What you should consider before selling to a relative.

Most owners of small businesses face a number of critical decisions related to succession planning or exit strategy. One of the most difficult questions is whether the business should be sold to a family member. Many times the answer is not as easy as one might think.

The Advantages of Selling to Family

There are a number of great reasons for keeping a business in the family. First, it can be very rewarding for the owners to know their hard work will continue to benefit family members for years to come.

When selling to a relative, the owners already have a tremendous knowledge of the buyer and most likely know if the individual can truly run the business. They can tell if that person’s values and visions are a fit for the company.

Plus, the entire matter can be discussed confidentially and planned well in advance, so there is a totally seamless transition. A family sale frequently results in a deal whose structure and timing are more advantageous to the seller. Furthermore, a role for the seller in the company post-sale, if desired, is more likely when the buyer is a relative.

The familiarity of both parties in a family takeover should result in more open communication throughout the process. Selling to a family member, if done right, should be a smoother process for both seller and buyer and should conclude with no surprises to either party at any point.

Consider Potential Drawbacks

On the opposite side of the coin, there can be some unique challenges when selling a business to a family member.

For starters, the owners must determine if there is a relative who is truly capable of running the business. If there is, then it becomes a question of deciding if that person wants to run the family business. Wanting to run a business is very critical to success, and it’s quite different from feeling an obligation to run a family business.

Another challenge arises if more than one relative wants to buy the business. How do you handle such a situation while maintaining peace in the family? Could the business support multiple owners?

There is also the issue of price. Family members frequently feel they should get a better price on the business than an external buyer would. Should they, or should they pay market price?

What if the relative buying the business cannot secure financing? Is the seller interested in assisting them? The owner must fully analyze the risks associated with owner financing or providing a guarantee on a loan. Nobody wants to sell the business and then, several years down the road, get it back because it wasn’t performing at an acceptable level.

What to Do?

Owners should probably consider selling to a family member if such a transaction is a real option. However, owners must be very honest with themselves when evaluating this possibility. They need to look at a family buyer with even more discretion than if they were selling to a nonfamily buyer. Such a view is required because if the business subsequently runs into difficulty, there could be quite an emotional toll on the family.

Also, if the possibility of selling to a relative is to be considered, it should be discussed very early in the succession planning process—before any efforts to market the business to outsiders.

Preparing the Successor

If there is a family member who wants to buy the business, is that person ready to take charge? Grooming a successor takes time. It cannot be done overnight.

The would-be owner could gain experience by working and progressing in the family business, but only if there is proper mentoring along the way. Sometimes an individual can receive even better training and experience by working at another company, where the process won’t be clouded by any family relationships in the workplace.

If a family member has worked someplace else, been successful and now wants to come back to take over the family business, it can be a solid indicator of real desire to own the company. Of course, there is always the risk the individual decides not to come back to the family business.

The only way owners are going to know what is best in their situation is to have open and frank discussions with the family members involved. They should do so years in advance of planning to sell.

Any plan also should address the role of the sellers after the sale. The former owners could become employees with a defined area of responsibility, part-time employees or business advisers. Or the previous owners’ role could be limited to helping with the transition.

Whatever the arrangement is going to be with the former owners, it should be clearly defined, put in writing and include a specified period of time.

When and Where to Start

An owner cannot start too early in developing a succession plan. The plan can always be amended and updated if needed in the future, and that will probably need to be done a time or two. The value of having developed a plan is you have given thought to the process and the future. The plan will identify things the owners need to address over the course of time.

Where the process begins depends on the owners. Many are capable of handling the initial discussions on succession planning by themselves. Other owners will want a third party to assist with those discussions. There are a number of professionals—business advisers, CPAs, consultants, attorneys and others—who can help. Owners should find advisers they trust, who make them feel comfortable.

A worthwhile succession plan must be tailored to the business and its owners. The sooner owners start the process, the better for them and their family.