Many business owners decide to sell their company to a family member, most often one of their children. Do you need a business intermediary to help with this kind of transaction? There are several ways a third party can help make the sale smoother. Here’s what to consider.
Is the exit plan and transition to the next generation clear to both parties?
It can be difficult for families to have the kind of candid and emotional conversations it takes to negotiate a business deal. Whether the owner is selling the business outright, phasing in equity for the child (or children ) over time, or gifting the company, everyone will benefit from having an objective third party facilitate the discussion and provide advice based on experience with many other deals, including those with family members.
It can be challenging for a child to say “no” to the opportunity to take over a family business. There may also be other family members who had assumptions and strong feelings about what should happen to the company. An intermediary can get to the bottom of complex emotions and help a prospective new owner decide if this is really what they want and if it’s the right fit for them at this stage of their career.
It can also be challenging for a parent to let go of a company they’ve built through years of hard work. Creating a plan that clearly delineates how long the parent stays involved with the company and how much input and control they have will help alleviate conflict and misunderstandings after the transition.
Does the family member have the motivation and skills to run the company?
Most family members who want to take over have worked in the business in some capacity, but they may have yet to see the full picture of what a CEO does. It’s important to objectively assess the new owner’s skills, strengths, weaknesses, and desires (loves operations; doesn’t want to do sales, for example.) The family may need to hire additional help to fill gaps or fill the role the family member played in the business.
If feasible, we recommend that a family member who has never worked in another business or industry get some outside experience before taking over. They will return to the family business with a fresh perspective and appreciation. Once they take over the family business, they may never have an opportunity to work elsewhere for the remainder of their professional lives. This can lead to “what-if” questions in their mind and could lead to future regret. When going through a rough patch, they may assume the grass is greener elsewhere. Having an opportunity to work outside of the family business will give them a more realistic perspective.
Another way to boost the new owner’s confidence and fill in gaps in skills and experience is to hire a professional coach. A fractional (contract) CEO, CFO, or COO can keep the company running smoothly while mentoring the new owner. A traditional executive or business coach can also provide an initial assessment and ongoing support during the transitional period.
How do you want to structure the deal?
Money complicates family relationships, and in the end, a sale transaction will have to be negotiated. An M&A Advisor or Business Broker may charge a reduced fee to help negotiate and close the deal since they don’t have to pitch the deal to the broader market. A broker will come in with no assumptions, make sure there are no surprises in the details, and help determine what kind and how much funding the new owner will qualify for. An experienced intermediary will also have a network of professionals such as appraisers, attorneys, and lenders who have experience in the industry and can evaluate risk and close the deal more quickly.
Long standing family lawyers and advisors may not have the M&A experience needed to structure and close this kind of deal, and they may be perceived as representing or favoring one party over the other, which can cause difficulties during the transaction.
Passing on a business to the next generation is part of the American Dream. You will probably only do this once in a lifetime, so planning carefully and getting professional advice is worth the investment to ensure the deal works for everyone involved.
