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The Fifth Commandment Of Family Business Succession: Know Whether To Sell Or Transfer

Jacob M. Engel, CommunityVoice

Many founders struggle with the big question: “Do I sell the family business or do I look to transfer it to the next generation?”

There are great benefits of selling, and there are many ways a sale can be accomplished. It allows the founder to cash in the chips and retire without any second thought of social security benefits or Medicare. It allows them to pursue dreams and once-in-a-lifetime payouts that are well-earned.

However, given that you have enough years to enjoy it, the money still has to make money, especially if you want to leave substantial amounts to your heirs or your favorite charity.

I know many founders who sold their business then regretted it immensely. For some, it was that the business was the love of their life and they missed it. For others, it was usually when the investors sold the business for even greater multiples that they felt a twinge of regret. For many, it’s mainly because they don’t feel they can continue the business into the next generation and do it right — not always about the money.

Selling 

I’ve seen some astute founders take advantage of what is called a “second bite at the apple,” meaning, they will find a minority investor, usually a strategic one (the difference between a strategic investor versus a private equity investor is very important), where both parties make sure they feel very comfortable working with each other for a period of time. Then there is an agreement to a larger-share purchase within a certain amount of years at an agreed-upon multiple of earnings, where the founder has the option to buy back the investor/partner. This way, if the business really takes off and the owner is agreeable to the terms of the second sale, he will reap the benefit of a larger payout. Otherwise, he must be agreeable to buy the investors out, as most investors want a clear exit plan.

If an owner doesn’t believe their heirs are capable or interested, or strategic or PE buyers aren’t willing to offer what he thinks it’s worth, there are other possibilities to explore. Perhaps he has a great team of employees who are like family to him and are interested in running the business.

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