Mergers and Acquisitions, Small business

Family Business Succession Planning

Bill and Mary, owners of a successful hardware distribution company, recently came to see me about selling their business to their son. Bill Jr. has worked for them for the past four years and is doing an excellent job. He left a promising career to return home after Bill Sr. had a heart attack. Several of Bill and Mary’s children worked in the business as well but had not expressed any interest in purchasing the company.

I asked them if Bill Jr. was really interested in taking over the family business and was he ready to lead the company. They weren’t sure if he wanted to buy the business now. As I listened to them, I decided that I should discuss the situation with Bill Jr. privately. They agreed. After spending time with him, it was clear the Bill Jr. was interested in buying his father’s business but had not seriously considered purchasing it now.

This is the advice I gave him

I told him that there is no single path to taking over a family business. More importantly, if he is interested in purchasing the business now, he needs to know how to proceed smoothly. It is wise to take a cautious approach that recognizes the family’s unique personalities, values, and interpersonal relationships since it is his family.

Author: Gary Miller
Author: Gary Miller

First, Bill Jr. will need to consider the ramifications of taking over the family business. I advised him to take some time to review his career goals and personal life. Since Bill Jr. was in his mid-30’s, he may want the chance to define himself and his career outside of the family business.

Second, Bill Jr. will need to review the benefits and risks involved in purchasing the business. He should secure the advice of a trusted mentor and a business consultant. There is a range of benefits that come with taking over the family business. You are:

  • Maintaining the family legacy.
  • Getting an established business with a modern infrastructure.
  • Getting the existing talent and knowledge of longtime employees.
  • Getting a profitable business with strong cash flow.
  • Getting a business with a solid customer base.

However, Bill Jr. needs to recognize potential risks, as well. I recommended that he take some time to consider the various risks. Questions he should ask himself are:

  • Is there potential for infighting among family members about the buyout?
  • How will he finance and pay for the purchase of the business?
  • Is the cash flow enough to pay the payments to his parents?
  • Is the initial financial investment economically viable?
  • Are there long-term growth opportunities for the business?
  • Does he have the right skill sets and leadership style for the company culture?
  • Will the existing customers and employees stay with the business if Bill Jr. takes over?

Third, I advised him to secure a professional opinion of value from an independent, certified valuation firm. Often, family members will either under or overestimate the value of their business. Without an independent valuation, family feuds can erupt. A certified valuation will help determine whether it is a good business decision to purchase the business and, if so, how much should Bill Jr. pay for it.

Fourth, Bill Jr. should make a holistic decision. Taking the benefits, risks, current financials, family dynamics and his own career into account, make the decision that is right for him.  His advisors should make sure that Bill Jr’s considerations are relevant, thoughtful and logical.

Fifth, assuming Bill Jr. decides to purchase the business, he should be cautious in how he proceeds with the purchase. Nerves can become raw and tense during the transaction process.  To keep things under control, it’s best to take a slow approach and not be too aggressive because either could spark negative reactions among family members.

Sixth, Bill Jr. should develop his own business relationships instead of relying on his parents’ or other family members’ relationships — lawyers, accountants, and consultants. It is advised that each participant in a family business transaction should have their own legal counsel. Bill Jr. will want to follow an arm’s length transaction process as if he were buying a company other than the family business. By using an arm’s length transaction process, he can minimize “family drama”. For example, avoid deciding on a purchase price around the dinner table or with a handshake on a family vacation. Hire a law firm with transaction experience to draw up the definitive purchase agreement and an M&A consultant to help negotiate price, terms and conditions, representations and warranties of the purchase. In addition, Bill Jr. should develop a clear communication and transition plan that addresses the transition of leadership from his father to himself.

Seventh, he should use his unique talents and leadership style instead of trying to run the business like his father. However, he should respect family rules and precedents.

Finally, I told him to be sensitive. When taking over the family business, remember that the last generation may be very attached to what they’ve built.  Whether the business was a start-up or they took it over from a previous owner, they have spent a great portion of their lives building a successful company. Just as starting a business takes a great deal of energy, taking over a family-owned business can be just as taxing — and surprisingly emotional, too.

Gary Miller ([email protected]) is the CEO of GEM Strategy Management Inc., an M&A consulting firm advising middle-market private business owners. Read more of Miller’s blogs here.