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Your Business: Should You Sell or Keep It in the Family?

This decision depends on many factors unique to you. However, there are some key questions to consider as you work toward making the choice that fits your situation.
How Will You Transition Your Business?
With every business there comes a point where the founder or owner needs to move on. It often feels bittersweet: with so much energy and effort put into the business, it can be hard to start a new chapter.
In many cases, there are two broad options: sell your business to the highest bidder and walk away, or keep the business in the family (or with other owners) with a succession plan. And there’s seldom a clear-cut answer: it all depends on you and your needs.
“Ultimately, as advisors, our job is to give our clients options,” said John Gregg, 1834 Wealth Planner. “We want to give them full knowledge of possible financial opportunities, so they can make an informed decision.”
With that in mind, there are four key questions that can help with your decision-making process.
Why Do You Want to Move On?
The answer to this can inform your timeline, your financial needs and your long-term goals for your business and your life. For example, a health event that necessitates lifestyle changes is far different from an entrepreneur wanting to capitalize on an overheated market. And, these two examples are far different from a long-time owner wanting to retire early.
In any scenario, forethought—and extra time—can make a big difference. Even if you’re ready to monetize soon, an extra year or two of preparation may help, since you may get a better offer if you work toward making your business more appealing to a specific type of buyer.
A long timeline is especially important with succession planning: it’s simply not enough to decide you’d like your children to run your business. You want time for them to build effective leadership skills and for you to slowly and gracefully step away. This can take 5 or 10 years.
Ultimately, you need to understand your underlying motivation for moving on, so that you have the conviction that you’re making the right choice—and develop a roadmap for pursuing the goals you want from the transition.
What Is Your Vision for Your Business?
Do you envision your business operating in much the same manner for several more decades? Is it more important to you that the business continues to provide for its employees and the community than it is for you to get the best possible price?
“Many entrepreneurs I encounter feel a personal connection to their business and want it to go on forever,” said Gregg.
Or, maybe your business was always about your family legacy: Do you already picture your grandkids and great-grandkids running it? Was it built to be a financial bulwark and a continued source of family pride?
If you’ve been incorporating your family members into the business for years, you may be able to follow the classic model: your children rise up through management and are ready to take over when you’re ready to retire.
Or, maybe it’s just a business for you. Perhaps you’ll be glad to gain as much value as you can for your years of hard work, since you’ve always seen the business as a vehicle for financial gain.
“A fair amount of people go into business for prosaic reasons,” said Gregg. “Maybe they didn’t like having a boss and they had an idea they could make work. For those people, legacy is less of a question. It’s more about maximizing their asset.”
Your vision for the business can help you sort through possibilities. For example, if you want to keep it running as it has, you may lean into the idea of an Employee Stock Ownership Purchase (ESOP) instead of considering offers from venture capital—even if venture capital offers a higher price.
Or, if you want it to be a family affair, but the next generation is unready, you could consider a trust that keeps ownership in the family, while relying on your current skilled management team to run the business.
Your Wealth Advisor and lawyer can help you identify transition ideas that respect your long-term vision for your business while also working towards your personal financial needs.
What Is Your Vision for Your Family Legacy?
Enacting your vision of a family legacy will take effort—and willing family members and business partners—to achieve. After all, a business is only as successful as its leadership. If the leadership is unwilling or unable to do the job, the business will suffer—and so will the reality of a family legacy.
“When thinking about this, as Wealth Advisors, we can pose this question: Can your family run this business? You know your family best; we can’t really answer that question for you. But we can ask you to consider it deeply,” said Gregg.
If the next generation is capable and interested, a smooth transition requires years of preparation. The next generation should work in many areas of the business, gain understanding (and practice) in managerial and leadership roles and start to take over your position. Doing this smoothly and effectively can take years.
“Any sense that you have that you may want to have family members take over—it takes time. You need to work toward that vision in an orderly manner,” said Gregg.
If your business has partners, you also need to consider them. Are they interested in working with other family members? Had they envisioned buying you out and taking over themselves? Or, once the next generation takes over, will your partners leave—and who would take over their roles? While these conversations may be hard, having them early and being honest about everyone’s needs can go a long way toward creating a successful transition.
If you don’t think your family members are capable of taking over your business—or they’ve told you they don’t want to—it’s time to consider other ways to enhance the family legacy. Would cashing out and creating a trust make more sense? Or would your family members prefer an ownership share without running the business—and how would that work? Or perhaps your children would like the proceeds from the sale to serve as seed money for their own projects.
This step is intensely personal. While many business owners pride themselves on their rational, hard-nosed business sense, working with your family to figure out what everyone wants involves many emotions. It pays to take them seriously: Over the long term, frustrated or unhappy family members will not serve your business legacy (or your personal life) very well.
What Is a Realistic Return on Your Business?
Your heart may be telling you to keep your business running as-is or pass it on to family members—but does it make financial sense?
“When it comes to keeping a business, it may be worth thinking of whether a business wants to keep going. For example, what is the profit margin you’re working at?” said Gregg, “If it’s only 2% or 3%, which is typical of grocery stores, for example, it may make sense to cash out after you estimate the return you may receive on more traditional investments. On the flip side, a business might have a huge margin. I’ve seen as high as 50% or 60%. In that case, cashing out may make less sense—you’re doing very well with that asset.”
Work with your accountant and a small business consultant to gain a thorough understanding of the value your business has as a retained asset, as well what you could expect in selling it and letting go. The results of this assessment can help you make a solid, informed decision.
When considering a sale, remember that a business is a relatively illiquid asset. Your valuation may be accurate, but perhaps your partners are unwilling to buy out your share. Or a third-party buyer may insist that the value of the business includes you—so you’d have to stay on for several years to help with a smooth transition. Explore real-life possibilities, too, so that you truly understand your options before you take the plunge.
Good Advisors Can Help
A decision like this requires soul-searching. While no one can do that for you, having people in your corner who have seen situations like yours before, and who have expertise in business and finance can help you in your decision-making journey.
At 1834, we’re always happy to talk you through the process, ask the right questions, and provide you with financial guidance. If you’re considering selling or transitioning your business, let’s talk.