front end of the sales process, figuring out why they want to sell, and realistically, what they expect to get out of it both financially and personally.
These are the questions that need to be answered upfront before any attempt is made to sell a family business:
- Does the owner want to exit the business or continue to work? And if they're going to stay, to what degree? How active will they 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 in the company 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 more, can impact the valuation of the business and should be thoughtfully evaluated. There are many different factors to consider when selling a family business that can be pretty personal and emotional. It is vital to have a trusted and experienced advisor to help you navigate 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.
