How to Sell a Family Business
A business sale is a transaction, but selling a family business involves much more than making a deal. Your family business represents your family legacy and the future of the next generation, not to mention your needs and wants from the sale.
Family members might depend on the business for employment or to provide liquidity for their pursuits. These and other objectives make selling a family business more nuanced and complex than selling other types of businesses.
Selling a Family Business Starts with Succession Planning
To sell your family business, you’ll first have to consider the family members involved and their level of engagement in the business. Has it just been a paycheck for them? Are there family members who want to run the business? If there are, are they capable of managing it?
Business owners with a carefully constructed succession plan can easily answer these questions. They might have identified the next generation to take the reins of the business and spent time and effort training them to become business leaders. On the other hand, they might have determined that the next generation has no interest in running the business and prepared an exit strategy that involves selling to an outside party.
Family business owners who haven’t developed a succession plan by the time they’re ready to exit the business should prepare for some candid conversations. They’ll have to assess the readiness and interest of the family stakeholders and get buy-in for their decisions about the future of the business.
Unique Considerations for Selling a Family Business
It’s a good idea to enlist the help of a team of professionals to sort out the many issues likely to arise during the sale of the business.
Attorneys, accountants, and business brokers can help you and your family members prepare for a post-sale future. Some questions that you can expect to surface during these conversations include:
- Do any family members want to assume leadership roles, and can they manage the business?
- What is the business worth?
- How would sale proceeds be distributed among family members?
- How does the liquidity expected of a sale compare with the income the business currently generates for family members?
- Can family members access capital or other financial resources to acquire the business?
- What kind of tax liability can family members expect if the business is sold to a new owner?
- Are there family members who would opt to continue working at the business if it were sold to a third party?
- How would an outside sale affect family members’ standing in the community and self image?
Family dynamics play an important role in the sale of your business. The best interests of your business should be top-of-mind as well. Aligning the stakeholders’ interests with your business needs is essential to a successful sale.
Selling to an Outside Buyer
Once you decide that selling the business to an outside buyer is the best option and you’ve resolved any family issues, it’s time to prepare your family-owned business for sale.
Prepare Your Business Documents
Potential buyers will want to examine every aspect of your business. You should gather the following documents and organize them so that they can be easily understood.
- Business plan (updated, if needed)
- Financial statements, including tax returns, balance sheets, cash flow statements, accounts receivable and payable records, and your credit history
- Business licenses and permits
- Business formation documents such as articles of organization for limited liability companies (LLCs), articles of incorporation for corporations, or partnership agreements
- Certificate of good standing from your state to show the business complies with state regulations
- Contracts with employees, vendors, and customers
- Leases for real estate and equipment
- Procedures and operations manuals
- Branding and intellectual property assets
- Inventory lists
- Business insurance policies
You likely won’t need all the documents above at the start of the sale process. Still, it’s a good idea to review them early, check any expiration dates that might affect a sale or your business valuation, and revise and update them as needed.
Get a Valuation
Next, you’ll need to determine the value of the business. Enlisting a business broker or an appraiser to conduct a business valuation and help you set a sale price.
The founder and family stakeholders might have unrealistic expectations about how much the business is worth or they might be at odds about the business’s value. A professional can help focus expectations on the elements that matter to prospective buyers and help build stakeholder consensus.
Small businesses are typically valued using an income approach, a market approach, an asset approach, or some combination of these three metrics. However, these traditional valuation methods might not accurately reflect the fair market value of a family-owned business.
Among the intangibles that can affect a family business’s worth are:
- Company culture and values
- Local brand recognition
- Customer loyalty
Showcasing the unique traits of your family business in your marketing can help boost your business valuation and the sale price.
Market the Business for Sale
If your family enterprise is more than the sum of its parts, your marketing will have to tell your unique story.
Highlighting your community involvement, such as local event sponsorships and charitable endeavors, along with your long-term customer relationships, can be especially helpful in setting your business apart and attracting prospective buyers.
You can also use your long history in the community to find potential buyers. Contact the local organizations you work with. Put the word out to service professionals such as attorneys and accountants whose clients might be interested in acquiring your business. And talk with other business owners.
Enlisting the help of a business broker can widen the pool of prospective buyers and target the types of buyers that would be the best fit. Listing your business on online business marketplaces like BizBuySell can also help you find potential buyers.
How to Structure the Sale of a Family Business
The family dynamics at play when deciding to sell a business can become even more contentious when structuring the sale.
Some stakeholders might want liquidity to pursue new objectives. Some might want a plan that generates ongoing wealth. Others might want to secure the financial well-being of future generations.
Enlisting the assistance of financial planning and estate planning professionals, wealth managers, investment bankers, and others can help navigate these disparate objectives.
While a lump sum payment can achieve your goals in some cases, it’s also important to consider alternative methods of structuring the sale of the business, such as:
- Installment financing
- Seller financing
- Earn-out payment arrangements
These alternatives can facilitate a sale to family members and widen the outside buyer pool. They can also lower the tax liability resulting from a sale and provide family members with a steady income stream.
For help with succession planning, developing an exit strategy, and selling your family business, visit BizBuySell’s Broker Directory to find someone who can walk you through the process for a successful transition.