Selling Your Business To Family Members

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AUTHOR

Bruce Coudrey

Selling Your Business To Family Members

There are many options when selling a business. One option is to sell the business to family.

Family succession

Business owners who have invested a lot of time and money in growing a business may have a strong desire to keep that business in the family when they leave. If you plan to transfer your business to a family member - either as a gift or through sale - you need to consider how this will affect both the business and your family.

Choosing a family successor

When choosing a successor from your family, it’s wise to take time to think about what's best for the long term future of the business. While you may want to set up your children financially by giving them the business, this could cause problems in the long run if they don't actually want to take it over. You need to make sure your successor has both the necessary skills and commitment to take the business forward. Avoid making a decision based on emotion. For this reason it can often be a good idea to establish a board of non-family members to get an objective opinion. Be aware of potential problems when choosing a family successor. Choosing just one successor may cause conflict if others are equally interested in taking over. Or, if you appoint more than one successor, this may lead to arguments as there is no clear leader. If the successor(s) don't agree on how the business should be run, this can cause significant problems. You can be sure that people will not agree on everything, and because family members will not be able to agree on everything consideration needs to be given to haw that can be dealt with – before a disagreement arises. … this is all about prevention. Ideally, your successor should have to 'earn' their role, not just be given it because they are family - this can upset other employees who are qualified to take over. To get some idea of a potential successor's suitability and interest, you could organise a “trial period” during which they work in different parts of the business. If you have more than one successor, it might be a good idea to delegate areas of responsibility based on each person's particular skills and goals.

Ownership and management

An important consideration in family succession planning is how you will transfer both ownership and management. Ask yourself the following questions:

Will you transfer both ownership and management to family members?
Will ownership be equal among family members?
Will the management team include non-family members?
Do you need to change the business's goals and long-term objectives?
How do you measure the success or performance of the succession?
Which family members will be actively involved in the business? What are their roles and responsibilities?
Will any family members have non-active ownership?
Does your successor need training or mentoring to overcome any lack of skills?
Do you want to act as an adviser once you have transferred ownership?
How long will the transition take?

Financial and legal issues

You will need to think about the legal and financial implications of family succession and include these in your succession plan:

Are you gifting or selling the business to your family?
Do you need to set up a trust as part of the succession? Forming a family trust to own and operate the business on behalf of your children will have tax implications.
If you are selling your business to a family member, will you get its market value? Getting a professional valuation will ensure you are rewarded fairly for all the work you have invested and will help avoid financial disputes.
Would you prefer to receive a regular dividend from the business rather than a lump sum?

Be sure to get professional legal and financial advice before selling part or all of your business.

Communication and dispute resolution

Open communication is a key part of family succession planning. You need to include both family and key staff in any decision-making related to future management and ownership. Their feedback is vital. Regularly review your plans with family to make sure they are aware of, and happy, with progress. You also need to make sure you have a process for resolving disputes. Family businesses can be emotional environments. A trusted outsider such as a lawyer, accountant, or family business adviser, can help provide an objective opinion.

Planning

The old adage is true. You know the one… “Failing to Plan is Planning to Fail”, and the act of planning for family succession is key to achieving a successful outcome. What sort of things should be included in plans?