Here’s what you need to know before selling your business to your family
Marc L. Goldberg
Leaving a company after a lifetime of caring for “your baby” is difficult. It is doubly difficult when the transfer of ownership, management and leadership is to a child or children.
Divestopedia’s Josh Patrick advised owners who are planning their next performance to consider a number of factors.
Give your adult children time to gain experience under the guardianship of someone other than you, the parent. Having proven experience in a similar business will be decisive in successfully assuming the reins of the family business.
When planning for business transition, don’t create jobs for your adult children, let them grow into existing jobs by learning the ropes of the business and earning the roles they are assigned to. If a job is created for the younger generation of owners, a host of issues can arise that might not have existed had they earned the job.
Make sure the pay is not only competitive, but fair when employing children. Everyone knows everyone’s pay rate or salary. When it is out of proportion with the rest of the employees, there is resentment from the outset.
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Whether ownership is transferred to children or strangers, the business will not be the same. The next generation of owners will not run the business like the current one. It’s a fact. Growing a business is different from maintaining it. As difficult as it may be, if the kids don’t have the skill base, then it might be best to consider selling to a third party.
Valuing a business is an integral part of the transition. The value of the business should be based on a third-party valuation, not the current owner’s personal valuation and therefore sale price. It may be an accountant, banker or business broker who can provide this objective assessment. This avoids a lot of grief between family members.
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Ownership of company shares is another issue that needs to be considered, especially if there are multiple children in the family. Even those not directly engaged in running the business should be included in ownership, especially if one or more are going to engage in the ongoing business.
There are always questions about whether the business should be sold or given to the next generation of owners. Something for nothing – you know. To ensure it has value, selling the business is best for them and the seller when it comes to estate planning.
When the business is sold to the owner’s children, it is not only important, but essential to the success of the successor owners, that the current owner step back and stay out of the day-to-day operations of the business. That doesn’t mean they shouldn’t be available for viewing, but hovering causes problems for the succeeding leadership.
Ultimately, it’s best to work with a lawyer, CPA, and M&A specialist to make sure the transfer works for all parties involved.
It takes as much planning to leave a business as it does to start one – sometimes more. The transition to family members requires foresight and a lot of communication.