Business tips from SCORE: What you need to know before selling your business to a relative
Exiting a business after a lifetime of nurturing “your baby” is tough. It is doubly challenging when the transfer of ownership, management and leadership is to a child or children.
Divestopedia’s Josh Patrick has advised owners who are in the process of planning their next performance to consider a number of factors.
Give your adult children time to gain experience under the tutelage of someone other than you, the parent. Having proven experience in a similar business will be instrumental in the success in assuming the reigns of the family-owned/-operated enterprise.
When planning for transitioning the business do not create jobs for your adult children, let them grow into existing jobs by learning the ropes of the business and earning the roles to which they are assigned. If a job is created for the younger generation of owners, then a multitude of problems may arise that might not have existed if they had earned the job.
Make sure that the pay is not only competitive, but fair when employing children. Everyone knows everyone else’s pay rate or salary. When it is out of proportion with the remainder of the employees there is resentment from the outset.
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Whether the transition of ownership is to children or outsiders the business will not be the same. The next generation of ownership will not conduct the business as the current one. This is a fact. Growing a business is different than maintaining it. As hard as it might be, if the children don’t have the skill base, then consideration might be best to sell to a third party.
Valuing a business is an integral part of the transition. The value of the business should be based on a third-party evaluation, not the current owner's personal appraisal and therefore the selling price. It might be an accountant, a banker or business broker who can provide that objective evaluation. This saves a lot of grief between family members.
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Ownership of stock in the company is another issue that needs to be considered, especially if there are multiple children in the family. Even those who are not directly engaged in the management of the business should be included in the ownership, especially if one or more are going to engage in the ongoing business.
There are always questions about whether the business should be sold or given to the next generation of owners. Something for nothing — you know. To be sure it has value, selling the business is best for them and for the seller when it comes to estate planning.
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When the business is sold to the owner’s children it is not just important, but critical, to the success of the succeeding owners for the current owner to step back and stay out of the day-to-day operations of the business. That doesn’t mean they shouldn’t be available for consultation, but hovering causes trouble for the succeeding management.
When all is said and done, it is best to work with an attorney, a CPA and a mergers-and-acquisition specialist to assure that the transfer works for all involved.
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It takes as much planning to exit a business as it does to launch one – sometimes more. Transitioning to family members takes forethought and plenty communication.
Contributed by Marc L. Goldberg, Certified Mentor, SCORE Cape Cod & the Islands www.cape cod.score.org, capecodscore@verizon.net, 508-775-4884.
This article originally appeared on Cape Cod Times: Here's what you need to know before selling your business to family
