Often a business owner wants to turn over his or her business to a relative for a variety of reasons, but ninety nine percent of the time this turns out to be a horrible mistake. The reality of small business ownership nowadays is that most family members don’t voluntarily want to share in the responsibilities of running a family business. Unlike previous generations, today’s young adults have no desire to work as hard as they watched their parent’s work nor do they want the family arguments.
That is why you need to understand the risks of insisting your business be turned over to an unwilling family member. Usually when this happens, the proverbial brother or sister-in-laws will very likely run the business into the ground and occasionally steal from the cash flow.
Let me share a tale of two families! The first father & son team didn’t fare so well in the business world. The father purchased a deli/café for his son. The son and girlfriend proceeded to run the business into the ground, losing the father’s $100,000 investment in the process. This store is now closed. The second father & son team are doing much better. They own several Dairy Queen franchises located in major malls and casinos. They work together as a team running the businesses in a very professional manner, much like a president and vice-president. They have built an empire together that will one day be passed onto the son.
From my 45+ years of experience in business brokerage, the story of the first family is a far more common reality than that of the second team. Families usually start out with the best of intentions, but tend to ignore some of the harsh realities that are visible to a stranger. I strongly suggest that if you are considering selling, or worse, giving your business to one or more family members that you at least sit down with an experienced business broker to get a second opinion and assessment of the situation from an unbiased independent third party. This may save you many thousands of dollars and plenty of headaches!
Don’t ask your friends, neighbors, or other business experts like your dentist, Realtor, or hair stylist. Generally these people don’t know anything about businesses and would be afraid to give you any positive opinions. The same goes for your other relatives. You are intelligent, you will figure it out, but it pays to consult with an expert. Don’t put more research into your next cell phone purchase than you do for selling your business to your family member or anyone else. Remember, business mistakes can be extremely expensive!
If you want to help a family member, then let that person purchase all or part of the business, even if seller carry financing is a part of the deal. This is when the seller becomes the bank and agrees to hold a certain portion of the purchase price as a loan usually payable from 1 to 5 years, sometimes a little longer and at a variety of interest rates regardless of the cost of money or prime rate. The repayment is usually principle and interest every month like a car loan. Sometimes the seller will want extra collateral such as a lien on your home. This is especially true if there are no or few hard assets with the business as found in many service businesses. The seller is not wrong to ask for it.
It is important for the Buyer, even if they are related to you, to have some “skin in the game.” If they have money or assets at stake, they will work harder to make the business a success. Working a business is not a labor of love, its hard work! If they are not willing to purchase the business, even for a nominal sum, then it’s time to look for other buyers who are not related to you. This will keep Thanksgiving gatherings a lot more friendly! Look at all the heart ache I just saved you!
Article contributed by Ed Smith aka Edward J. Smith, Ltd. Ed is a professional licensed business broker in the states of Nevada and Utah with First Choice Business Brokers firstname.lastname@example.org