Selling a Family Business - the Basics. 

(Part one of a series on buying and selling a business)

There are over four million family owned businesses in the United States, most employing 10 or fewer people, and between now and 2010, 40% will change leadership and in most cases, leadership and ownership. Over the next six years we are going to experience the greatest transfer of wealth in our history, and most small business owners, despite the fact that the family business typically represents the families’ most valuable asset, are not prepared for the transfer.

The majority of the businesses that will change hands are controlled by entrepreneurs who were born shortly after World War 2. They are at the age of retirement and many of the businesses do not have family members interested or competent to continue the business.

Those of us that practice in the rust belt states are all too familiar with niche businesses that were started in the 1960’s that successfully captured a market in a   non-high tech industries such as steel or automotive. These businesses required a combination of man and machine and by today’s standard are considered low tech and mundane. Additionally, they require active participation by the owner.

The family business provided for a comfortable life style, that provided a higher education for the children. Armed with expensive degrees, the children are not interested in continuing the family business and turn to white collar jobs, away from the rust belt cities.

There are virtually thousands of profitable businesses for sale by retirement age owners who have all but given up trying to convince family members to continue the business. What is a business owner to do? We recommend the following steps to insure an orderly sale:

Obtain an independent appraisal of the business. More often than not, the owners’ perceived value is very different than the market value. Retain an unbiased experienced appraiser who will opine on the true value of the business.

Require the potential buyer to execute a properly drafted confidentiality agreement. One of the most agonizing aspects of selling a business is the due-diligence process. Potential buyers need to review the books, verify inventory, talk to customers and meet key employees. The seller is going to have to open up the books and possibly expose trade secrets. Confidentiality agreements are a highly litigated area accordingly, do not use boiler plate agreements; they may be unenforceable and useless. The worst thing that can happen is a competitor obtains proprietary information and you are left without proper legal recourse.

Hire a merger/sale specialist to handle the questions from potential buyers. Few entrepreneurs welcome all interested parties to look over their books and open the sale to an auction of sorts. More typically, sellers narrow the field of potential buyers by retaining a third party to help identify the serious buyers verses parties whose only interest is obtaining proprietary information. There are going to be many questions. If you do not hire someone to insulate you from the potential bidders, you will end up spending considerable time away from your business answering questions and you run the risk of having emotions enter the discussions.  

Hire an experienced acquisition attorney. If your merger/sale specialist is not an attorney, make sure your advisors include an attorney versed on business sale matters. Poorly structured sale agreements will prove costlier, in the long run, than the fees charged by a competent attorney.