The Sign Businesses For Sale Blog
Navigating the Sale or Succession of a Family Business
When it comes to passing on or selling a family business, the process can be emotionally and financially complex. But whether you’re planning to keep the business in the family or hand it off to an external buyer, careful planning is crucial. Below are some considerations for family-owned businesses when preparing for succession or a sale to keep the process running as smoothly as possible.
Prioritize Employee Retention
If keeping jobs for family members or long-term employees is a priority, be prepared for potential adjustments to the sale price. While maintaining these roles can add value for the buyer, it may also impact the final valuation. Obviously, you’ll want to strike a balance between preserving jobs and getting the right price. This requires careful negotiation.
Ensure Your Advisors Are Experienced in Deals
Many family businesses rely on long-term legal and financial advisors who may lack the expertise required for a successful sale or transition. It’s essential to hire professionals with experience in M&A or business sales. This ensures they can handle complex negotiations and you’ll be more likely to protect your interests.
Understand the New Management
When selling, family members who remain with the business will likely answer to new management. There could even be external investors. Clarifying roles and expectations will help minimize conflicts and confusion after the sale.
Get a Consensus from Your Family
All family members involved, whether as employees or investors, must agree on the terms of the sale. Disagreements over price or conditions can delay or derail the deal entirely. Clear communication within your family is key.
Further it is a good idea to designate one family member as the primary decision-maker during negotiations. Having a single point of contact ensures that decisions are made efficiently and reduces the risk of internal conflicts.
Consider Hiring a Professional Intermediary
Hiring a professional business broker or M&A advisor can smooth the process of selling or transitioning a family business. These professionals bring expertise in managing transactions, finding buyers, and navigating the complexities of family dynamics. Their experience can accelerate the sale and help prevent financial missteps.
One of the biggest challenges for family-owned businesses is ensuring that the next generation is prepared to take the reins. According to PwC’s 2024 Family Business Survey, around 40% of family businesses have a succession plan in place. However, only 20% have a formal written plan. Additionally, 33% of businesses report that leadership transition is a key concern due to a lack of readiness among the next generation.
These findings highlight the importance of forward-thinking when it comes to succession. With careful planning, family businesses can avoid common pitfalls and ensure the longevity of the business.
Copyright: Business Brokerage Press, Inc.
Source: PwC, 2024 Family Business Survey. For more information, visit https://www.pwc.com/gx/en/services/family-business/family-business-survey.html.
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Creative Strategies for Closing the Price Gap in Business Transactions
When buying or selling a business, the question of price is often the most contentious point. Sellers typically aim for all-cash transactions, hoping to receive the full value upfront. However, in middle-market business deals, it’s common for partial seller financing to be a necessary element. Interestingly, sellers who insist on an all-cash offer may end up with a lower price than they would if they were open to other deal structures.
Even buyers with the ability to pay in full may prefer to negotiate a deal where some portion of the price is deferred. This might be in the form of a note or an earnout. Buyers feel these strategies give them leverage should the business not perform as promised.
For example, an earnout ties part of the payment to future business performance. Buyers often argue that if the business is as represented, there should be no issues with this arrangement. On the other hand, sellers typically feel that they’ve already taken on significant risk while managing the business and are reluctant to continue assuming risk once the transaction is complete.
Are there ever circumstances where an earnout or other deferred payment structures can benefit both parties? This does happen on occasion. Consider a business that has invested considerable time and money into developing a new product but has just launched it when the business is sold. In this case, a portion of the price could be deferred until the new product begins generating revenue. This would ensure the seller is compensated for the investment made. This kind of deal structure allows both the buyer and seller to align their interests for mutual success.
All of this is to say that often price differences may seem like a dealbreaker. However, there are several ways to bridge the gap between buyer and seller that can lead to a successful transaction.
Below are a few strategies that can help close the deal:
- Real Estate Flexibility – If the sale originally included real estate, the seller might choose to lease the property to the buyer instead of selling it outright. This reduces the purchase price by the value of the real estate and can still offer the seller a steady stream of rental income.
- Partial Acquisition with Future Purchase Option – A buyer could initially acquire less than 100% of the business and have the option to purchase the remaining shares in the future. For example, the buyer might acquire 70% of the company’s stock, with an option to purchase an additional 10% each year for the next three years based on a predetermined formula. This arrangement allows the seller to continue benefiting from the business’ potential growth.
- Royalty Payments Based on Performance – Instead of an earnout, a royalty structure could be implemented, where payments are made based on revenue, gross margins, or even EBITDA (earnings before interest, taxes, depreciation, and amortization). Royalty payments are often easier to negotiate than earnouts, as they are tied to measurable performance. In that way, they are more predictable.
- Carving Out Assets – In some cases, the seller may own assets that may not necessarily be tied to the core business, such as personal property or non-business real estate. These assets can be carved out of the sale, reducing the overall purchase price and making the deal more attractive to the buyer.
While these strategies won’t solve every price discrepancy, they can be very beneficial and serve as creative solutions that bring both parties closer to an agreement. The ability to structure a deal that works for both the buyer and the seller requires a combination of time and expertise. Sometimes a little creativity is also involved.
Copyright: Business Brokerage Press, Inc.
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The Essential Guide to Creating a Partnership Agreement
When starting a business with a partner, whether it’s a friend, family member, or colleague, people often find that it’s tempting to skip formalizing things with a written agreement because there is a level of trust already in place. However, even the best relationships can face challenges when money and business decisions come into play.
A partnership agreement is a critical document that can protect both parties and prevent future misunderstandings. By clearly defining the terms of your partnership upfront, you set your business up for stronger and more streamlined collaboration.
This legally binding document outlines the roles, responsibilities, and expectations of each partner. Without one, you risk facing disputes down the line. This could be over everything from profit sharing to decision-making. This agreement is essential for clarifying ownership, profit distribution, and conflict resolution. It can help prevent a lot of headaches down the road.
Key Components of a Partnership Agreement
- Ownership and Profit Sharing:
- The first thing your agreement should address is ownership structure. Who owns what percentage of the business? It’s important to clarify this at the outset to avoid confusion later.
- Roles:
- Clearly define each partner’s role in the business. Having a clear understanding of duties helps avoid overlap and ensures that everyone knows what’s expected of them.
- Decision-Making:
- Another essential aspect of the partnership agreement is how decisions will be made. Will you make decisions together, or will you rely on a majority vote? Whether it’s day-to-day operations or major business moves, outlining how decisions will be made helps keep the business running smoothly.
- Financial Considerations:
- It should come as no surprise that money is often at the root of business disputes. That’s why it’s vital to address financial matters in detail. For example, if the business needs additional capital, who will contribute, and how will that be managed?
- Exit Strategy:
- An often overlooked but important section of the partnership agreement is how to handle a partner leaving or selling their share. This can prevent conflict if one partner wishes to exit the business or if the partnership dissolves for any reason. You want to make sure both parties are protected in advance.
- Dispute Resolution and Contingencies:
- It’s also important to set guidelines for handling disputes. What happens if a disagreement arises that cannot be resolved internally? Consider specifying how conflicts will be addressed. This could be through mediation or arbitration.
While it may be tempting to draft your own partnership agreement, working with a lawyer is a smart investment. A legal professional can ensure your agreement is comprehensive and legally sound, preventing issues that might arise from poorly drafted terms. They can also help tailor the agreement to suit your needs. Creating a detailed partnership agreement may take time upfront, but it’s an investment that will pay off in the long run.
Copyright: Business Brokerage Press, Inc.
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