Keep or Sell Your Family Business: How to Make the Decision

There’s a reason the term family comes first in family businesses: emotional and family considerations loom large, no matter how level-headed the principals aspire to be. M&A decisions about these assets can be tricky, but a few simple questions can help guide you down the right path. If there’s a family dispute, encouraging each family member to thoughtfully answer these queries may bring everyone closer to a meaningful agreement. The right M&A firm can help you as you make your assessment.

Is this business an heirloom or an asset?

A business is a lot like a child. It’s something your family has poured years of hard work into, making it difficult to make rational decisions. Consider asking yourself whether this business is an heirloom—such as a part-time small book business or a beloved greenhouse—or a financial asset. It typically makes more sense to sell a financial asset. But if the company is a valuable heirloom boasting years of family history, consider working with an M&A advisor or investment banking firm to devise a strategy for keeping it financially viable.

Does the family want to continue operating the company?

Running a company sounds good in theory. Many family members may have a sense of identity wrapped up in being a business owner or heir. But the daily grind can prove challenging. Consider whether there are family members who are ready, willing, and competent to manage the company and perform the daily tasks necessary to operate it. If not, are there family members who want to master the skills necessary to oversee the company? If the answer to both is no, the only alternatives are to either hire an outside executive or to sell the company.

Is now the right time to sell?

Work with an investment banking firm to assess whether the market is right for a sale now. This means not only looking at the health of your individual business, but also at wider market conditions, and how those might play out over time. Sometimes holding the business and growing it is the better strategy.

Is selling a financially viable option?

Selling a business is not cheap. The family needs the funds necessary to oversee the process, as well as a strategy for ensuring the sale is sufficiently profitable. The right investment banking firm is critical to this process. In most cases, the sale will require:

• Valuation: Determining fair market value is important for assessing whether now is the time to sell. If the valuation is lower than expected, the family may want to consider holding onto the company for a while to increase value.
• Analysis of cash flow: Will the sale address the family’s need for cash? Or will the family be left with financial shortcomings? A wealth advisor can help with weighing the risks and benefits of a sale, as well as assessing how delaying a sale might assess family wealth planning.
• Analysis of tax liability: Sales incur taxes—capital gains, regular income, and sometimes both. Work with a tax advisor to assess what your tax liability is likely to be, as well as how different deal structures might affect this liability.
• Planning for due diligence: Family-run businesses tend to have poor record-keeping, and may run personal expenses through the business. Buyers know this, so due diligence tends to involve quite a bit of close scrutiny. Preparing for due diligence is key to the final success of the sale.