“Dealing” with Family Businesses

Some families may have spent this past Father’s Day discussing family business issues, including when, how or whether to pass the baton. There are several issues to consider when dealing with a family business.

An owner may have started the business with the idea of passing it along to their kids. This model used to be more common, but it is rarer now for companies today to be passed down to the second generation and even rarer for those companies to succeed. Perhaps kids have more options these days or global competition makes it difficult for family businesses to succeed. Particularly in the PCB industry, global competition has put the pressure on all companies to be efficient.

From a buyer’s perspective, they are often somewhat wary of family businesses because of key person risk (the whole family might leave if they are not happy with any changes after closing), difficulty in changing the culture, potential nepotism, and a lack of professionalism and efficiency. At the same time, buyers may like a family business if the risks can be mitigated and the buyer feels they can increase efficiency and profitability (in other words, the buyer is getting a bargain). Experienced buyers will be worried that the family is not in agreement to sell the business and that there could be last-minute surprises.

For the seller, getting a family business ready for sale can take years, but preparing can greatly increase the value and improve the terms of a deal. Some things to assess include:

1. Is the business being run efficiently?
2. Are there too many family members in key positions?
3. Are the family members qualified?
4. Are family members receiving market-based compensation, or overly low or high compensation?
5. Are the family members on the same page about selling the business?
6. Has the business survived because it is in an increasingly niche sector of the market, or can it compete globally?

If you are thinking of selling a family business, be up front with your family members, shareholders, partners, and key non-family employees (if possible). Most likely, it will not be a huge surprise to everyone that the 80-year-old patriarch is thinking of retiring. It is good to have regular family business meetings, and not at the pool on Father’s Day, to discuss business issues. If the meetings get contentious, consider using an experienced third-party mediator (a business therapist) to run these sessions. Try to hold these meetings at least annually, but quarterly would be best. If the business is fairly substantial and can afford it, consider creating a professional advisory board.

One issue that often comes up is that the second generation is not ready or capable of running the business. Maybe they have other talents or the apples just fell a little too far from the tree. Sometimes the founder assumes that the next generation wants to take over, but they actually want to be surf instructors in Maui. It is important not to burden the next generation with too much responsibility (or debt).

Be sure to consider key non-family employees in these matters. Good employees may feel that there is no chance for them to advance because they have the wrong last name. Perhaps the best thing for the business and the family is to move family members to advisory board positions and promote key non-family employees.

Some alternatives to selling a family business are employee stock ownership plans (ESOPs) or similar types of management buyouts. In these cases, the owners may not receive top dollar and there are administrative costs, but with the proper planning and advice, these situations can be advantageous taxwise. At a minimum, the business should have a buy-sell agreement among the owners and key person life insurance in case a key owner becomes ill or passes away.

If the owner(s) are concerned about the company’s legacy, selling to a strategic buyer might not be the best answer as they often want to change the name, move the facility, etc. Many private equity buyers want to keep the name and facility in place, but they may want to make a lot of other changes. Ask for references to see how they handled other family business acquisitions. Although legacy may be important to an owner, be sure to think about the difference between a clean strategic offer and an offer with a lot of strings—the cost of keeping that legacy may be millions.

As early as possible in the process, include your key tax, legal, wealth, and investment banking advisors. Your advisors have worked with a range of family businesses, and because they are not emotionally tied to the business, they can provide an unbiased assessment.

We have found that it helps with the entire process if the owner has a clear goal for retirement. This is especially true for a founder/owner, and even more so for a family business. It’s not easy to give up a family business and there may be many ups and downs throughout the deal. Being properly prepared and having clear incentives for the owner and all stakeholders can help smooth the process when dealing with a family business.

Tom Kastner is the president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. Tom Kastner is a registered representative of and securities transactions are conducted through StillPoint Capital, LLC—a Tampa, Florida member of FINRA and SIPC. StillPoint Capital is not affiliated with GP Ventures.