Selling a Family-Owned Business: Financial & Emotional Considerations

Fifth Third Bank


The decision to sell a family owned business involves strong emotions, interpersonal relationships with family members, and complex financial issues related to taxes and wealth management following the sale. To add to the complexity, the current average business owner is about 67 years old—and most have no exit strategy in place, according to Glen Johnson, National Director of Fifth Third Business Advisory Services.

If you are considering selling your business (or think you may be in the next few years), consider these tips to maximize the value of your business, ease the financial and professional transition, preserve positive family dynamics, and have a successful selling experience.

Plan in Advance–but Expect the Unexpected

In a perfect world, family owned businesses will allow at least two years to begin planning for a potential sale—yet Johnson acknowledges that such a timeline isn’t typical, or even possible, in many cases. “Most businesses are sold as a result of a reaction, like a change in the owner’s health, an unsolicited offer from a competitor or private equity firm or other uncontrollable circumstances,” says Johnson. “Most of the planning work we get called into is about a six- to nine-month process, depending on the size of the business and complexity of the deal.” While not ideal, there is work that can be done to assist the family within this timeframe.

That said, the more time you have to prepare, the better all family members who are involved in the business can prepare for the implications selling it may present and to potentially minimize the taxes on the sale—thereby allowing you to maximize the value of your efforts.

Consider the Financial Impacts that Selling a Family Business Will Present

From a personal wealth standpoint, the issues can be complex since many family related expenses such as travel, entertainment, and charitable endeavors may be contained within the business. So understanding cash flow of the business and the owner is critical to developing a workable plan. “Obviously, the owner’s lifestyle can’t drive a business valuation that isn’t sustainable; it may actually demand some lifestyle changes,” says Johnson.

Business owners should understand how much money they need from the sale of the business to remain financially stable, and what they want life to look like once the business is sold. “Those folks who know what they’re going to do after the sale, who understand and are confident they have sufficient assets to live on after the sale, tend to have a more successful experience. That’s where financial planning and wealth management comes into the process,” says Johnson.

Get Your Business Operations (and Family Relationships) In Working Order

Johnson says family owned businesses should have appropriate governance mechanisms in place within their family based on the size and nature of the company; these can be as simple as informal gatherings, or formal meetings. “Governance isn’t hard, it’s just informed decision making. It will probably feel uncomfortable at first. A biannual or annual family meeting prepares family members to start making decisions together.” These meetings should include discussion about the business but also a values-based discussion that identifies a family’s core values, what wealth means and is to be used for within the family as well as a discussion of the roles and responsibilities of family members.

On the business side, governance is equally important. The sale of a business impacts senior leadership, key customers and vendors and other community relationships. Work must be done to ensure those remain post-sale, and part of that includes a robust discussion about how long those with a stake in the company may be willing to stay on after the sale, whether there are business units, services, or product lines that are not core to the business that a potential buyer may not be interested in, including company-owned real estate. There is also the need to gather data and to build a library of information, contracts, and other types of data a buyer will want to review during the sales process.

Ultimately, family members and owners have to be in agreement for the sales process to be successful. “If a buyer sees two partners or groups of family members who aren’t on the same page, they are just going to move on to the next company,” says Johnson.

Look at Your Business Like an Outsider

The nature, size, scope, and history of a family business will dictate just how much advance planning is required to arrive at an appropriate valuation, but Johnson says it helps to view your family owned business through the eyes of a person who isn’t vested in it. He explains that while a family owned business may include expenses (like salaries, and assets unrelated to the core business) that will get stripped out in the valuation process, you should get the cleanest process on your side in advance of preparing your business for review by potential buyers.

In addition, consider the appeal of your current leadership from an outsider’s perspective, and the value of relationships with third parties, customers, or vendors without the current stakeholders’ continued involvement. “As an owner, your departure shouldn’t negatively impact the business,” says Johnson.

If your business has a history of financially supporting a philanthropic cause or community events, Johnson urges family business owners to consider how they will continue their family legacy, should a new owner choose to abandon such initiatives.

What Partners Do You Need to Support the Sale?

Building a strong multi-functional team of professionals is critical to your success and will limit the range of issues you face following a sale. While the partners a family business needs to successfully complete the valuation and ensure that personal financial issues, wealth management, tax implications, and the legal transition for the sale are all intact depends on the size and nature of the business itself—most will require assistance from a combination of investment bank professionals, accounting and wealth management firms, and transactional and estate planning attorneys.

Johnson says the success of a family owned business sale is directly correlated to the expertise of the team you bring together and their ability to work together to support the transaction: “It’s like selling your house. If you are trying to sell by owner, you will attract a different group of buyers than if you have a partnership with people who can connect you with other networks.”