Recently, I was reminded of some of the issues that impact owners of privately held companies when they decide to sell their business to family members. We had an attendee at one of our seminars who was in the process of transferring ownership to his two sons. At the time of our conference, he had already transferred about half of the company to them and was in the process of selling the remaining 50% to them over the next few months.
As we met with him after the seminar, we asked, “Why did you attend our exit planning conference since you are already well down the road in selling to your children?” His answer was troubling because we hear this all too often.
First, neither of his sons had been active in the business in the past 20 years. They had both worked there through college, but afterwards had transitioned into other non-related careers. They decided to buy Dad out for what turned out to be emotional rather than business/career reasons – they wanted to keep the company in the family (it was branded with the family name) and retain the legacy. A noble goal indeed!
However, after being involved in the day-to-day decisions for a few months, one of the sons had decided that he really was not that interested in the company. His passion in life lay in other areas, and the idea of running the business with his brother for the rest of his life no longer was as appealing.
Secondly, the father/owner of the business had become painfully aware that the other son was simply not capable mentally and physically of actually being co-CEO. He was a wonderful son and had a great career in another field, but his skills/demeanor/mental acuity simply were not lending themselves to making decisions related to the business.
So the owner/father, the fellow who attended our seminar, did so because he was facing a huge dilemma: He was 50% down the road of selling his company to his sons and was actually now being forced to work in the business nearly every day, during what was supposed to be his retirement, to run the company.
This is how our managing director who met with the owner described the situation to me post conference:
“It's a real sticky situation insofar as he has a provision to take the company back, but he doesn't want to entertain that as it would cause some rather serious issues in the family.”
Even though the purchase agreement contained a “clawback” provision (usually allowing the seller to re-purchase the company if certain key metrics are not met over a 1 to 5-year period), he was hesitant to use it because of the internal strife, discord, and division it would logically cause the family.
So his only recourse at this point was to continue with the sale process and hope/pray that in the end, it would all work out for his retirement, company, and family.
If this were the first situation like this that we had encountered at our M&A seminars, it would not be so bad. However, nearly every week we hear similar stories that have combinations of these same themes:
This is just a small sampling of what we hear all too often. And as you can see, these all have a common theme. Before you sell to family members be sure that they:
If you do this analysis and determine that selling to your family members is really not the optimal scenario, I have great news: Selling to a third party can actually benefit you, your family members, the business legacy, and your employees.
Why? Because most buyers of lower middle-market businesses are acquiring because of strategic reasons, i.e. the future growth of the company. This means that they want to retain the brand (often the family name), keep the key employees, and most importantly invest capital in the business to help it expand. And, just as critical, if fully vetted, these buyers usually have the capital necessary to successfully fund your buyout! As you can see, a third-party buyer can really benefit all parties.
Do all acquisitions work out 100% successfully? Of course not. But the odds are much higher with a professional third-party buyer than they are with your children or Cousin Larry.
I know that many of you are facing a very difficult decision right now. Aging baby-boomer business owners are reaching a point in their lives where they have to make some tough choices. Fortunately, Generational Equity, part of the Generational Group of Companies, is here to help. As I mentioned earlier, we hold complimentary, no-obligation exit planning conferences for business owners. Why? Because in the next 10-15 years, we believe that we will see the largest transfer of wealth in the history of the world, as baby boomer business owners transition to the next phase of their lives.
If you are in the position where you are considering the transfer of your company to family members, employees, or third parties, you should attend our conference. The knowledge you gain will keep you from getting into situations that are nearly impossible to get out of.
To learn more about our conferences and Generational Equity, follow these links:
By Carl Doerksen, Director of Corporate Development at Generational Equity.
© 2016 Generational Equity, LLC. All Rights Reserved.
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
Dear Chris and Andre, I just wanted to say thanks for all your help. Even though this process was not an easy one, it was comforting to know that I had a capable team standing beside me. You made me feel like we were almost your only client or at least the most important one. Thanks again, and I will recommend your service in the future.Shenille Engelhart, Owner – CLS Technology
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.Bryan D. Horn, Owner, Over Under Clothing
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!Eric Erlandson, Owner, Action Fastenings, Inc.
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
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