Selling a Family Business: Are You Sure You Can?
08 August 2022: Selling a Family Business: Are You Sure You Can?
Even in the best case instances, selling a family business is fraught with complications, obstacles and headaches. This is especially true if the business is more than one generation old and even more so if the next generation is large and spread out – and has some interest in the business.
If the structure of your business has not been updated over the years to reflect both its growth and the growth of the family interests, you might discover, at the least optimal time, that the way your business is currently organized could make selling it a monumental challenge.
And this is not something you want to discover during a buyer’s due diligence because that buyer will be headed out of town and on to the next opportunity as soon as the problems turn up.
Generational Transfers
What problems could put the brakes on a sale? From over-pricing and bad financials to collapsing sales and potential law suits, there are too many to count.
But many of them can be, with determination and coordination among the buyers and sellers, overcome. But there’s one aspect that, if not addressed, let alone discovered, prior to coming to market, will be harder to surmount. And that’s unclear or complex ownership.
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The prospect of selling a family business – one that has survived at least two generations – can unearth any number of “forgotten” structural and ownership revisions that have been implemented in fact but not in documentation.
The sale of a family business could trigger rights of people who are neither working in nor managing the business. In fact, the family members that run the business and believe they own it might not even consider that other members of the family might have some clear but little-known rights that will be sure to surface at some point and are very likely to derail any deal.
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Where’d All These People Come From?!?
One of the first things owners should do when beginning the process of readying their business for sale is to look for reasons that could possibly impede getting a deal done. And there are many such potential impediments.
From a cloudy organizational structure and the requirements of unanimous consent to loans made to the business by various owners or rights of first refusal, there are dozens of potential “inside-the-family” issues that could derail any deal.
If you’re running a family business with your sister and a cousin, a business that was started 40 years ago by your parents and your uncle, any siblings you and your cousin have could very possibly have some minor interest in the business.
Sure, you may be aware of them and their interest. But what if some of that interest was placed in various trusts for their children, all of whom are now in their late-20s and 30s?
Insider Transactions
And what about loans made to the business by one or more of the owners years ago; or, worse, loans made to any owners by the business? If you want fewer roadblocks and speed bumps, get these off the books by getting all management-related loans paid or collected.
Another possible stumbling block is a trust that some owner – possibly deceased – created for his or her heirs. The original owners may have agreed that certain actions needed the unanimous consent of the owners before such action could be taken and such consent requirement could have passed to the next generation via the trust.
The worst time to discover this is when you’re about to bring the business to market – or during a buyer’s due diligence – because the possibility that some wayward nephew who hasn’t been heard from in years, desperate to release his inner John Bonham and get his drumming career off the ground, becomes a holdout and leverages his minority stake to try to get an additional ZERO added to the value of his position.
Customers
Relatedly, look closely at the business’ customer relations.
The business may have been selling to any number of customers for years and the original purchase contracts have long-since expired. Make sure you have current contracts in place with your customers. And before putting new contracts in place make sure that, if any handshake agreements are “sweetheart” deals, try to negotiate market-level agreements – while still being competitive, of course.
Legitimate current contracts for your business’ products or services are significantly more valuable to a buyer than the buying history of clients.
Contracts give a buyer confidence that a certain amount of revenue will be coming in the door over the next months or years. Such confidence has value. Buyers will pay for that certainty.
The Bottom Line
There are other issues that, if not prepared for, could bite the sellers in the butt at the worst possible time.
For example, it is common for business loans – credit lines and other debt instruments – to require the lender’s consent before certain actions can be taken by the owners. This is particularly true when it comes to changes in ownership.
Many so-called “third-party consent” requirements are triggered even when a small minority of the business is changing hands. We’ve seen some instances where such triggers are tripped when the transferring equity is as little as 20%.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at jo*@Wo*******************.com.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
Searching For…
A U.S.-based investment holding company has contacted us about acquiring U.S.-based businesses in the B2B services; industrial services; consumer services; multi-site / franchised businesses with Discretionary Earnings of at least $1.5 million.
If any of you know of something that might fit, please let me know.
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 500 in the world. He can be reached at jo*@Wo*******************.com