Selling a business is complex, but it becomes even more challenging when family members are on the payroll. At Unbroker, we’ve guided numerous entrepreneurs through this delicate process.
This guide will walk you through the key considerations and strategies for how to sell a business with family on payroll. We’ll cover everything from assessing the impact of family employees on business value to preparing your relatives for the transition.
How Family Employees Impact Business Value
When you sell a business with family members on the payroll, you must understand how these employees affect your company’s value. This knowledge can significantly influence both the price and the attractiveness of your business to potential buyers.
Evaluating Family Roles and Contributions
Take a hard look at what your family members actually do for the business. Do they perform essential functions that drive revenue? Or do they occupy roles that non-family employees could easily fill? Be honest about their productivity and impact. A family member who doesn’t pull their weight could drag down your business value.
For instance, if your sister is your top-performing sales representative, that’s a valuable asset. However, if your nephew holds a made-up position with no clear responsibilities, buyers will see this as a red flag.
Market-Rate Compensation: A Non-Negotiable
You must evaluate whether you pay family members market-rate salaries. Overpaying relatives is a common mistake that can significantly reduce your business’s profitability and, as a result, its value.
Use salary comparison tools or industry reports to benchmark family member salaries against similar positions in your area. If you find discrepancies, adjust compensation to align with market rates before you put your business on the market. This step alone can boost your profit margins and make your business more attractive to buyers.
Identifying and Addressing Red Flags
Buyers will scrutinize your payroll, especially when it comes to family employees. Common red flags include:
- Nepotism: Multiple family members in high-paying positions without clear qualifications.
- Unclear roles: Family employees with vague job titles or responsibilities.
- Excessive benefits: Family members receiving perks far beyond what’s standard for their position.
To address these issues, consider restructuring roles, adjusting compensation, or even transitioning some family members out of the business before the sale. While these conversations can be tough, they’re essential for maximizing your business value.
The Impact on Sale Price
Addressing family employee issues can significantly impact sale prices. Some business owners who adjust family salaries to market rates see increases in their final sale price.
Potential buyers look for a business that can thrive without the current owner’s family involved. By addressing these issues head-on, you not only increase your business’s value – you also make it more attractive to a wider pool of potential buyers.
Now that you understand how family employees impact your business value, let’s explore how to prepare for a sale and prepare these family members for the impending transition.
How to Prepare Family for a Business Sale
Selling a family business impacts more than just finances. It affects everyone involved, especially family members on the payroll. Proper preparation can make or break a sale. Here’s how to navigate this complex process.
Prioritize Open Communication
Start with a frank discussion with your family employees. Don’t wait until the last minute to announce the sale. Involve them early in the process. Explain your reasons for selling and listen to their concerns. This transparency builds trust and prevents misunderstandings.
PwC’s Africa Family Business Survey shows that although families trust their relatives, better governance structures and strong communication protocols are essential for maintaining trust among family members. This trust proves essential when navigating the complexities of a business sale.
Address Job Security Concerns
Family employees will worry about their future. Be upfront about potential outcomes. Will their positions remain secure post-sale? Will they need to reapply for their jobs? Or might they face job loss?
If job losses seem likely, offer career transition support. This could include creating a learning culture, building employee career paths, delivering continuous performance management, and offering a variety of career development opportunities. Such support eases the blow and maintains family relationships.
Develop Individual Transition Plans
Each family member’s situation differs. Work with each one to create a personalized transition plan. This might involve:
- Upskilling to increase their value to the new owner
- Gradually reducing their role in the business
- Exploring opportunities in other company areas
- Planning for retirement (if they’re near that stage)
For younger family members, this sale might present an opportunity to explore their own entrepreneurial ambitions. Help them view the sale as a chance for personal growth rather than a loss.
Establish Clear Expectations
Be explicit about what you expect from family employees during the sale process. This includes maintaining confidentiality, continuing to perform their duties, and potentially assisting with due diligence.
Set guidelines for how they should interact with potential buyers. Brief them on what information they can and cannot share. This prevents accidental leaks that could jeopardize the sale.
Offer Financial Planning Assistance
If family members have relied on the business for their livelihood, they may need help adjusting to a new financial reality. Connect them with financial advisors who can help them plan for the future, whether that involves finding new employment or managing a potential windfall from the sale.
As you prepare your family for this significant change, the next step involves implementing strategies to handle family employees during the actual sale process. These strategies will help ensure a smooth transition and protect the value of your business.
Managing Family Employees During a Business Sale
Retaining Key Family Talent
Retaining key family talent is crucial when selling a family business. Step 1 involves taking stock of your exit plan and legacy. Step 2 requires viewing the business and family as separate entities. Step 3 involves taking family stakeholders into account.
For example, if your daughter manages your company’s largest accounts, her continued involvement could prove crucial for client retention. In such cases, you should negotiate with potential buyers to keep these family members on board, at least for a transition period.
A study by the Family Business Institute shows that family businesses that retain key family members during ownership transitions are 30% more likely to survive to the next generation. This statistic underscores the importance of carefully considering which family employees to retain.
Severance and Alternative Arrangements
For family members who won’t stay with the business post-sale, you need a clear exit strategy. Offering generous severance packages can soften the blow and maintain family harmony. These packages might include extended health benefits, outplacement services, or lump-sum payments.
In some cases, alternative arrangements might work better. You could help a family member start their own business or transition to a consulting role. This approach allows them to maintain their income while gradually separating from the company.
A survey by the National Association of Corporate Directors found that 67% of family businesses have no formal succession plan for senior executives. Don’t make this mistake. Plan early and thoroughly for every family member’s future (whether it’s with the company or elsewhere).
Addressing Conflicts of Interest
Family businesses often blur the lines between personal and professional relationships, leading to potential conflicts of interest during a sale. These conflicts can derail deals or significantly reduce your business’s value.
One common issue involves family members with ownership stakes who are also employees. Their dual roles can complicate negotiations and valuation. You should consider buying out their shares before putting the business on the market, or clearly define their roles and compensation to potential buyers.
Another potential conflict arises when family members have access to sensitive information about the sale. You must implement strict confidentiality agreements and limit information sharing to those who absolutely need to know.
Family businesses fail due to a lack of boundaries. When dealing with family, you have less anonymity than in other business situations. To avoid this pitfall, maintain open lines of communication throughout the sale process. Regular family meetings can help address concerns and keep everyone aligned.
Navigating Emotional Challenges
Selling a family business often involves intense emotions. Family members may feel a strong attachment to the company, viewing it as part of their identity. You need to acknowledge these feelings and provide emotional support throughout the process.
Consider engaging a family business consultant or therapist to help navigate these emotional waters. These professionals can facilitate difficult conversations and help family members process the changes.
Ensuring a Smooth Transition
A smooth transition benefits both the family and the new owners. Try to create a detailed transition plan that outlines roles, responsibilities, and timelines. This plan should include training periods for new owners or managers, as well as a gradual handover of key relationships and knowledge.
You should also consider establishing a formal advisory role for key family members post-sale. This arrangement can provide continuity for the business while allowing family members to stay involved in a limited capacity.
For more expert advice and tips on selling your small business, visit our Unbroker Blog.
Final Thoughts
Selling a business with family on payroll requires careful planning and strategic decision-making. You must address family employee issues head-on to maximize your business’s value and attract potential buyers. Evaluating roles, adjusting compensation to market rates, and identifying potential red flags will significantly enhance your company’s appeal and potentially increase its sale price.
Clear communication stands out as a cornerstone of a successful business sale involving family. You should keep family members informed, address their concerns, and involve them in the process to maintain trust and prevent misunderstandings. Developing individual transition plans for each family employee demonstrates your commitment to their well-being and can ease the emotional strain of the sale.
At Unbroker, we understand the unique challenges of selling a family business. Our modern platform offers transparent, low-cost options for business sellers (eliminating high brokerage fees while providing expert support throughout the sale process). Whether you prefer a hands-off approach or want to take the reins yourself, Unbroker can guide you through every step of selling your business, ensuring a smooth transition for both your company and your family.
