Should You Sell Your Business to a Family Member?

Exit Planning_Selling to Family MemberIf you’re a business owner who has family members working in your business, you’ve likely had the following thought: “When I retire, wouldn’t it be nice to sell the business to my __________ (insert favorite family member here)!” If you have, you’re definitely not alone. Keeping your business in the family seems like a great idea – but is it really?

In my experience, it’s too easy to give in to your emotions when faced with the choice of whether to sell your business to a family member. However, if you don’t balance this emotionally charged decision with a more objective financial analysis, you won’t be doing yourself or your loved one any favors.

First of all, consider the reality that most family members do not have the financial capability to purchase your business for cash.  Therefore, you will have to carry a large part of the purchase price as part of any transaction.  In most family business sales, you receive very little of the price up front, with the majority of the purchase price coming to you in the form of ongoing installment sale payments after the sale.

The first biggest consideration here is that this deal structure may create an undue risk to you, if you are relying on these payments to fund your retirement.  If you need the proceeds of the sale of your business to fund your retirement, and your family member for any reason stops making payments to you, you won’t have the funds to continue to live in the manner that you have become accustomed to. You may even have to return to work.

The second biggest issue when selling your business to a family member is that he or she may not be the right leader to assume control of your business.  It is perfectly natural for you to overestimate the potential of your family successor. In fact, I find that most business owners don’t really take the time to properly educate and thoroughly vet those family members.  This increases the probability that the buyer won’t succeed in running the business and may not be able to pay you in a timely manner.

If a family member is incapable of managing the business in such a way that payments to you can continue, you’ll have only a few available options – and they are not fun.  Once you retire, will you want to return to the business to pick up the pieces after the business is “run into the ground?” Heck no!

Also, if you structure a long-term payout, it’s possible that for health or other reasons, at some point you may not even be physically able to return to the business to “pick up the pieces.”

When a business owner needs access to the proceeds of the sale of the business, selling the business to a family member can be fraught with risks that could profoundly affect the business owner at a time when there’s no longer a desire – or, more importantly, even the physical ability – to do anything about it.

In my next post, I will discuss some ways to mitigate these issues.

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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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