What You Need to Know About Family Businesses
Family businesses are critical to both the US and World economies. In fact, there are approximately 5.5 million family-owned and controlled businesses in the US alone.[1] While much of the world’s wealth is a byproduct of family-owned companies, the fact is that most are not prepared to sell in a way that will profit the owners for their life’s work.
Many owners of family businesses care deeply about the legacy that they built. They want it to remain in their family or with someone that will continue it with the same mission, vision, and values on which it operates. This is often difficult as the owners lack an established succession plan or exit strategy.
Studies show that about one-third of family owners never even plan to retire. As a result, they have no succession or exit plan in place. In some cases, the business is forced to form a strategy by default when the business owner becomes burned out, disabled, or worse, passes away. This is not the best path when it comes to maximizing profits.
Pros and Cons of Conveying Your Business to Family Members
According to Businessweek.com, the average lifespan of a family-owned business is 24 years. About 40% of family-owned businesses are successfully passed down to a second generation, with only about 13% passed down to a third generation. [2] The survival rate is 3% or less with the fourth generation and beyond. Whether a family business owner intends to convey their business to a third party or have it remain in the family, it is essential to maintain confidentiality and have the proper documentation in place for a successful transition.
Some disadvantages must be considered if you plan to sell your business to a family member. One key drawback is that a family business owner will typically receive less value for their business than engaging the sale with an independent third party. Selling to an independent third party can often force a family business owner to also paradoxically agree to a lower value to negotiate the retention of jobs and incomes for the family members they wish to remain with the business after the sale. It is essential to prepare the remaining family members that they will have to accept the fact that they now answer to new ownership and management of the business.
Handling Multiple Owners and Decision Makers
Suppose there are multiple owners and decision-makers in the family-owned business,d the business is being sold to a third party. In that case, appointing one family member to represent the negotiations is essential. Multiple decision-makers at this critical step in conveying the business to a third-party owner can lead to numerous issues and headaches for both the buyer and seller. Many times, multiple decision makers cause failure in the ability to transition the business to third-party ownership, as the parties involved have competing priorities with the sale of the business that prevents everyone involved in the process. Remember that all family members must agree with the business’s price, terms, and sale, or it will never happen. This fact can be actual even if the family members involved are just employees or active/passive investors in the industry. Disagreements among family members often derail the possibility of a deal happening.
Obtaining Outside Assistance
To increase your probability of success with conveying a family-owned business to future generations or new independent ownership, having a third-party guide you through the process, which is not emotionally involved like the various family members involved, can be critical in making the deal happen. That’s why multiple professionals, including business brokers, M&A advisors, lawyers, and accountants, should be brought in to help.
This article highlights just a few of the myriad issues and processes involved in conveying your business to new ownership once you decide it is time to retire or move on to a new venture. If you are beginning or actively considering transitioning your business to new ownership, please do not hesitate to contact us for advice and assistance.
[1] https://www.gvsu.edu/fobi/family-firm-facts-5.htm
[2] https://www.johnson.cornell.edu/smith-family-business-initiative-at-cornell/resources/family-business-facts/
Copyright: Business Brokerage Press, Inc.
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