When to Inform Children of the Sale
By John Herubin, Managing Director
Our firm is in its third decade of guiding primarily entrepreneur-run and family businesses through a sale process. Our roster of closed deals would indicate we’ve successfully identified the best buyers at meaningful values for our clients. We’re especially proud of our achievements when looking at the unique market cycles we navigated to achieve these results.
What our record doesn’t reflect is the variety of the behind-the-scenes drama we’ve encountered involving the communication from an owner to their children (or other relatives) who are also involved in the business. Negotiating with a buyer can generate a myriad of feelings with the owner seller. Those feelings are often magnified when combined with disclosing a potential sale to children involved in the business. This can be especially emotional when it’s the first time they are becoming aware of the owner’s intent. The disclosure can generate anxiety and uncertainty surrounding their future role in the business and get tangled with non-business personal emotions that accompany an intertwined business and family relationship (i.e. making decisions as an owner are not always aligned with making decisions as a parent or relative).
Although we are not trained psychologists, our goal in these situations is to ensure that everyone involved enjoys future Thanksgiving dinners and family events together post-sale.
That experience has shown us that a successful process oftentimes relies on the preparation, timing, and communication of the desire for a sale from the owner to his/her children.
A couple stories will illustrate this principle:
- We represented a father who was a very involved CEO of a successful distribution business. His son was a salesman and not quite ready to ascend the management role of his dad. Our client who was in his late 60’s and was contemplating retirement, received several unsolicited offers to sell the company at values that were intriguing. His son did not have the financial wherewithal to purchase the company and his dad knew he was not experienced enough to run the entire company. We encouraged the owner to disclose his desires and plans to sell to his son. The buyer was inclined to keep the son employed as a successful salesman, but not as the CEO. Our client was petrified of the reaction his son would experience upon learning this news. To avoid this perceived conflict, our client waited until the last possible second before disclosing to his son that he was selling.
Much to our client’s great surprise, the son (as well as his non-employee sister) were thrilled that their dad was going to realize the fruits of his nearly 40 years of hard work and sweat equity and spend more time with his wife (the fact that they were each going to receive sizeable portions of the sales proceeds as a gift didn’t hurt either). A significant amount of distress on top of the normal deal anxiety could have been avoided had the owner decided to communicate more openly with his children earlier in the process.
- Lesson learned – the fear of a child’s reaction is often far worse than the reality when open, honest, and heartfelt communication is exercised prior to a sale.
- We were hired to represent an owner desiring a sale of his specialty manufacturing company so he could retire. He has four sons with two actively involved in the business (one in sales and the other in operations). Based on our early discussions with the owner and his attorney, we were assured that the two active sons were not interested in ascending to ownership and continued management of the company post-sale. The owner didn’t believe it was necessary to speak with his sons or inform them of his desires. His belief was that the proceeds were needed by all four of his sons and he would find a way to share his largess with them post-sale.
We proceeded with a sale process that resulted in an attractive offer to purchase the business. As diligence progressed and closing was in sight, the owner finally felt comfortable enough to tell them a sale was imminent. The owner (and his attorney) were both floored to learn that the active sons were indeed anticipating ultimately owning and operating the company together. Their cooperation with the buyer would be important moving forward. Equally surprising, the two inactive sons were in full support of their brothers’ desires and encouraged their father to hold off on the sale (which he did) to further explore a succession plan that would facilitate the active brothers’ goals.
- Lesson learned – Strongly encourage an owner to have an honest and candid conversation with children involved in their business prior to embarking on a sale process. This early dialogue will help ensure that the owner does not spend an inordinate amount of time and money on a sale process, and helps direct them towards a desired transition outcome.
Numerous variables can impact how an owner approaches this conversation. These include the active children’s age, years involved in the business, importance of their role in the company, strength of the personal relationship between the owner and his children, level of open and honest communication that occurs surrounding ownership succession.
These conversations with children (regardless of their age) are difficult and emotional. They can be complicated by input from spouses, siblings, and non-business active family members, and exacerbated by non-business family or generational dynamics.
A skilled investment banker helps identify and prepares to address these conversations early in the process to avoid post-transaction family conflict and ensure the owner can stay focused on completing the inherently emotional sale process with the buyer. We’ve also learned that sometimes the family dynamics are too complicated to be resolved exclusively with the involvement of an investment banker. There are a number of trained coaches and counselors that focus exclusively on resolving family business conflicts in advance of a transaction occurring. They can skillfully facilitate a dialogue to improve communication and avoid conflicts that can subsequently derail a successful closing.
It’s incredibly rewarding for us to assist a business owner realize the fruits of their (and possibly prior generations) labor through a sale and maintain harmony with children that are also involved in the business. Honest communication and preparation are the best strategies to avoid unnecessary family conflict when a sale ultimately occurs.
There’s plenty of things to disagree about over Thanksgiving dinner these days, and our goal is to make sure the sale of a business is not one of them. Please pass the stuffing!
© Copyrighted by John Herubin, Managing Director, EdgePoint Capital, merger & acquisition advisors. John can be reached at 216-342-5865 or at email@example.com.