Selling the Business

Six Best Practices for Selling or Transferring Your Business

Selling or transferring a business can be a life-changing event.  The event is the culmination of years of hard work and often results in the monetization of your largest, albeit most illiquid, asset.

That said, the process requires forethought and planning.  The best outcomes are realized through years of advanced planning.  Assemble a team of advisors who will lead you through each step along this journey so you can ensure the most favorable outcome.  BMO Family Office shares six best practices to guide you in the pursuit of a sale or transfer of a business.

  1. Leave ample time to structure the kind of transition you want. 

  1. Understand the true value of your company.

Knowing the realistic value of your business helps ensure you avoid surprises when considering running a competitive process to maximize value. 

Valuation is typically conducted by a mergers and acquisitions firm or an investment bank.  For estate planning purposes, a valuation conducted by a qualified appraiser with knowledge of your industry will establish a fair market value for the business.  Knowing the fair market value is essential if your estate plan involves making gifts to family in order to have a certain value of shares or interests transferred for tax planning purposes.

  1. Consider the emotional aspects of a sale or transfer. 

This may be a financial transaction, but there are emotional aspects to any sale or purchase.

Your business has likely been one of your highest priorities for many years.  Prepare emotionally to accept the change before you begin your negotiations.  Are you looking forward to travel?  Spending more time with the family?  Starting a new venture?  Joining a charitable organization?  We recommend you set aside some time to develop a well-crafted plan for your next chapter.

  1. Create a solid plan for the outcome you desire.

A good plan will direct you to the right type of buyer, be it an outside buyer, management, strategic partner, or family member.

You may want to stay involved in the business during a longer transition period.  In that case, you’ll want a buyer who welcomes your involvement.  Perhaps you feel that the future owners should stay in the community that you cherish.  The negotiations are your opportunity to structure the deal with the most favorable terms for you.

Know that insisting on specific conditions may mean agreeing to a lower sale price.  Some owners are willing to give up some value if it means executing a sale on their own terms.

  1. Plan for unforeseen circumstances.

A business is an illiquid asset, and a sale is often necessary to monetize the value.  However, emergencies may arise that can pre-empt even the best-laid plans, such as the death of an owner.

If a business needs to sell fast, perhaps to settle an estate, that’s a less than optimal situation to obtain the best price.  For starters, the right people may not be in place to take over, and the market cycle may not be as receptive as other times.

Advanced planning is vital, so you can sell on your terms and realize the valuation you seek.

  1. Understand the tax implications

A sale of a business will most likely require capital gains on the appreciation of the sale of stock or interest units (if you are selling securities).  In addition, there may be ordinary income and income recapture if the buyer only purchases the business’s assets.  However, with early planning you may minimize some of the consequences of the transfer.

You may structure the sale so you receive income payments over time, rather than in one lump sum.  Installment payments may lower your overall tax obligation by keeping you in a lower tax bracket.  An installment sale involves some risk.  In theory, by doing this, you will be financing the buyer’s purchase.  If the buyer is unable to pay or the business fails, you may not realize all your payments.  You may need to step back in and run the business for a time, and then begin the transition all over again.


Consult with your tax and estate planning professionals for the most tax-efficient strategies for your particular situation.

As you begin the next chapter of your business and look toward the future, work with your team of advisors to help you optimize value, find new owners, and protect your heirs with the necessary estate planning – all on your own terms.  

Pratik Patel is managing director and head of the Family Wealth Strategies team at BMO.

Dealing with conflicting emotions after selling your family business

After years of dedication to building your business and seeing it through countless ups and downs, you might receive an offer for the company that you can’t refuse. While this may sound like a great opportunity, you must prepare yourself and your family for life after the sale.

Prepare for an emotional rollercoaster
Deciding to sell a company you founded or helped build can feel like riding an emotional rollercoaster. Add in the expectation of an influx of newfound wealth, and you may find yourself facing an identity crisis.

An owner of a successful commercial real estate business felt remorse and a sense of loss after the company, which had been in his family for three generations, was sold. Having been raised during the Great Depression with a scarcity mentality, he was neither prepared for nor comfortable with the idea of being rich. He didn’t know how to accept and identify with wealth. He also grieved the loss of his family business legacy, since his children and grandchildren would not be able to work in the family business.

As this example shows, letting go can be hard for founders, owners, executives and even key employees, and it’s helpful to prepare for that feeling of loss. Selling a business can be compared to having your child leave the nest: It may be the right thing at the right time, but it can undeniably feel bittersweet. It’s important to take the time to process those emotions.

Fortunately, you don’t need to go through this emotional journey alone. While some people may be unable to relate to your feelings of loss, only seeing your “golden ticket,” try to lean on friends and peers who have sold businesses of their own. They can offer advice and support. You may be surprised by how generous people can be with their time.

Communicate thoughtfully
The first step in processing the sale of a business is to take a deep breath, decompress and do some serious reflecting. You may be tempted to splurge and start spending right away, but it’s important to pause, develop a plan to diversify and protect the wealth, and wait until you actually have the dollars in hand.

Once you’ve taken the time to process your emotions, consider how and when to share the news of the upcoming sale of the business with your loved ones, friends and employees. More importantly, how do you help those close to you prepare for the impact of the news, in addition to the wealth?

Consider this cautionary tale: An owner of a successful family business made the decision to sell his business, but he kept that decision to himself. His immediate family did not even know. His son, a senior in college at the time, was confronted by his significant other and roommate, who had read about the sale in the news. They asked him what was going to change now that he was “rich.” The son didn’t know anything about it and had no idea how to respond. His significant other wanted to know how this would affect their relationship. He was furious about being put in this situation.

This example shows the importance of communicating early on with those likely to be affected by the sale. However, be thoughtful about whom you tell and when. There are rules to be followed from a business and regulatory standpoint. Before you start talking to anyone, investigate what you are allowed to say, to whom and when.

That said, don’t wait until the sale has been publicly announced to tell those closest to you. They should hear the news from you first and should be given time to prepare for how their worlds could change.

To ensure the key people have advance notice, make a list of all the stakeholders who could be impacted. These might include parents, siblings, children, employees, board members and friends. Think strategically about how and when to share the news with them, and what their reactions might be.

Beyond telling stakeholders that a sale is likely and the news could spread, also talk about the potential impact and what others are likely to say to them.

People could ask, “Are you still going to work? Are you going to move? What are you going to do with all that money?” They also might say, “Must be nice!” or, “I have a great investment (or business) for you!”
Include your inner circle in thinking through how to handle those types of comments and questions.

Define what’s next
Even when everyone who needs to know has been appropriately informed about the sale, there will still be numerous conversations that must take place. Start by gathering together those closest to you to discuss your values and vision for the future.

Then take the time to dive deep and talk about what you want your lives to look like in the future. Make sure everyone is at the table, including children. Involving younger generations makes a world of difference. Even at a young age children are intuitive and know when there is something happening in the family. This can create anxiety, stress and fear. Create an open forum to share feelings about the changes to come and possible implications.

Explore what it took to get the family where it is, and celebrate those endeavors. Also, set expectations for what a healthy lifestyle looks like going forward. In other words, enjoy the fruits of your labor, but don’t lose yourselves or sacrifice who you are. You should redefine your purpose and reestablish your identity. Wealth can feel incredibly empty without a sense of purpose about who you are outside of the money.

Next, develop a governance plan that establishes how decisions will be made regarding the wealth. Include all generations who will have a voice and a stake in establishing the legacy.

Finally, don’t avoid talking about sensitive issues when it comes to money. Yes, money can be an awkward thing to discuss, and it can be tough for people to get over that hump. But it’s important to do so. It shouldn’t be a taboo topic.

What happens if you don’t have those conversations? The consequences can be dire. Research has shown that when family wealth is lost, the cause is often not poor investments or financial planning but a lack of communication among family members and a failure to establish consistent values.

After all the hard work of helping to build a company and achieving success and fortune from its sale, what a shame it is to squander that wealth, or for it to ruin family relationships. The good news is that this doesn’t have to be your fate. For those who take the time to process their emotions, communicate effectively and define values and legacy going forward, the wealth — and the impact of that wealth — can last.  

Jill Shipley was formerly with Cresset. 

Copyright 2020 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

Selling to private equity

When Charles Scheidt learned in early 2012 that his sons were not interested in taking over the family’s specialty foods company, he knew he had to make some hard decisions for the good of his business, employees and family.

“I decided the worst all around would be to go out, so to speak, feet first,” Scheidt says.

For more than 40 years, Scheidt had dedicated his life to American Roland Food Corp., a specialty food company started by his parents in Paris in 1934. With the start of World War II, Bruno and Suzanne Scheidt were forced to flee France in 1939. The couple relocated to New York and began operating Roland Foods out of a one-room office in downtown Manhattan. It grew to become one of the largest specialty food importing businesses in the United States.

“It was important for me to keep what my family had built. I wanted to keep it going and see it grow,” says Scheidt, who is an only child and a Columbia-trained lawyer.

Eventually, Scheidt decided to sell the entire business, which today generates annual revenues of approximately $250 million.

“I was not interested in a partnership of any kind,” Scheidt says. “Having gone to law school and seen enough conflict, I always wanted to stay away from that.”

By the time of the sale in 2013 to Vestar Capital Partners, a private equity firm that focuses on leveraged buyouts of middle-market companies, Scheidt says, he felt as if he had run 10 marathons.

Despite his exhaustion, he says, “I felt I’d done my best.”

Not all families who sell their businesses to private equity experience happy endings. In 2003, the Oreck family sold their vacuum cleaner business to a private equity group, American Securities Capital Partners. After American Securities borrowed heavily to invest in Oreck, a firm called GSC Group acquired the vacuum cleaner business by buying up its debt. When GSC went bankrupt in 2010, Black Diamond Capital Management acquired GSC Group’s assets, including Oreck, in 2011. In 2013, Black Diamond put Oreck into bankruptcy.

Company founder David Oreck, 94, says he found the bankruptcy “astounding.” At the time of the sale to American Securities, the company had no debt and was generating more than $400 million in revenues, he says.
The family — led by David Oreck’s son, Tom, who had stayed with the company until 2010 — tried unsuccessfully to reacquire the vacuum cleaner manufacturer in bankruptcy in 2013. They were outbid by Royal Appliance Manufacturing Co., a subsidiary of Hong Kong-based Techtronic Industries Co. Ltd., which also owns the Hoover brand.

“I felt bad about it. The product had my name on it … that means something,” David Oreck says. “If I’d known I was going to live this long, I would have hung on.”

To Oreck, what happened to his company was the result of “arrogance.” Oreck says he offered to provide advice, but the new owners never reached out to him.

“To this day they never once called. They didn’t even say ‘Let’s go to lunch,’” Oreck says. “All I was trying to do is be helpful.”

Brian O’Connor, Vestar’s managing director and co-head of the consumer group, says that while there have been bad marriages between private equity and family businesses, the success stories outnumber the negative ones.

“There’s no doubt, we meet people who have a negative view of private equity because they’ve read something in the paper,” O’Connor says.

Scheidt approached the sale of his business with the diligence and thoroughness of a top M&A lawyer. He had numerous conversations with lawyers and accountants before he hired investment banker Evercore Partners. He also did a lot of reading.

Evercore came up with a list of potential parties that might be interested and could constitute a good fit. Gradually, competitors were eliminated in cases where Scheidt felt the business and his team might not survive. Vestar impressed Scheidt because the firm was serious and thorough. Scheidt had a “good chemistry with them individually,” he reports.

“They understood and had a good feel for the business,” Scheidt says.

In the end, Vestar didn’t offer the top price. But it had owned several food companies and brought knowledge and understanding to the table, Scheidt says. He found it impressive that during Vestar’s due diligence process its team included someone who knew the specialty food business.

“Money isn’t everything. You have to have good feelings about who you’re working with,” explains Scheidt, who serves on Roland’s board. 

When the deal closes, family business owners should feel they’ve done the right thing, says Christian Schiller, managing director of Cascadia Capital LLC investment bank.

“After they sell, they need to feel that when they run into any employees at the grocery store, they will be proud of what they did,” Schiller says.   

Maureen Milford is a business writer based in Wilmington, Del.

Advice on selling your family business to a private equity firm

Charles Scheidt, who sold his family business, American Roland Food Corp., to Vestar Capital Partners in 2013, offers some advice for family business owners considering selling their companies to a private equity firm:

• Start the process early. Allow enough time to explore all the options, including a sale to a family office or a strategic buyer as well as a sale to a private equity firm. “The process was twice as demanding as I thought it would be,” Scheidt says.

• Hire the right advisers. You should feel comfortable that you’re engaging an investment banking firm or other adviser who is committed to your interests. Scheidt used an intermediary to approach investment bankers so that they didn’t know who the prospective client was. He says he found significant differences in approaches and styles among advisers.

“I knew it was going to be a long slog. I wanted to make sure I chose [an investment banker] who I could live with, since that banker would be part of my life for a year,” Scheidt says.

Scheidt advises family businesses to insist on confidentiality agreements during the process of hiring an investment banker.

• Analyze your numbers. Scheidt found that although he had a very good accounting system, third parties would slice and dice the numbers “in ways I never heard of [and had] never been interested in.” During the selling period, Scheidt would get requests for various reports, and it became an enormous strain on the business.

“Before you hire an investment banker, get someone to analyze the numbers and find the gaps between existing internal protocols and the requirements for sales documents,” he advises.

•  Wait for the right buyer. Tell your adviser to investigate prospective buyers and bring in only those who have a good reputation. Be confident the business and its team will survive under the new owner.

•  Expect change. After the business is sold, the new owners will do some things differently. “Buyers will change things, and you better realize that going in and not take it personally,” counsels Scheidt, who says he also prepared his employees for change.

Maureen Milford

Copyright 2018 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact



September/October 2015 Openers

Lawrence Herbert was dining at a restaurant while on vacation in Turkey in 2007 when he received a call from his attorney. Before leaving for his trip, Herbert had accepted an offer from a private equity company for his company—Pantone Inc., a Carlstadt, N.J.-based provider of color standards and technology, including the iconic Pantone Matching System. Although the private equity firm's bid was not as high as a competing offer from a strategic buyer, Herbert had accepted the lower bid because he felt the private equity firm would be a better fit for Pantone's management team, which included his children.

Herbert's attorney interrupted his vacation to tell him about an unexpected development: The strategic buyer had come back with a substantially higher bid.

"I said, 'Well, that's a new one. Let me speak to the kids,' " recalls Herbert, now 86. "And I got them all on the phone from Turkey, and I told them what was going on, and they said, 'Look, Dad, we'll be OK. Just go for the money, and we'll be fine.' "

On Aug. 23, 2007, Pantone announced that it had agreed to be acquired for $180 million by the strategic buyer—X-Rite Inc., a provider of hardware, software and services for measuring, formulating and matching color. Five years later, X-Rite was itself acquired by Danaher Corp., a publicly traded company with holdings in science and technology.

Herbert is one of eight business owners whose exit-planning activities were studied in a white paper by Barbara Roberts, entrepreneur-in-residence at Columbia Business School, and Murray Low, director of entrepreneurship education at Columbia's Eugene Lang Entrepreneurship Center. The paper, entitled "The Owner's Journey," was commissioned by U.S. Trust, Bank of America Private Wealth Management. The eight entrepreneurs—five of whom owned family businesses—shared their stories of selling their enterprises or completing an intrafamily transfer, including details of the planning process as well as family issues they faced as they prepared to exit.

Common themes

Co-author Roberts says a goal of the study was to provide guidance to baby-boomer business owners who are beginning to consider retirement. In researching the topic, she says, "I was quite surprised [by] how many people, particularly in their 50s, had not done too much thinking about exactly what was going to happen to their company."

Roberts compares business founders to artists; both, she says, begin their work with little thought to how much they could realize from selling their creation. "It's my strong opinion that very few entrepreneurs actually start companies to get rich," she comments. "Most entrepreneurs start a company because they have a passion about something."

Wealth becomes a priority, however, when business owners shift their focus from building the company to planning an exit strategy. Yet owners who wait too long to develop an exit plan may jeopardize their ability to maximize wealth, or their ability to leave the business at a time of their choosing.

A theme that emerged from the business owner interviews, according to Mitchell Drossman, a managing director at U.S. Trust, was the interviewees' surprise at the length and complexity of the exit planning process. "It wasn't 'set-it-and-forget-it'; it wasn't a one-time conversation," Drossman notes. "Because it dug deeper than techniques; it got to the heart of the issue." In addition to dealing with nuts-and-bolts matters such as tax planning and drafting an agreement of sale, he explains, business owners must answer difficult questions, such as which next-generation member will be the successor or how proceeds from a sale will be divided.

Herbert understood that it was important to get an early start. In 2004, he and his son, who was Pantone's president, discussed the possibility of selling the company. "You have to make a decision," Herbert explains. "And the decision has to come quickly, because, you see, you need a good period of time to set your company up for an acquisition." Herbert had worked at Pantone since 1956. He bought a stake in the company at age 34 and a year later acquired full control. Three of his four children had worked at the company; two of them were at Pantone at the time of the sale to X-Rite.

Prospective buyers generally will want to see several years' worth of certified financial statements, Herbert explains. In addition, he says, buyers want assurance that a high-level management team and a solid strategic plan are in place. "When you bring in another company to acquire you, you want to be able to show them that you're a forward-moving company and you're not at the end of your line," Herbert notes. "You have to show that you're planning for the future. And you have to do some good marketing analysis to be able to determine what your next moves are going to be with regard to products."

Roberts says many business owners who sold their companies "told me that the process took much longer than they had ever envisioned, was much more complicated [and] had much more twists and turns. Some of them told me that they wished that they had had financial people come in earlier, on a consulting basis, to help them identify the two or three things they could do that could have added value even further."

Case studies

In addition to Herbert, other business owners interviewed for the white paper include Charles Scheidt, the second-generation leader of New York-based Roland Foods, which was sold to a private equity firm in 2013; Anita and Ashok Khubani, who in their early 50s are beginning to transfer ownership of Fairfield, N.J.-based Ontel Products to their children; Gina Addeo, who succeeded her father as the leader of ADCO Electrical Corp. in Staten Island, N.Y., and at age 50 is thinking about her own succession plan; and a pseudonymous fourth-generation CEO of an industrial services company who navigated some nettlesome family dynamics in the process of succeeding her father.

Roberts says the report demonstrates the importance of open communication among family members. In many of the cases, she says, "there was an assumption that a child would take over the business," but a succession plan was never explicitly discussed. "That was a little bit of a surprise to me," she says.

Roberts says she has met business owners who were proactive about their estate planning but failed to explain their vision of how the company should be run when they were no longer able to lead it. "They'd fairly divide up the shares [among] all their children and feel that everything was taken care of, forgetting that the governance of the family business is very critical," Roberts says.

Dividing ownership shares equally among children can cause problems for a business. According to the white paper, after the death of Gina Addeo's father, she and her sister both owned 37.5% of ADCO; a non-family partner of her father's owned 25%. The sisters, who were equal owners, had several difficult conversations about how the business would be managed before finally reaching an agreement.

The white paper's authors emphasize in their report that although estate planning and succession planning are intertwined, they are two separate issues. A business owner mentioned in the Columbia/U.S. Trust report created an estate plan that left equivalent assets to each of his children but gave control of the family company to his daughter, who had succeeded him as CEO. The owner transferred a majority stake in the business to a trust and named his daughter as beneficiary. A large life insurance policy was put in trust for his son, who had left the business.

When Herbert decided to sell Pantone, he set up GRATs (grantor retained annuity trusts), an estate planning technique that minimizes tax liability in intergenerational asset transfer. In establishing the GRATs, he provided equally for his four children, even though his youngest son had never worked in the company. In addition, when the company was sold, Herbert paid bonuses to the three children who had worked for Pantone. The amount of those bonuses varied, depending on the value that each child had contributed to the business.

Starting wealth transfer planning early enables business owners to take advantage of tax-saving strategies such as a GRAT or a sale to a grantor trust. However, Drossman and Roberts point out, if planning does not begin until the closing of the sale is imminent, it will be too late to move shares of the business into tax-favorable trusts.

Luck and timing

The white paper pointed out that luck and timing can have a major effect on the exit planning process. Both were involved in the sale of Pantone.

Just as the sale of the company was about to close, X-Rite disclosed that its banker had withdrawn its commitment, leaving the company without the funds to complete the acquisition. X-Rite requested a six-week extension to obtain financing; the company did secure a loan—at an interest rate of 12%. The deal closed in October 2007—ahead of the stock market crash in 2008.

Herbert avoided heavy losses from the crash because at the time he was still educating himself about wealth management and had not invested heavily in the market. Meanwhile, X-Rite, which traded on the Nasdaq, saw its stock drop from $14.50 a share to $1.26. Herbert realized that his family could buy Pantone back at a lower price, but he and his children opted not to pursue an acquisition. Within six years after the sale of Pantone, all of his children had left the business.

"People say I was very smart. I wasn't smart; I was just lucky that everything I was working on happened to come [to fruition] at just the right time," Herbert reflects. "You know, you can't always bet on that."

Although a business owner can't count on good luck, beginning to plan well in advance of retirement will minimize the chance that the owner will have to exit on someone else's terms, the report's authors note. Anita and Ashok Khubani began speaking with advisers about wealth transfer planning and doing their own research on the topic when the couple were in their 40s.

Even so, certain elements are outside of one's control, Roberts points out. "Someone could begin a process to sell a company and find that they're going to have to wait because something happens to the market or the offers that are coming to them are not the price that they need," she cautions.

U.S. Trust's Drossman says a major message of the white paper is, "Always have your business ready for sale. Understand what it is that a buyer is looking for, and get a sense of what the value of your business is. At the same time, even if you're not ready to implement planning, educate yourself on the availability of planning and what options are out there." 

10 fates that can befall a business

Barbara Roberts, entrepreneur-in-residence at Columbia Business School, serves as a board member and consultant to family-owned and venture-backed private companies and consults to families on succession planning; she also chairs peer learning groups and runs succession planning workshops.

Roberts believes that television shows like Shark Tank have spread the misconception that growing a company and selling it for a large amount of money is a common occurrence and easy to accomplish. She says every business owner should be aware that there are ten things that can happen to a company:

1. IPO.

2. Transfer of ownership to a family member.

3. Transfer of ownership to management team.

4. Transfer of ownership to employees.

5. Transfer of ownership to a partner.

6. Sale to strategic buyer.

7. Sale to financial buyer.

8. Passive owner with an independent CEO.

9. Bankruptcy.

10. Liquidation.

Roberts says her aim in writing "The Owner's Journey" was to raise business owners' awareness of these ten possible fates. She urges business owners to educate themselves about how to maximize the value of their companies. "There's a real art to making the numbers work," she says.—B.S.

Copyright 2015 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

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When planning to sell your business, be sure to address your family issues

Selling a family business is an intense process that draws on the skills and experiences of everyone involved—the CEO, owners, management team and outside advisers. Combining family issues with business considerations further complicates the sale process. Understanding what the family business provides to each key family member and addressing these needs ahead of time is essential to getting the required buy-in from the family and, ultimately, the successful execution of a sale.

Several areas require careful consideration early on in the sale process: the reason why a sale is being considered, timing of the sale, educating family members on the sale process and preventing or resolving conflict.

Motivation and timing

The key driver of the sale of a family business inevitably involves the family circumstances. The business leader may be nearing retirement age or thinking of moving on to something else. There may be no capable family successor who is willing to run the company, or perhaps several competing successors are in conflict with each other. The business may require new investment, a management overhaul or a repositioning, and the owners may not be interested in more heavy lifting.

Understanding what the family is looking to achieve through the sale is crucial. If it is to be a complete sale and exit from the business, maximum cash at closing and a short transition will be the likely key drivers. Other families may want to take some chips off the table while continuing with a partner that would fund and guide growth. Sometimes a generational issue can be resolved by having the senior leader exit in full while the next generation moves forward with a new partner.

The timing of the sale is critical. I have always been impressed by successful entrepreneurs who had the judgment to exit at the right time rather than waiting for the next big (or little) thing. On the flip side, we have known many owners who didn't pull the trigger when they had the opportunity and ended up with very little to show for years of effort.

Planning the timing of the sale involves a number of factors. Is the economy growing? Is financing readily available? What is the health of the industry sector in which the business operates? Is it growing, contracting, consolidating or undergoing other significant structural change? What are the implications for the company in question? Has the company been approached by a financially capable and motivated buyer? As a general rule, having a strong and motivated buyer at your door is far more important than improving performance a bit and going to market without an aggressive suitor.

Rallying the family

Driving agreement around the sale of a business requires that all family members have a clear understanding and realistic expectations as to what a sale of their company entails. Family business owners generally underestimate the intensity and length of the sale process, which often takes six months or more to complete. And, while good investment bankers will do their best to minimize distraction to management during the sale process, selling a business is a labor-intensive process and requires additional work and commitment on the part of management. At the same time, the business must continue to run successfully; there is nothing more important in value creation during a sale process than management hitting or exceeding its numbers each month.

Disclosure and sharing confidential information with prospective buyers is often a source of concern for family businesses. Many families are very secretive and sensitive about dispersing information within their own company, let alone to third parties. Most are highly concerned that if word gets out that their business is up for sale, this will have a devastating effect on customers, employees and the business as a whole. And, while they understand conceptually that the use of non-disclosure agreements and secure data sites offers some protection in regard to what information is disseminated and to whom, such measures never fully alleviate their concern.

Business owners also need to be educated about the quality and degree of financial information that must be provided to prospective buyers. For example, many family businesses do not track profitability by unit or segment, nor do they prepare detailed projections and forecasts for the upcoming years. Others may not have an outside accounting firm prepare audited or even reviewed statements. Corporate governance might be minimal; board meeting minutes may not have been kept, and other records and contracts may be hard to find. Getting these in order in advance of a sale process is time well spent.

The other area that is typically of concern to family business owners contemplating a sale is the requirement that they provide the buyer with representations, warranties and indemnifications. Many family owners don't like to "guarantee" anything and so shy away when asked to give these assurances. Part of the education process involves explaining to the owners that they are standing behind the historical information and actions of the company rather than giving any guarantees about future performance.

Potential sources of conflict

Family businesses are peculiar animals and serve a variety of needs and roles for different family members. Selling all or part of a business that has been in the family for generations raises a vast array of intense emotions that color virtually all decision making. It is helpful to understand what the business provides to each of its owners in order to identify potential conflicts and structure solutions in the context of a sale. Areas to consider are:

• Job with salary and bonus.

• Dividends or distributions.

• Lifestyle benefits (e.g., health care, cars, travel).

• Self-worth.

• Status in the community.

• Something to do every day.

Giving thought to what different family members are getting out of the business today and what their participation might be in the business after a sale is important. A change in circumstances could spark a range of potential conflicts. Often, if addressed properly, solutions accommodating the various family members' goals and expectations can be found. For example, conflicts involving status and position may be addressed by having the new owner offer continued office space, a role on the board, service on a relevant committee or an honorary title.

In one instance, the founder of a high-growth family business wanted to cash out and move on to other endeavors. His two younger partners running the business wanted some liquidity but also a strong partner to help them grow the business. Once we understood what each family member wanted, it was possible to structure a deal that accomplished exactly that: The founder was paid in full (in cash) at closing. His partners received cash but continued to own part of the company going forward, with finely structured put/call options giving them a potential substantial second payday down the road.

Another client, with two children in the business, was in his 70s and looking to move on. His daughter was married to the CEO and wanted to grow the business. His son preferred to run a smaller discrete operation. A transaction was structured in which the daughter and her CEO husband raised capital to buy the bulk of the business from the father, giving the father cash at closing. At the same time, one property was carved out to be owned and run by the son. This structure facilitated an orderly transition that left everyone happy. In our experience, many family business owners are unaware of solutions that could mitigate their seemingly huge conflicts and result in very desirable outcomes.

Owners of family businesses will do well to draw on all available resources in preparing for a sale and exploring their options. Trusted advisers, including investment bankers, lawyers, former family business CEOs, accountants and specialized consultants, can be helpful. While family business owners are quite comfortable leading, tapping sources from outside may not come easily to them. However, gaining this knowledge and perspective in advance will provide a more solid foundation for the consensus building needed to get family members on board and execute a successful sale.

Warren H. Feder, a former owner and operator of a family business, is a partner and the co-founder of the investment banking group at Carl Marks Advisors (

Copyright 2015 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

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Transition plans should be made years in advance

Rob and Laura Gordon opened their first restaurant, Top Five Dishes, in Chicago's Wicker Park neighborhood in 1984. The business now has 15 locations across Illinois and more than 600 employees.

The Gordons' whole family has worked for Top Five. The oldest son, Barry, played a key role in the expansion of the business downstate—selecting locations, managing construction and supervising the restaurant openings. Rob always assumed Barry would be his successor. But Barry's wife recently had triplets, one of whom has special needs. As a result, in the near term, Barry cannot devote the time necessary to serve as CEO. The Gordons' tech-savvy daughter, Anna, has helped the family increase its marketing efforts on social media to great success, and recently took her first hands-on management role in the company's offices. But Anna is not ready to take the reins. Nick, the Gordons' youngest son, is a high school teacher and does not want to be involved with the business.

One non-family employee might be able to run the business. Marie DeSalle started with Top Five as a server 19 years ago and has worked her way up to the company's CFO position. Marie has held many management roles in the company, oversaw the openings of several Top Five locations and is more involved with day-to-day operations than any employee besides Rob and Laura, the founders. Marie is the Gordons' most trusted employee and has proved herself capable at every position assigned to her. Yet while Barry and Anna trust and like Marie, it may be hard for them to take direction from someone other than a family member.

After 30 years spent building a successful restaurant group from the ground up, Rob and Laura are ready to retire. But they have not decided what to do with their business. The Gordons had always imagined that it would stay in the family, but Barry's recent decision to remove himself from the operations and Anna's lack of management experience have given them pause. They are considering whether it would be better for everyone if the company were sold.

A common dilemma

The decisions facing the Gordons are not unique. Many family-owned businesses confront these dilemmas—whether to sell, to pass the business on to a family member (even if he or she is not really equipped to run it) or to transition management to non-family members. These are difficult, personal and sometimes acrimonious issues. Continued family harmony may depend on choices made with respect to continued ownership, comparative percentage ownership and continuing salaries through employment. More than one family has been torn apart by poorly made or communicated decisions on these issues.

The key to transitioning a closely held business is planning for when the owner will step down from the day-to-day operations. Ideally, this planning should begin many years ahead of the transition.

• Management. Whether the transition will be to family members, employees (through an ESOP) or by sale to a third-party buyer, a business owner should identify and train successors early on. It takes time for future leaders to learn all aspects of the business, take on various responsibilities and begin charting a strategic plan for the company.

Whether the business is sold or not, it will need strong leadership. If there is no leadership and strategic plan in place, a buyer will likely offer substantially less for the company. If, on the other hand, new leaders have already been identified and are managing the business successfully, a buyer will have greater confidence going forward. This will maximize value at sale.

If the owners intend to hold the company after retirement or pass it on to their family members, much of the family's wealth will be tied to the success of the business going forward. Ordinary prudence would dictate that leaders should be identified and trained to carry the business into the future.

Consider the Gordons' situation: Rob and Laura always expected that their son Barry would take over their business, but Barry's family situation will not allow him to do so. A good plan would identify several possible future leaders. Fortunately, it appears that Marie DeSalle may be equipped to run the business. This should not be left to chance, however.

The succession plan should be shared with and understood by the family. In the Gordons' case, Barry and Anna should endorse Marie as a leader of the company. If they do not, the transition plan may be doomed to fail, since both Barry and Anna can undermine Marie's authority as leader. If Barry and Anna support Marie, she will be even more empowered to lead.

• Estate and tax planning. The sale or transfer at death of a family business could have enormous income or estate tax implications for families. For instance, if the owners sell the company for cash, they will pay taxes on the gain from the sale. If and when the net proceeds from the sale are passed on to the owners' children, an estate tax may be imposed upon the value of the estate. In other words, the transfer of the value of the business could be taxed twice! Given enough time, a tax or estate planning lawyer can design a plan that achieves the owners' transition goals but minimizes the taxes due.

Moreover, a clearly defined transition and estate plan will reduce the chances that a dispute will arise among the owners' family members after death—every parent's nightmare. The owners should share the plan with their children so that they understand what will happen after the parents retire or die.

• Cleaning up the books. Many family and founder-owned businesses have their own unique ways of doing business that have evolved over the years. Sometimes, however, those methods will be unrecognizable to a buyer or a bank considering an investment in the business. As they work toward a transition, family business owners should consider employing professionals to review the company's accounting and corporate recordkeeping practices to ensure that they comply with generally accepted accounting principles (GAAP) as well as applicable corporate law and best practices—or, if not, that the company's practices at least may be clearly identified and understood by a prospective buyer. A buyer or investor's first real exposure to a company will be via examination of the financial statements. If the financials are in order and comply with GAAP, the buyer will be more likely to make an investment. Financial statements that are not in order, or are idiosyncratic, will raise questions and doubts about the business.

• Long-term growth strategy. Most financial investors/buyers, such as hedge funds or venture capital funds, are not looking to manage the business they acquire; they are seeking returns and growth. As such, they will pay a premium if they believe that the company's profits will be achieved and will grow after their investment. Thus, though it may seem counterintuitive, a family business owner should be planning a growth strategy for the company that extends past the date that he or she retires. The plan should be in place and have buy-in from the current management team.

Pat Stanton leads Dykema's Business Litigation Practice Group and is the former office managing member of the firm's Chicago office. Jeff Dalebroux is the director of the firm's Business Services Department and a member of the Family Business Transition Team (

Copyright 2015 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

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Beyond the business

This issue's cover story subjects are different from the families usually profiled in Family Business. While we generally feature families who own an operating company, the Power family no longer are the owners of J.D. Power and Associates, the highly respected consumer survey business founded by patriarch Dave Power in 1968.

After the sale of J.D. Power to McGraw-Hill in 2005, Power family members formalized their family governance, formed a family limited partnership and began working with a multifamily office on investing as a family and educating the next generation. The Powers continue to work together on philanthropic activities, as well; they established a family foundation in 2005.

The Powers are using the proceeds from the sale of their business to generate new wealth and fund their foundation. They are working collaboratively as a family. Sounds like an American success story, right?

Of course it does—except that J.D. Power and Associates can be considered as one of the 87% of U.S. family businesses that did not survive into the third generation, according to frequently cited statistics compiled by family business researcher John L. Ward way back in 1987. Reliance on those statistics fails to take into account the fact that families like the Powers—and around the world there are many, many others like them—do not fit into a simplistic "survival or failure" binary.

A three-year global study of 118 family firm executives conducted under the auspices of the Family Firm Institute and completed in 2010 found that over their history, the participating families had owned an average of 6.1 companies and spun off an average of 1.5. I wrote about this study in the 2011 edition of Family Business Agenda. (The study was eventually published in the June 2012 issue of Family Business Review, an academic journal.)

The study, as I wrote in 2011, "aimed to reframe the view of family enterprise from a focus on operating companies to an assessment of value creation over time." The researchers concluded that the family, not the business, is the key wealth creation vehicle.

Of course, some family firms file for bankruptcy. Others are sold because the family owners are unable to compete in the market. Still others don't last because the family quarrels over how the business should be run.

Family business educators must teach the public that there is another end of the continuum—sales of a business that do not represent a family's failure, but rather are part of its transition to a new kind of family enterprise.






 Copyright 2014 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

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Donatos' family owners deliver value

As a teenager working at a pizza restaurant, Jim Grote got his first lesson in customer service. He noticed that one of the owners was generous with pizza toppings and the other stingy. “The one that made good pizza and wasn’t stingy with toppings, his nights were busier than the other guy’s, who watered down sauces and stretched toppings,” Grote recalls.

The value of treating customers well stuck with Grote. This year marks the 50th anniversary of Donatos Pizza, the company that he built, expanded, sold and then bought back.

Today, Donatos owns or franchises 155 pizza restaurants in seven states: Ohio, Kentucky, Indiana, Virginia, North Carolina, South Carolina and Alabama. (About one-third of the restaurants are company-owned; the rest are franchises.) The restaurants generated revenues of $166 million in 2012. A subsidiary started in 2008, Jane’s Dough Foods, makes pizza shells and pre-topped pizzas.

Jim Grote, 70, and his daughter, Jane Grote Abell, 46, are the only family members currently working for the company. Abell, who is chairman, owns about 20% of the company; Grote owns 70%. The rest of the shares are owned by other family members and a few employees.

Donatos is based in the Columbus, Ohio, area, where Jim Grote has his roots. He grew up in the south end of the city, a blue-collar area where his father was a buyer for a restaurant. With money tight, Grote and his four siblings got jobs as soon as they could. Grote started delivering papers at around ten years old and got his first job at a pizza restaurant when he was 13.

Pizza was relatively new to Columbus then, and the company that hired Grote had no equipment. “They hired me to slice pepperoni with a paring knife and shred cheese with a grinder,” Grote recalls.

By the time he was 15, Grote was managing the store on the owner’s day off. When he was 16, the owner offered to sell him the store, but his father said he needed to finish high school and go to college.

When Grote was 19 and a sophomore at Ohio State University, he had another chance to buy a pizza place, this time Donatos. At the time it was run by a seminarian and open only on weekends. He borrowed $1,300 from his father and his future father-in-law, and Donatos opened under Grote’s ownership on June 26, 1963. (Grote did not finish college owing to the restaurant’s success and the workload associated with growing the business.)

A principled business

One of Grote’s goals in opening his own business was to become financially independent. “That was exciting for me, especially coming from a real poor area,” he says. Another goal was to “bring my principles to work with me,” he explains. “I said, ‘I’m going to prove that we can make a good pizza, give good service—we can grow, we can make money, we can keep our principles.’ ”

Treating others as you would want to be treated is a cornerstone of Donatos’ mission: “To promote goodwill through products and services, principles and people.”

Grote soon discovered two key challenges to succeeding in the pizza business: consistency and speed.

“When a person comes in, they get a pizza and they like it,” Grote says. “When they come back, they expect to have the same good pizza.” Grote worked out a system of weighing toppings for each size pizza, for example, so each pizza had exactly the right amount.

Another issue was that as business picked up, customers had to wait longer for their pizzas. The restaurant was in front of his house, and he would send customers there to wait.

When she was a child, “People from the restaurant were always at our house,” Abell remembers. “Every single night we had customers in our living room. I didn’t know other people didn’t grow up like that.”

The proximity of the house to the pizza place also meant that they could see the store’s sign with blinking arrows. “Our bedroom would blink every single night,” Abell says. “Dad would get us from our bedrooms, and we would go late at night in our pajamas and stand under the sign. He would say, ‘One day you’re going to see Donatos around the world. But we’re only going to do it if we can do it and be the best, if we can promote goodwill and have good principles.’

“These are some of my earliest recollections and why emotionally I am so connected to this business,” Abell says.

By the early 1990s, Donatos had 17 stores and was continuing to expand. Along the way, Grote looked for ways to improve efficiency and consistency. One bottleneck was putting on pepperoni. (There are 100 pieces on a large pepperoni pizza from Donatos.) Grote created a machine that would slice the pepperoni over a pizza, a device that ultimately led to a separate restaurant equipment business, the J.E. Grote Co., started in 1972.

Grote’s four children grew up surrounded by and working at the family business, but Grote didn’t want them to feel obligated to work there as adults if it wasn’t their passion.

Abell worked for Donatos while attending Ohio State. After graduating with a degree in organizational design and communication, she began training managers at the family company. She later became “chief people officer.” Her older brother, Tom Grote, graduated two years before she did, from Miami University. He became the chief operating officer.

A new path to expansion

In 1999, McDonald’s approached Donatos out of the blue. The hamburger giant was trying to diversify. In addition to a Mexican restaurant (Chipotle) and a chicken restaurant (Boston Market), it wanted to acquire a pizza chain. McDonald’s had done a nationwide search for the chain that made the best pizza and had the most repeatable processes.

As Grote tells it, his first reaction was, “Are you kidding? That’s my baby. We’re not selling our place.”

“My dad was expressionless,” Abell recalls. “I was very emotional about it, and my brother was very excited about it. I was like, ‘This is crazy: This is our family business—we would never sell it.’ ”

The family had been discussing what its next steps would be in expanding the business—by 1999, it had about 140 restaurants in five states —but selling the company had never been discussed.

Jim Grote and his children Jane and Tom flew to Chicago on McDonald’s private jet to discuss the possibility. (Jim Grote and the children’s mother had divorced, and she was no longer involved in the business.) They were impressed with McDonald’s corporate culture and with the company’s plans for Donatos.

The decision to sell was “really tough,” says Chuck Kegler, a partner in the law firm of Kegler Brown Hill & Ritter, which has been working with Donatos since the 1980s. “It was complicated in a lot of ways by their [the Grotes’] love for their people, the community and the way they do business.”

Kegler remembers asking Grote what his long-term vision was for the company; Grote replied that he wanted to sell Donatos pizza all over the world. That goal required a “significant amount of capital,” which made the idea of selling to McDonald’s more appealing, Kegler recalls.

“It took about three months for us to get to the point to say, ‘OK, we’re going to sell,’ ” Abell says. Their only hesitation: “Can we be bought by the world’s largest restaurant and keep our culture?”

The sale let Grote’s children, who all had shares in Donatos, pursue new interests if they wanted to. His son Kyle bought a ranch in Colorado. Grote and his other three children stayed involved in the company after the sale. Grote’s daughter Katie worked for McDonald’s for a time, then left to pursue other interests and move to Florida. Tom also stayed for a few years before leaving to go to business school.

While Donatos was owned by McDonald’s, Tom Krouse, now the president and CEO, was recruited from Wendy’s to lead the company’s marketing efforts.

“We were changing the concept, we were building restaurants quickly, we were adding lots of people,” Krouse recalls. “The product stayed the same, but for everything around it, the pace at which change came was really quick.”

The McDonald’s sale created a lot of uncertainty for employees, says Roger Howard, who started out sweeping and mopping floors at Donatos when he was 14 in 1967. “We always worked for the family and we always knew what was expected of us,” Howard says. Even though things worked out all right, “there was a lot of ambiguity when McDonald’s was coming in.”

Howard had been Donatos’ vice president of operations for about five years when McDonald’s purchased the company. He stayed during the McDonald’s years. “For a guy who had hardly even left Columbus, I ended up flying a lot of miles,” he says.

Four years later, McDonald’s stock was slumping after the bursting of the tech bubble. A new CEO decided the company should focus on hamburgers again. Donatos was up for sale.

Grote recalls his daughter’s reaction: “We’ve got to get this company back. Our people are still there. They won’t have jobs, and there are people who have been with us since we started.’”

Grote was less certain about the idea.

“I didn’t know if I really wanted to do it again,” he says. But Abell “made it happen with her excitement.” Grote and Abell both put in money to buy the company back. They, along with Krouse and other advisers, met on their days off to plan a strategy for reacquiring the company.

When Abell and Grote bought the company back in December 2003, they faced a huge turnaround task. Donatos was losing millions of dollars a year, and it had 75 buildings sitting empty.

Abell focused on the people and product, visiting stores. Krouse worked on a long-term strategy for the company. They kept the products the same. “The turnaround was [achieved] because our people started caring again,” Abell says.

Today, Donatos has an advisory board that includes Grote, Abell, Abell’s brother Tom Grote, and the company’s financial adviser. The company leaders continue to get legal and strategy advice from Chuck Kegler.

In late 2010, Grote stepped back from his day-to-day responsibilities, and Abell became chairman. Krouse became president and CEO. Donatos officials say that sales and profits are better than they were during the McDonald’s era. The year after the family bought the company back from McDonald’s, they say, Donatos made $10 million more than it had in the prior year.

Krouse likes the fact that the company can easily invest in a bakery facility if needed, without worrying about Wall Street’s quarterly expectations. “On the other hand,” he says, “having worked for publicly held companies, I understand the need for performance.”

Although this is his first time working for a family business, “I don’t think I’ve ever felt more comfortable in my skin,” Krouse says. “I was not really family, but I certainly believe in and understand the mission and culture of this company.”

Spreading values to the community

Those who know the Grotes are impressed by the family’s values.

Howard, for example, says he was perplexed as a teenager by the company’s philosophy that “as soon as a customer hung up the phone, we entered into a contract with them to take care of them,” instead of merely taking an order. “I always thought it was weird,” Howard says. But he soon learned what Grote meant: “We just made a promise to the customer: We’re going to make the best pizza and get it there on time.”

Once when Howard was about 18, an intoxicated customer gave him a $10 tip—a huge amount at that time—for a pizza he delivered. “Being young, I was going to keep it. But when I got back to the store, Jim said, ‘You have to take that back,’” Howard recalls.

Howard saw the Grote family’s commitment again many years later, after his wife passed away in 2006. After taking a leave to be with his wife in her final months, he did not want to return to the same job. “Jim and Jane both said, ‘You’ve been here your whole life. You tell us what you want to do,’” Howard says. He decided he would like to run a store, so they sold him a store as a franchise. That store has done well, and he recently opened a second one.

Family members say their commitment extends to the community. “Every single store, part of their promise is to be a good neighbor,” Abell says. Donatos stores sponsor local sports teams, for example, and work with schools and other non-profits in their local communities.

Abell, who serves on the local board of Goodwill Industries, works with both Goodwill and a community shelter to put homeless people to work. Donatos has employed six people through the program.

The mayor of Columbus has asked Grote to be a champion of the city’s south side, and Grote has been donating both money and time to help develop homes and create a learning and development center that will offer job training.

Kegler says Grote and Abell’s leadership inspires others. “When they reach out, other people want to join,” Kegler says. “If it has the blessing of the Grote family and Donatos, people are more likely to contribute and want to be a partner.”

The company is committed to maintaining its culture. As Abell puts it, “We don’t have to be the fastest, we don’t have to be the biggest, but we believe that we have a destiny.”

Margaret Steen is a freelance writer based in Los Altos, Calif.









Copyright 2013 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact

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Getting the most out of planning for transition

Perhaps the most important—and the most frightening—decisions that business owners will face are when and how to transition out of the business they have built. Yet most owners procrastinate about addressing these issues. They then have to make rushed decisions under duress, substantially reducing both the value of the business and their comfort with the outcome.

Why don’t owners plan their transition? Most are uncomfortable with facing their departure from the business. This is a pity, on two levels. The first is that departure is inevitable, and planning will make it more orderly. But the greater pity, and the irony, is that planning for transition will actually increase the company’s value and enhance the business owner’s satisfaction and peace of mind, both before and after the transition. Delay costs money and promotes ulcers. Rather than shun and avoid the transition process, you should embrace it.

To get the most out of the effort, I recommend that you develop a Transition Strategy, which combines a rigorous strategy for the business with a thorough and comprehensive transition plan. To formulate this plan, be sure to consider all the transition options that are open and appealing to you.

The business strategy will help maximize the value of your business; the transition plan will help you groom the organization for your preferred option and will also help you reap the business’s value, while giving you the comfort of knowing that you picked the optimal alternative for you.

Business strategy

Your business strategy should build on the solid foundation of financial research that has shown that businesses create value by first obtaining a return on investment above the cost of capital and then—and only then— growing the business. The cost of capital is likely to be in the 12% to 15% range. Seek to exceed this threshold, then drive to grow the profits—not sales, which are irrelevant to value—as quickly as you can.

Also assess your competitive environment. Some environments allow only a few competitors to create value, some many, and others none. If your business is in a difficult environment, try to break out of it.

When developing your strategy, focus on the details of your company’s economics. For example, analyses of a wide range of businesses have found that only a relative handful of customers, products and services generate the majority of a company’s profits, while the rest are money losers. Figure out whether this is true in your business and either improve the margins of the losers or show them the door. Doing so will put you well on the way to increasing your returns and your company’s value.

Determine how fast your company is likely to grow —and how fast it can afford to grow. Make sure you can finance your growth in a way you can be comfortable with. In your company, your personal preferences, including your personal risk tolerance, are critical and legitimate considerations. So if you don’t want to take on the financial risks required to grow as fast as your market, you are free to make that choice—but make sure you know what that means strategically for your business and its value.

As you develop your business strategy, you should obtain a clear idea of what the business value is today and how it should change over time. This will in turn give you insights into the best times to consider transitioning out of the business and coordinating that with your own personal preferences.

For example, suppose your business appears to have a decade of clear growth ahead. You want to set aside some of the burdens of running it sooner than that, yet you want to realize the benefits of growth. You can consider grooming or hiring a CEO to lighten your load without prematurely giving up your ownership.

Transition options

Your transition options are: selling the business to an outsider (too often the default for owners); passing it to heirs; selling it to one or a few managers; selling it to all the employees (often through an ESOP); hiring a manager to run it while you retain ownership; taking it public (an option only for companies that have the ability to generate earnings exceeding $100 million or are willing to risk becoming tiny-cap orphans); and—least desirable of all—leaving the problem to the Almighty, the IRS and your estate attorneys.

To help you identify the best option, seek the advice of trusted confidants with relevant experience. These could be friends, family, board members or professional advisers. But beware of the potential for conflicts of interest. Many advisers, especially intermediaries (such as business brokers and investment bankers), have strong incentives to encourage you to sell the business, which may not be your best option. Intermediaries have another potential conflict: While they represent a private business owner just once, they may work with private equity and corporate buyers many times as both buyers and sellers of businesses, and therefore may be more attentive to these repeat clients than to the private business owner.

Throughout the transition planning and execution process, bear in mind the old saw about ham and eggs: For the chicken, it’s just a day’s work, but for the pig, it’s a lifetime commitment. So choose advisers with enough experience to help you level the playing field against the professionals with whom you’ll have to deal.

If you opt to transfer ownership of the business to heirs or employees, you’ll probably want to receive cash in return for the equity. To raise that cash, the heirs or managers may have to go to the same financing sources that you would encounter in a sale: private equity firms and subordinated debt or “mezzanine” lenders. Using them will make the process essentially the same as a sale to a third party. Yet if you don’t use such financing sources and instead lend your heirs or employees the money, you are essentially taking the same risk as the financial pros would, but without their training and experience.

Selling a business is a complex, time-consuming, expensive and risky proposition. The greatest risk is a transaction that collapses after the company’s confidential information is disclosed to a competitor. If you decide to sell, you should go into the process with your eyes wide open after weighing the risks and rewards. Too many business owners leap to the sale option without understanding these tradeoffs and without exploring their other options, sometimes to their great regret.

If selling the business is your preferred option, you’ll want to consider whether the buyer is likely to be a competitor (a “strategic buyer” in industry parlance) or a private equity group (a “financial buyer”). The type of buyer you want to attract will affect the sort of organization you will need to build. Financial buyers prefer to see fully staffed, fully functional, cohesive management teams, while strategic buyers don’t necessarily even want such capabilities. This is an important reason to consider your transition options well in advance, because if you expect to sell to a financial buyer, the value of your business will be penalized if you haven’t had your team in place for a reasonable amount of time.

The type of buyer you court will also depend on your willingness to stay with the business for a transition period, or even indefinitely. Financial buyers tend to look for this, while strategic buyers don’t.

Embrace the opportunity

These are but a sampling of the issues you should wrangle in developing your Transition Strategy. You have a number of personal preferences to consider: for liquidity; for ongoing involvement vs. immediate departure; for passing the business to family or managers; and many others. You have a wide range of options for transitioning and for realizing the value you build in your business. Formulating and executing a clear and effective business strategy will enable you to maximize that value. Embrace that opportunity and develop your Transition Strategy now.

Bruce C. Stevens is principal of Strategic Ventures Consulting Inc. and author of Reaping Your Reward: Prepare Your Business Now (




Copyright 2013 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact





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Capturing wealth via a sale of the family business

Planning for the future of your family business can be one of the most challenging tasks for the family; it is also one of the most critical. One of the most difficult decisions for family business owners is whether to transition the business to the next generation or to sell it.

Regardless of the size or age of the family business, considering its sale can be extremely emotional and sometimes divisive. The business is often the result of years, or even generations, of a family’s hard work and devotion. The family’s past role in the business may have created expectations about continuity, tradition, community activities, dividends and even family employment. Often the business also serves as a source of family unity. However, the owners, the board and the family council must take the responsibility for succession planning and preserving the value created by the business. This sometimes means making the difficult decision to sell.

There can be significant costs if the family fails to recognize when it is time to sell. And, in the current economic climate, a sale may take significantly longer to accomplish, requiring a longer-range perspective.

Should we sell?

When a family business is involved, the decision to sell requires much more than an economic analysis. The emotional consequences of such an action can be greater than the financial impact. Here are a few issues to consider:

• Is the timing right? Today, while the market for M&A has improved, we are by no means out of the woods; adverse factors persist. In most industries valuations likely will increase slowly, if at all; there are fewer buyers, and financing is tighter. Don’t expect dramatic increases in valuation over the near term, unless your business shows significant growth or is in a “hot” sector.

Often, advisers will recommend a sale if they feel the potential for the future growth of the business has faded. A slower growth curve, a decline in sales, significant challenges from a large competitor or the development of competing technologies may be your signal that it is time to consider selling.

You first must do your homework and determine a range of likely values for the business today. Then it is important to make your best guess as to whether, and how much, these values are likely to change over the coming years. This analysis requires a critical look at the current state of the business as well as a careful study of the industry and the external factors that may affect its future prospects. You should also consider whether the family’s assets are sufficiently diversified. If most of the family’s eggs are in one basket, you should seriously consider whether a sale or other transaction is a prudent way to reduce this dependence.

• Succession issues/family conflicts. Because selling is an emotional as well as a business decision, the family must honestly discuss the available alternatives and their implications. Perhaps the younger generation is not as interested in carrying the torch, or family members have developed such divergent views that a smooth transition to the next generation is next to impossible. Would the business prosper if only some of the family were bought out, or if professional management were brought in to supplement or replace family leadership?

Managing the different views of all the stakeholders is a challenging but integral part of the decision-making process. If this process is ignored or not properly managed, it can lead to controversy, bitter feelings and even deadlock, any of which could make a sale inevitable, whether or not most family members want to avoid that outcome. If the family can agree on the internal issues and expectations, it may be able to produce a solution that works for everyone and ultimately even enhance family harmony.

Another important issue is burnout. When a family is in business together, there often is no respite at work from family issues, and vice versa. And, on the other hand, while some can sell their business and never look back, many people have sold their companies without adequately planning what they would do next. Boredom, disenchantment and regret often follow a sale.

You should consider the impact of the sale not only on your family members, but also on the communities where the business operates, its customers, employees and other constituencies. Once the business is sold, the family will likely lose control over factors such as product quality, workforce and reputation. Consider whether this separation will be acceptable and, if so, how you will prepare for it.

• Capital concerns. At the end of the day, businesses fail because they run out of cash. Looking down the road, you may be able to identify substantial requirements for capital that will be needed to adopt a new technology, expand or capture market share, or simply remain competitive in a rapidly changing environment. If it is not clear from where the business will obtain these funds, it may be reasonable to consider selling the business. Raising capital and investing it in your company can involve a significant execution risk. Even if well executed, and the capital deployed as contemplated, the plan may still fail because of factors totally outside of your control.

Preparing to sell

If you decide to explore selling, both the family and the business must be prepared for the process. This preparation includes the following steps:

• Pre-deal assessment. Preparing for a sale involves a significant degree of personal planning, including an assessment of the potential tax and estate planning consequences and the family’s expectations and goals. It is important to select advisers such as investment bankers or business brokers, tax advisers, estate planners and experienced M&A counsel and accountants who can help guide the family through this process.

Next, the company should review any inside deals and assess its state of corporate and financial housekeeping. This step involves identifying and quantifying any “side deals” and informal arrangements with family members. You should document or perhaps eliminate any off-market employment or other arrangements with family and friends, and qualify any material off-balance-sheet contingencies. If not already done, consider having your accountants prepare a full GAAP audit of the company’s financial statements. If a total cleanup is not practical before the sale, the company should be at least be able to identify and quantify this type of information so that potential buyers can understand the impact of these arrangements.

• What kind of buyer? Buyers generally come in two flavors: strategic and financial. Strategic buyers are already running a similar business, or are in an adjacent industry. They typically know the industry, the customers and the risks and upside potential of your business. Because they generally have similar operations, a transaction with a strategic buyer often allows for “synergies” in an acquisition, which may mean the elimination of overlapping employees and operations. A financial buyer is a financial investor who may not know your industry well but is looking principally for a financial return over five to seven years.

Strategic buyers often have a reputation for moving more slowly than financial buyers but may be willing to pay more for the business because of the strategic advantages it can bring, as well as the opportunity for cost savings achieved through consolidation. This consolidation may include layoffs and restructuring that could be far more dramatic than would typically occur with a financial buyer. Consequently, you should consider the impact of a sale to a strategic buyer, and any consolidation activities, on your community, your employees and your family’s values. On the other hand, if any of the current owners would like to continue to invest in the business, financial buyers are often willing to allow you to retain an equity stake in the business, at least for the duration of their investment. This generally is not possible with a strategic buyer.

• Due diligence and disclosure. The due diligence phase can be critical to obtaining the appropriate value for the business. In addition to the buyer, due diligence requests will come from potential financing sources and the buyer’s advisers. The goals of the due diligence are for the buyer and its financing sources to understand the company, its future prospects, business plans, position in the market and management team, and the risks and upside associated with the business and the industry.

Potential buyers will ask for extensive detail on a seemingly endless list of items. Documents requested typically include customer and supplier contracts, financials, projections, organizational documents, intellectual property and licensing arrangements, and information on environmental compliance, employees and employee benefits, taxes and litigation. It is usually preferable to build your buyer’s confidence early by disclosing existing or potential problems than to wait and surprise the buyer late in the process. Buyers may want to talk at some point to customers, employees and suppliers.

In order to respond to requests for information, you should develop a process to handle due diligence. Confidentiality is particularly important during the sale process, since if word leaks out it may be unsettling for employees, customers and other constituencies, and competitors often use this information to try to take customers or hire away key employees. These issues are particularly important if you are considering a sale to a competitor. It is also important to have a consistent storyline for those without knowledge of the deal, including customers and suppliers.

• Communicate with stakeholders. Communication about the sale is critical to a successful transition. While the buyer should communicate to you its expectations regarding changes to the business, you should be communicating with the family, management team, employees, customers and suppliers. The communications strategy should be planned early—well before the deal is signed.

A good communications strategy will help the family, management and key employees to buy in to the deal. To do so, it must be delivered in a controlled, timely way, aligning the key messages of buyer and seller and planning for uncertainty, including contingency plans. It also should address the risk that customers and employees may hear the news from outside sources (e.g., competitors or the press). Part of the communications strategy should be to develop standard responses to “Frequently Asked Questions.”

Planning is essential

Deciding to sell the family business is a complicated process that requires careful planning, consensus building and a frank consideration of the family’s own strengths and weaknesses. Most of all, it requires thoughtful and effective communication. A successful sale can be the solution to many family concerns, such as succession and wealth management, or it could dissolve the ties that bind the family together. Paying attention to the signals you are receiving and taking the time now to plan for the future of your business are crucial first steps.

Doug Raymond is a partner in the Corporate and Securities Group at the law firm Drinker Biddle & Reath LLP ( This article was written with assistance by Ena Lebel, an associate in the firm’s Corporate and Securities Group.

Copyright 2011 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact

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