A family-owned business is defined as any business in which two or more family members are involved. According to the U.S Census Bureau, that describes 90% of American businesses.
Eventually, your family will have a conversation about succession planning. Those discussions can get complicated in a hurry, and make for uncomfortable Thanksgiving dinners if they go poorly. Before you get ahead of yourself, join some industry support groups. Chances are, someone in the group has faced your challenges before. Gaining perspective is a good thing.
One thing all family-owned businesses have in common is the owner will exit the business one day; on their terms or not. One solution is to sell the business to an investor for a great multiple and achieve the financial security and freedom that comes with it.
But what does that mean to your family members that work in the business? They could be left feeling abandoned, betrayed, and deceived.
Instead, consider selling to your family member. Usually, the first reaction I hear from owners is, “My family member can’t afford it.” However, that's not always the case. Attractive bank financing exists (with the help of the SBA) that can make deals work. The cash flow from the business can service the loan and also pay the new owner’s salary.
One word of caution is to avoid negotiating the sale on your own. With so many emotions in play and complicated relationships, it’s almost always better to hire a business intermediary. This third party serves as a buffer and keeps the communication professional and methodical. After all, this is a business transaction and needs to be treated as such. Not only will you have to settle on a sale number, but you’ll also have to work out details such as inventory, loan payoffs, accounts receivables, and other terms that determine how lucrative the deal is for the seller.
Selling your business to a family member can be a beautiful thing because it tells a great story and creates a legacy for the seller.
When banks finance the family-owned business, it’s treated like every other transaction they do. They’ll require business financials, determine the creditworthiness of the buyer, and make sure they have enough experience to take on running the business. In SBA deals, most sellers don’t realize that they will have to share the risk with the bank and hold a note from the buyer too. In traditional deals, it might be 5% of the sale price. We normally want the seller to hold as little a note as possible so the buyer gets all the money they can at the time of closing. However, if financing becomes tight, the seller can hold a larger note. I’ve seen sellers hold 10% or more. They are willing to do this if the buyer is their son or daughter because they’re more willing to get the deal done. It can be a great win-win because the seller gets their payday and the buyer gets a great business that they may have not been able to afford otherwise.
Deals like this don't have to be limited to blood relatives either. Sometimes it’s with long-term employees too. Perhaps they helped build the business and the seller sees it as the “right thing to do” to help them buy it.
What can’t be left unsaid are the emotions that come with any family-related deal. A business intermediary will try their best to limit the stress for both parties and make the deal go as smoothly as possible. I’ve been fortunate to sell more HVAC businesses than any other broker in the last 3 years and in every deal, the seller wants to do right by employees and customers. After a while, business associates turn into friendships. Turning the keys over to the next owner is an emotional decision as much as it is a financial one. Transitioning to a family member or long-term employee can give the seller the peace of mind they need to enjoy retirement. When your friends are taken care of, it caps a career you can be proud of.