These days, the familiar description of private business ownership, the “mom and pop operation,” fits only a small fraction of companies. Fewer households are traditional married couples these days, and even when married couples own a business one of the spouses is typically engaged in some other endeavor.
Even so, there are many mature businesses whose owners are ready to pass the operation and the equity to sons or daughters. And while business ownership over a series of generations has that “mom and pop,” “apple pie” wholesomeness about it, the truth is that selling a company to relatives may be a poor business move.
Look at it this way: A stranger walks into your office one day and offers to buy your business. The stranger has an attractive price in mind and may even be open to negotiation.
Will you sell? Probably not, because you are convinced that there are other potential buyers out there. A big factor in your reluctance is that you are not sure what the company is really worth to qualified buyers.
A business owner should be just as hesitant about selling to a familiar buyer as he is to a stranger, and there are many reasons.
The best prospect is a premium buyer, who sees the company’s future worth and wants to exploit it. While that prospective buyer may eventually be someone already involved in the company, the seller can’t be sure until the sale is presented properly to a larger market.
Here at Generational Equity, Dwight Jacobs has seen some discouraging factors in the sales of companies to close relatives and associates. Jacobs, executive vice president for mergers and acquisitions, said he would like to see sales to family members and associates succeed for sentimental reasons.
“But in the best business practice, we have to set sentiment aside for the good of all concerned,” Jacobs said. He enumerated “just a few reasons why close-in sales can be disappointing.”
- A relative or associate is likely to be at a disadvantage in obtaining credit for the transaction. This further limits the relative’s ability to offer a competitive purchase price for the business.
- Even the closest of families can harbor differences of opinion, and these can be magnified when relatives transact business.
- Relatives may not be ready to buy the business when the owner is ready to sell.
Even if it’s almost a cinch that the business will be sold to a relative, the owner acts in everyone’s interest by undertaking the merger and acquisition process in the marketplace.
“Generational Equity provides a high-value, low-cost solution to all the problems an owner is going to encounter when selling a company,” Jacobs said. “The M&A procedure assures the seller that the company brings full value, even if the buyer is that relative or associate. At the same time, the buyer acquires the company with confidence that its value has been established.”
Here’s why:
- Valuation methods alone are a strong incentive for the seller to enter the M&A arena. Generational Equity helps business owners recognize value factors they might otherwise overlook — important factors driving the market values of their companies.
- By running a complete M&A process, soliciting a large, targeted universe of potential acquirers and hand-picking the best candidates will yield maximum value for the business.
- If the relative looking to buy the business already has minority ownership equity, sharing in the sale to a third party may benefit that relative more than outright ownership. In private company M&A transactions, 75% of sellers leave 75% of value on the table.
- The professional M&A advisor sets a timetable that allows buyers to get involved. The timetable encourages participants to close the deal.
“It would be nice to think that companies and their owners as well as their new owners benefit most when succeeding generations take over and reward their forebears for the opportunity,” Jacobs said. “Sometimes that happens, but when it does, all should be certain that the deal is what’s best for everyone.”
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