Small businesses are synonymous with family. With so much at stake, entrepreneurs tap trusted spouses, uncles, cousins, and kids to help out. If it goes well, the business supports an entire tribe and everyone gets along. But what happens when the founder wants to sell? Does having family employees affect selling your business?
“Selling a family-operated business can be tricky for a few different reasons,” says Bianca Evans, a business broker with Transworld Advisors.
If a buyer is interested in the business, they will look at both income and expenses as part of the due diligence process. For most businesses, payroll is the most significant expense. Therefore, buyers will take a close look at all employees and the functions they serve. If family members are over or under-compensated, the buyers will ask for an adjustment to reflect market rates. “It’s not usually a big deal, but it’s something to be aware of. Depending on how these numbers wash out, it could affect the value of the business, and therefore the offer from the buyer.”
Will they stay or will they go?
Another bigger issue is the willingness of family members (or other key employees) to stay and work for the new owner. It’s fair to say that the more family members there are in the business, the more problematic this can become. Buyers will want assurances key people remain in place so the business continues to perform. To combat this, it is common to pay a retention bonus to employees if they commit to staying. This can be paid by the buyer, seller, or both. The owner will be expected to stay on for a period of time after the transaction. This is to ensure a smooth ownership transition. While there is no set customary length of time, owners of family-owned businesses are usually asked to stay longer than non-family owned ones. “With an individual as the buyer, it could be a few weeks or months, or in rare cases up to a year,” says Evans.
While most businesses are sold to individuals that plan to be involved in the day to day operations, other larger businesses could be acquired by private equity firms. When a PE firm makes an acquisition, the strategy is usually to have the business continue to run as it always has. And to keep the management and employees largely intact which may include the seller. PE firms view it as more of a managed asset, whereas the individual buyer is making a career move.
It can be tough for family business owners because they need to do what’s best for them. But they also feel an obligation to the family. Relationships are more complex and it can make for uncomfortable Thanksgiving dinners if handled poorly.
How to navigate a sale?
Evans lets us in on her strategy, “When I’m working with a seller, we talk frequently especially when a buyer has been identified. It’s important to note that the seller is interviewing the buyer during the entire process. Most of my family business clients want to make sure they are leaving their most precious asset and relationships in good hands. When the time is right, we strategize about which employees to tell and in what order. Under normal circumstances, it’s advisable to tell employees only after the deal is done. But that’s not always realistic when brothers, sisters, or other close family is involved.”
So is it tricky? Yeah. But is it doable? Absolutely.