5 Advantages of Selling a Family Business: Part 1
June 15, 2022 by Interchange Capital Partners
By Brian Baum, CEPA®, CFP®
The sale of a business can be one of the most complicated aspects of a closely held company, especially if it’s a family-owned operation. You may have always dreamed of passing the business to the next generation, and now as the time approaches, maybe it doesn’t make the most sense.
Despite the desire that family businesses should be passed down for generations, sometimes it makes more sense to sell instead. Here are 5 advantages of selling a family business and how to decide if it’s the right choice for you.
Selling Can Be an Effective Cash-Out Strategy
Though many business owners struggle with the idea of selling the business they’ve put their heart and soul into, in some cases it can be an effective cash-out strategy. This is especially true if you have large amounts of your personal wealth tied to the business, as is the case for many family business owners.
Rather than passing the business to the next generation and hoping to structure the transfer in a way that provides for you in retirement, you can choose an outright sale that would cover your retirement lifestyle and put you in a position to leave a lasting legacy for your loved ones.
Not only that, but selling is also an effective way to add liquidity to your finances, freeing up resources for other financial goals, investments, or business opportunities. There is much more flexibility with how you can use your financial resources when they are not tied up in a family business.
The Next Generation May Be Unprepared
Despite your best intentions and desires, the next generation of business leaders may simply be unprepared to take on the role. They may lack the skills, leadership ability, or desire to take over the business, making it nearly impossible to design a succession plan without bringing third-party management to the table.
Though it may be disappointing and different from how you always imagined your business would look, it does not necessarily have to be a bad thing. Selling the business can help you avoid potential disappointment or financial ruin if an unprepared next generation were to take over and squander your hard work.
The Business May Require Specialized Leadership
Another reason why selling may be a better option is if your business will require specialized leadership in the future. The underlying business may be in solid shape right now, but if the longevity of the company requires leadership resources you and your family do not possess, it could cause problems down the line. It can be easy to lose sight of the long term when your business is thriving in the moment, but this is a mistake that can lead to devastating consequences over time.
Like all investments, past performance does not guarantee or predict future results. Don’t let your desire to keep your business in the family override the wise decisions that will help keep the company running for decades down the road. Selling can be a great way to provide innovation and longevity to your business while freeing up resources for you and your family to invest in other ventures.
Reduce Negative Ownership Dynamics
Though it can be hard to admit, sometimes ownership dynamics can create tension and negativity with non-family officers and stakeholders. This is often the case when family members are automatically given roles, whether qualified or not, or if they are not held accountable for their responsibilities in the company.
Nepotism of all forms is a red flag for shareholders, and it also serves to create tension and resentment among non-family employees. These negative dynamics can be avoided by selling the company to a third party who is competent and qualified to take over leadership of the business.
Businesses (and Families) Naturally Change Over Time
Like everything else, businesses and families are not immune to the natural tendency to change over time. If your family business is only thriving right now because the current patriarch or matriarch has always held things together with their unique abilities or relationships, there may be major problems on the horizon. It is not reasonable to expect that the next generation will be able to fill the exact same role and possess the exact same skills as their predecessors.
Instead, it may be time to pass on the torch to someone else who either does possess those unique skills or who can provide the leadership and innovation necessary to take the business to the next phase in its life cycle. All businesses have life cycles, and it’s important to recognize when it’s time to pass on the reins.
Making the Right Choice
Deciding to sell your family business is a huge decision. Maybe the business has been passed to you from previous generations and you don’t want to let your predecessors down. Or maybe you have spent your whole life building the business from scratch and you want to keep it in your family for generations to come. Whatever your situation, at Interchange Capital Partners, we can provide the outside expertise necessary to evaluate your options objectively.
To learn more about your options or to schedule an introductory appointment, email us at firstname.lastname@example.org or call our office at 412-307-4230.
Brian Baum is the managing director of Interchange Capital Partners, an independent registered investment advisory firm providing family office and transition strategy services to family businesses. With 10 years of experience, Brian spends his days working with his clients to determine ideal strategies to simplify and optimize their processes and the future of their business. He is known for his attention to detail and going the extra mile to become familiar with the dynamics surrounding each situation so he can offer customized and creative guidance.
Brian has a bachelor’s degree in psychology with a minor in business from Penn State and is a Certified Exit Planning Advisor (CEPA) and CERTIFIED FINANCIAL PLANNER™ professional. Brian is also the president of the Pittsburgh Exit Planning Chapter, which he helped found in 2019. The chapter’s mission is to give business owners a forum to become educated on how to build a valuable and transferable business through a proven process. Outside of work, Brian enjoys spending time with his wife, Natalie, and their daughters, Quinn and Blair. He is also an avid golfer and likes the occasional scotch and cigar. To learn more about Brian, connect with him on LinkedIn.
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