Selling or Transitioning Your Business to a Family Member

istock_000002937110xsmallThere are three common ways of selling or transitioning out of your business.  Most succession plans involve selling or transitioning the business to; family, employees or managers, or to a third party.  Each of these Exit Strategies has positive and negative attributes and – depending on your situation – may or may not be a viable option.

The first Exit Strategy is to sell or transition the business to a family member or members.  This is the most difficult option due to the complexities of merging family and business interests. If you have only one child it is much easier, but as the number of children increases it becomes exponentially more complex to weigh the many factors all at once.

The major problem with selling your business to family is that most do not have a way to purchase the business other than putting down a small portion of the purchase price and having you, the seller, carry the rest. That small amount may not be adequate to meet your retirement needs.  In some cases, the business can raise cash through borrowings or a recapitalization, but these may add significant risk associated with the long term viability of the company.  Otherwise, you may need to rely on the business to generate the retirement income you need.  Another risk to consider is that once you exit the business you certainly won’t want to take the business back if it cannot continue to make payments to you.   Coming back into the business once you have made your exit is very difficult, particularly if you are much older. If, on the other hand you have the luxury of not needing to convert some of the equity in the business to fund your retirement, this option may be attractive.

Also, grooming a family member for the leadership role in the business is a long-lead item.  It requires years to season someone for a management position.  This individual must be a visionary as well as an excellent manager.  Many second-generation members just may not have the “right stuff.”  It is better to admit this before investing many years of labor, only to find out that your successor doesn’t possess the multiplicity of skills required to successfully operate a business.

Lastly, your Exit Plan must ensure that family members who work in the business – as well as those who do not – are treated fairly and that business decisions made today do not create discord in the family that may last a lifetime.  For example, there is a natural tendency for family members who work in the business to have objectives that are different from those who do not.  Individuals who work in the business tend to have more strategic objectives that include the long-term well-being of the company.  This may be in stark contrast to those who do not work for the business and may be interested only in the short-term cash flow that can be distributed to them.  I have seen these types of conflicts literally tear a family apart.

These kinds of Exit Strategies cannot be implemented in a short period of time.  They require years of planning and often may mean going back and trying a different Exit Strategy.  I always recommend that you begin creating your Exit Plan as far ahead of the time you plan to leave the business as possible.

I will continue to talk about the other options for selling or transitioning out of your business in my next post.  So check back!

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About Gary T. Brooks

Gary T. Brooks has over 27 years of experience in the investment banking industry and has been involved in over 100 transactions. He is currently the CEO of ExitPlanPros, where he helps business owners grow their business while planning their exit.

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