When deciding to transfer a family business, owners might find themselves in a tough spot. Passing ownership to the next generation can often be difficult because they either don’t have a desire to lead the business and/or they don’t have the skills necessary to take the company to the next level. Liquidity and valuation can also be an issue for owners because internal transfer often means self-financing and a lesser value than could be garnered from a third-party buyer. So, where do business owners turn if passing the company down is not an option?
Another important consideration when selling or transferring the business is timing, and this year is one where many are considering a sale. Companies are thriving coming out of the pandemic, the threat of tax increases is looming and there’s more money to buy than ever before. These events are the “perfect storm” that may make 2021 one of the best years in history to sell your business.
The right place and the right time
A major driver that is making business owners more interested in selling this year is the Biden administration’s proposed federal tax changes, which will increase capital gains and lower profits of the business sale if passed.
Additionally, since much of 2020 was spent in the pandemic, there is more private equity money on the sidelines than any time before. They’re ready to put it to work, meaning business owners have a better chance to sell at a price they like. Depending on the goals of the owner(s), private equity buyers can often be a more attractive choice than “strategic” buyers. This is because owners can sell a portion of their company instead of the whole thing, allowing them to retain some ownership, stay involved in managing the business and cash out on a potential future transaction.
More than just a buyer
No matter who an owner decides to sell to, it’s important to remember that you’re looking for a partner rather than just a buyer for your company. Don’t select the first person that comes to you and expresses interest. Rather, interview them just as much as they interview you – find out what their reputation is and talk to people who have worked with them before to see what that transaction was like. This is why it is important to have an advisor and run a competitive auction process. This process gives you options and helps you both select the best buyer and extract the most value for your company.
After investing your lifetime into the family business, it would be detrimental to see it go down because of a bad transaction. Find out which buyer most aligns with your personal and company values and get a feel for how well they will care for the business, its employees and customers. The more conversations you have about this, the more likely you’ll choose one that will fulfill your wishes.
If there are conditions you’d like to be met in the sale, such as keeping employees or the company name, be sure to bring these up in conversations with potential buyers. Money is not everything, but it can be a key consideration when making this decision. The more control you want or specific requests you’d like to be met, the lower the price tag.
Navigate the sale with emotions at bay
Selling a family-owned business is often more than just a financial transaction. It can be a very emotional process because owners often have an attachment to the business, its employees and the customers. Many owners have built or helped build the business over their entire lives, growing what they or their ancestors started, and carrying on that legacy and the business’s success is important.
Ask and answer key questions to fully understand and set realistic expectations of the sale. Negotiations are an important part of the process, and although it is a business transaction in the end, emotions can run high if you’re unsure of what you want. Working with a trusted advisor can help you make the best decision for you and your company.
Although some family business owners might be facing a tough decision when it comes to passing their business on if they don’t have someone to succeed them, if selling is in the cards, 2021 is the year to do it. Finding the right buyer and partner to take over the business will help owners who are transparent get a deal that will let them rest easy at night.
Wes Legg is president of Founders Advisors, a merger, acquisition and strategic advisory firm focused on serving middle-market companies across the nation in the technology, business services, consumer, energy, industrial and healthcare industries. As the name implies, Founders Advisors specializes in selling founder-owned businesses, and about 70% of their clients are family businesses. In order to provide securities-related services discussed herein, certain principals of Founders Advisors are licensed with Founders M&A Advisory, LLC, member of FINRA & SiPC. Founders M&A Advisory is a wholly-owned subsidiary of Founders Advisors. Neither Founders M&A Advisory nor Founders Advisors provide investment advice.