With Baby Boomer business owners now reaching retirement age, the next few years could see as many as 350,000 Australian small businesses going under the hammer. For many of these entrepreneurs, selling to someone they know and trust – such as a member of their family – might be the preferred option. However, it isn’t always the quickest or the easiest option as it comes with plenty of challenges and potential pitfalls.
Despite our best intentions, relationships with loved ones can sometimes be far from straightforward. When business enters this mix, the stakes are raised and with livelihoods on the line, sometimes things can get messy. So how can entrepreneurs navigate these potential pitfalls and ensure that both family relationships and the business remain intact?
Firstly, selling a business is like most things, the more you plan for it, the easier it becomes. This is especially true when selling to family members, as personal relationships can often cloud the process. It’s therefore recommended that owners begin planning for a sale at least five years prior to it being completed. In reality, this is often more like two years. However, this is one short-cut that business owners should avoid. Selling a business canhappen incredibly fast, but these types of sales rarely benefit both parties. With family members involved, it’s important to ensure that the sale works for everyone, and this requires preparation.
When planning it may be helpful to draw up a checklist to include the following considerations, will the business need to diversify to remain profitable in the next fives years; will the business appreciate or depreciate in value in the next five years and what do you (the current owner) intend to do once the sale is complete. This is by no means a comprehensive list but does act as a solid starting point and should help guide your overall thinking.
Taking into consideration the above will help you to identify what responsibilities the new owner will need to take on board. If it’s a family member this gives you the added opportunity to guide them ahead of the transfer taking place. These considerations can also help you to ascertain if your chosen heir is indeed the right person for the task.
For larger families, where several individuals are potentially in the running, agreeing on the right buyer can be a tricky process and one that should be approached in a transparent and well-thought out manner. This is not the time for back-room deals. Family-wide discussions need to be had with the notion of what’s best for businesses informing the final decision.
It may seem like an obvious point but it’s also important that whoever you’re selling to actually wants to take up the mantle of the family business. Make sure they’re saying yes out of a passion for the business, not just out of family loyalty.
Once a buyer has been identified, one of the first issues to arise when negotiating an inter-family sale is that of financing. It can often be a major stumbling block. Usually, with inter-family sales, businesses are being sold to younger offspring who typically lack liquid assets. As they are unable to pay in cash, they often have to arrange financing options. In these cases it’s common for the seller to act as a guarantor of debt for the buyer. This adds an extra layer of complication to the process and has the potential to cause a lot of headaches, especially if the business’ new owner struggles to meet repayments.
With inter-family sales, the exiting owner is usually eyeing up retirement. However, suddenly being confronted with 40+ hours a week of spare time can be a daunting prospect for many. Many business owners feel tightly connected to their company and draw a lot of their identity from it. For example, although not near retirement age, who is Mark Zuckerberg without Facebook? Psychologically it can be a trying time, with former owners not realising how emotionally hard it can be to walk away from their life’s work. Business owners need to map out their retirement. If they don’t they run the real risk of getting sucked back in.
Navigating family politics and retirement planning aside, business owners also need to consider what state they’re leaving their business in. Much like selling your home, does your business need a fresh lick of paint before you handover the keys? Incumbent owners should ensure that their business is in a healthy state and that any necessary investments, in terms of staff or infrastructure have been made well ahead of the sale. This will make the handover process easier for the new owner and increases the chances of you making a clean exit.
Leaving the business in a strong position also dampens the sting of your departure. Clients, customers and suppliers can be fickle, They may have been loyal to you but this does not guarantee they’ll extend the same loyalty to the new owner – even if they are family. Future proofing the business via necessary investments gives the new owner a stronger hand and decreases the risk that your heir will need to rely on you to maintain key relationships.
There comes a time when all business owners must step aside from the company they’ve nurtured for the best part of their professional lives. Selling to a loved one shouldn’t be painful or hard but it can be if the correct steps are not taken. So before you go down the inter-family sale route, ask yourself, is this person up to the task and is the business running as smooth as it can be? Because if not, then an outside buyer, with a different skill set or the required capital, may be what’s best for your family and the business.
Dean Porter is a Managing Partner at Findex.