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The transition of business ownership from one generation to the next is a plan that typically crosses the mind of most owners of closely-held family businesses. While this may seem like a reasonably safe, natural option, especially if the transition is to the business owner’s child/children, the choice can be smooth or it can be disastrous, depending on many factors.
Selling to a family member can be richly rewarding and highly beneficial, including the impact on your family goals, a continuance of income and even tax planning. Yet it may also be extremely difficult to separate emotions and family dynamics, which can ultimately lead to a long and daunting transaction process.
In most instances of transferring a business to a family member, an M&A firm or advisor may not need to be present during the internal transaction process, as an attorney can manage the deal. However, if complicated family dynamics exist, having an advisor throughout the process can help mitigate the emotional components and keep the focus on the factual, more objective business elements of a transaction.
Over the years, I've been involved in many family business transactions and witnessed many successful transitions. Unfortunately, I have also seen many scenarios that didn’t go as planned and left the business owner disappointed or disheartened. Whether the situation was children not wanting to pay for the business, even when it was offered at a discounted price, or a child simply having no interest in owning the business or continuing the family legacy, selling to a family member can be challenging on many, often unexpected, fronts.
For example, retirement is always a key factor of consideration when selling a business, but it is especially important when choosing to sell to a family member. Recently, I was introduced to a couple looking to sell their 30-year-old business to their son. Over the course of multiple meetings, I explained the process and what would be involved to successfully transition the business. We discussed rewards and challenges based on their specific business situation and family dynamic.
Finally, as we were wrapping up one of our conversations, I asked the couple about their retirement plans and whether proceeds from the sale of their business were necessary to fund their retirement. Without hesitation, they simultaneously replied, “YES!” However, moments before, the couple had conveyed a lack of confidence in their son’s ability to successfully run the business.
'Selling to a family member can be richly rewarding and highly beneficial, including the impact on your family goals, a continuance of income and even tax planning. Yet it may also be extremely difficult to separate emotions and family dynamics, which can ultimately lead to a long and daunting transaction process.' Emery Ellinger
With the successful continuation of the business imperative to the couple’s retirement and the couple’s doubt as to their son’s capabilities to successfully operate the business at that time, the conversation had to pivot to a new exit strategy — offering the son a position at the company under a third-party buyer. It was crucial for the family to realize this before the transaction, so they didn't have to come out of retirement and try to save the business themselves if decline or ultimately, failure, ensued.
There are many factors to consider when selling a business to a family member or to an independent third party. Family dynamics can heavily influence the sale of a business. While some business owners may feel the need to sell to someone in their family, it may not always be the best decision for the business owner and/or for the future success of the business. It is essential to understand the dynamics at play in order to understand all the options available when selling a business so that you can determine what is best for you, your family, and your business.
Emery Ellinger is CEO of Aberdeen Advisors Inc., a St. Petersburg-based M&A Advisory firm he founded after having built and sold his own multimillion-dollar marketing company. Emery has expertise in all areas of M&A Advisory practice and has successfully completed hundreds of transactions, including mergers, acquisitions, divestitures and financings.
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