Selling a Family Business Is Tough. Here Are Some Tips to Make It Easier.

Selling a business is complex, even more so when a family owns it. The price owners receive may depend as much on family dynamics as financial metrics, even if the family doesn’t have a direct role in operations.

Leah Jane Barnwell’s parents ran an industrial manufacturer founded by Barnwell’s grandfather in Charlotte, N.C., for the past 40 years. Now in their 70s and without anyone else in the family willing to take over, Barnwell tried to get her parents to create a succession plan so they could retire.

Despite the daily stress, her mother’s worries about legacy for her offspring and business continuity kept her working. When a key employee left in 2023, her parents realized they needed to turn over the reins.

Barnwell, strategic initiatives manager at Trust Company of the South, helped her parents find a buyer, but there wasn’t time to modernize the operation to something more turnkey. Her mom didn’t use spreadsheets to track the numbers; she ran it on instinct. Some key industrial designs weren’t patented either. There wasn’t time to formalize all that for a new buyer. “That would have helped boost the value of the business,” she says.

Much of the value for a business sale, of course, is determined by such universal metrics as profitability and competitive pressures in the sector in which it operates. For example, it can be hard to sell dentist or doctor offices, when the identity is tied up with a single owner. On the other hand, there is usually a good market for well-run manufacturers. But family dynamics and management can impede a sale.

All the family members need to be on the same page when it comes to selling a business, says Eric Czepyha, director of business services for Northern Trust. Otherwise, it “can cause animosity and potentially bad decision-making down the road,” he says.

Jennifer Ridley Hanson, director of wealth planning at family office SlateStone Wealth, worked with a couple who didn’t discuss money or their restaurant supply business with their children, who weren’t employees. They sold in part to avoid telling their kids they didn’t believe their children could run the business. After the sale, the children resented never having the opportunity to work there and try to keep it in the family.

Family can be an asset for a buyer

Czephya says family members can be an asset to a business. He tells business owners to write a family employment policy to create transparency and rules around joining the family firm.

He says Northern Trust created a policy for a 75-plus-year-old, multigenerational, family-owned manufacturing company where only some family members worked in the business, and multiple generations had ownership through trusts. The policy cut through the complexity and part of it stated that to join the business, family members need to have worked elsewhere for at least two years.

A policy informs buyers and nonfamily managers that the business owner’s children were hired for their merits and are skilled at their jobs, rather than just collecting a paycheck by the virtue of their last name, he says.

Czephya says having a strong second-in-command is key, as this person, family or not, will be incentivized to work with the new buyer. “If I’m a buyer, looking at a business, I want to know who the second-in-command is and who’s their successor,” he says.

Charles Shook, founder of private investment firm Trestle Capital Partners, concurs. In 2023, he worked with two business co-owners who had strong managers across the three divisions of their business. “Those two owners could go to Europe for a month, and the business wouldn’t miss a beat,” he says.

When those owners were ready to sell, they received seven or eight letters of intent to purchase and the business sold at a high valuation, he adds.

Avenues to sell

Czephya says selling to a third party requires hiring an investment bank to value the company and run a sale process, which can take between six months and a year.

Owners have a few routes to selling. Ridley Hanson worked with a multi-generation family manufacturing business, which sold part of a stake to private equity. The sale allowed the father to retire, and the children could run their divisions without needing to become CEO. “The customers love it, because now there’s still the people that they were used to working with, and the company is still running and operating the same way,” she says.

Shook says a growing segment of buyers comes from search funds—investment vehicles where individuals are backed by investors to buy businesses.

That is how Barnwell’s parents found their buyer. Barnwell says her parents and the buyer had aligned on values and vision for the company. As part of the deal, her mom and the new buyer are working together for about another year to smooth the transition, and it is going well.

“They have been loving working side by side with someone that has fresh energy, new ideas,” Barnwell says. She adds that they are adjusting to having another responsible person at the company, which is allowing them to relax and enjoy their success.

By Debbie Carlson

This Barron’s article was legally licensed by AdvisorStream.

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