Lower the Pain of Selling Your Family Business
In many articles about baby-boomers, the attention and emphasis is placed on succession (planning), that is, the transition of the family business to the next generation.
But what if the current owners want or need to sell the business due to circumstances such as:
- The business is causing a family disputes and possible disintegration.
- The current owners are unable to provide for what’s needed, e.g., cash or management expertise, and the other family members are unable or willing to assist.
- The current owners have lost their passion for the business and the next generation does not have the required specialized craftsmanship or knowledge to continue.
- The current owners need the money to fund their retirement and the only way to get it is by selling the business.
Emotional grieving, such as feelings of loss, almost always emerges when a family business is sold. Some family members may fear that without the “glue” of the business, people will drift further apart. Others, for whom the family business provides an important part of their identity or meaning in life, may feel like they’re losing part of themselves. Others may fear for their economic future or even more powerfully, for their children’s economic future. These emotions are quite difficult to plan around and control; having such feelings is integral part of human nature.
The emotional grieving described above are not the only negativities that one could anticipate, and that one needs to plan and prepare for, but the sale of a family business also carries other serious considerations.
As each family’s dynamic is different, each sale process is different. However certain acts and omissions have been identified as the most frequent failures in the process of selling a family business.
A comprehensive listing would include, among others:
Arrange for timely and proper tax planning
A lack of adequate tax planning results that far less money is kept by the family than what originally was anticipated.
Prepare and line up the family members
Potential good buyers sometimes get frustrated and walk away because family members are not in agreement with each other about whether to sell the business and for what price.
Assemble a knowledgeable and experienced team
Most family business leaders know all the ins-and-out of their business but lack the required level of knowledge and expertise to ensure a successful business sales transaction. Get experts to do the job.
Prepare for the due diligence
All too often inexperienced sellers are unprepared to deliver the documents and information for which buyers typically request.
Structure the deal properly
It is important to sort out what exactly will be sold. Will it be the assets of the company or the shares of the company? The tax treatment might differ, depending upon what is sold.
Analyze and review the sales agreement properly
Sellers sometimes tend to focus solely on the sales price and do not properly review and analyze the other provisions in the agreement, provisions that might impact the final amount of cash in hand.
Review the representations and warranties
Properly review and acknowledge the representations and warranties that always forms an integral part of a business sales agreement.
Prepare for eventual post-closing disputes
It is important to decide how eventual post-closing litigations will be dealt with. Issues such as payment of legal expenses and litigation proceeds should discussed and agreed upon among sellers.
Arrange for a break-up fee
Avoid that buyers can walk away freely. Quite often, sellers rely on a gentleman’s handshake deal and fail to realize that the deal is only closed when payment has been received.
Anticipate second thoughts
No matter how attractive the price, sellers of family business almost always develop second thoughts, reassessing whether it is a good thing to sell or not. This second-guessing sometime leads to the loss of a sales opportunity.
The emotional grieving and feelings of loss will come anyway
Spend time planning and anticipate that you may need help dealing with it.
Do it right the first (and only) time
Most of the time a family business is sold only once; there is no learning curve on this! An opportunity to learn from mistakes will not likely present itself again.