Selling a Business with Multiple Family Owners – From Jordan Zweigoron
Many small businesses are owned and operated by multiple family members. At Sunbelt, we enjoy helping families to sell their business when the time is right. Family-run businesses can be very attractive to buyers; however, it’s useful to anticipate and avoid one particular pitfall when you’re considering selling in the future.
Acme, Inc was started by John and Jane Doe in 1992, when their son, Jacob, was 10. In 2005, Jacob graduated from college and joined the family business. Jacob runs the day-to-day operations today, with his parents each contributing 20 hours per week. The business operates very smoothly with 3 family owners each contributing what they do best.
When the Doe family is ready to sell the business, they may encounter a challenge that is common in family-run businesses. Between the three family members, the Doe family is effectively working two full-time jobs (Jacob is full-time, with his parents half-time). A new owner, likely an individual, will need to hire a full-time resource to fill the hours and roles currently covered by John and Jane Doe.
The resulting adjustment takes a toll financially on Acme’s adjusted earnings, as the hypothetical salary of a full-time employee reduces the net income, and therefore, the valuation of the company. While the Seller is unhappy with the reduced valuation, the potential buyer may also be unhappy with the unknown challenge of hiring a replacement for several disparate roles (currently held by John and Jane Doe). This challenge could scare many buyers away.
The Doe family could have anticipated their eventual plan to sell the company, and taken steps to mitigate the problem illustrated above. Jacob could have analyzed the roles of his parents, and slowly re-assigned tasks to other employees or consultants. For example, if Jane Doe performs bookkeeping tasks, perhaps Jacob could have outsourced that task to a bookkeeper.
Additionally, we often find that family businesses are not well optimized, in terms of management labor allocation. With some introspection, it may be possible for Jacob to re-prioritize his own day-to-day responsibilities and take over some of his parents’ tasks –directly reducing the number of hours that a hypothetical buyer may need to fill.
With some upfront work, the Doe family can effectively replace the hours that his parents spend in the business, before the business goes to market. This strategic move could maximize the value of the business, while attracting more interested buyers.