Of the many challenging decisions that come with owning a business, deciding whether – and when – to sell often tops the list. This is particularly true of family businesses, and comes with more nuanced dynamics and personal feelings that become primary considerations.

Families who own businesses may struggle to determine the best time to sell their business. They’re unsure of the steps they should take to ensure that the business remains successful during a transition. Here are some thoughts and suggestions about this process.

To Sell . . . or Not to Sell?

There’s a simple equation that helps answer the financial question of whether any asset should be sold or retained: if the cost of ownership outweighs the benefits of selling, an asset should generally be sold.

However, things are rarely this simple when considering an asset like a family business. For example:

• Conflicts may have arisen among family members who work together in the business.
• There may be a need to diversify financial assets beyond the business to reduce concentration risk.
• Family members involved might desire more independence when it comes to making decisions about their personal finances.
• Some family members may want to transition from active business ownership into passive investments that require less direct oversight and management.

Furthermore, another key variable is whether next-generation family members possess the interest, desire, and skill sets required to run the business and keep it in the family. If not, the business may need to be sold before the current generation of leadership steps down.

On the flip side, some family members might feel an obligation to hold on to the business due to their commitments to their employees or the community. The founding generation might even be committed to keeping the business in the family long-term to benefit future generations.

Productive Use of the Business

Here’s another way to approach the decision: Can the family use the asset—in this case, the family business—in a way that is productive and adds value to the family, the community, and society at large? If not, the family should consider selling the business to someone else who can. This will free up the family members involved to focus on other activities that better suit their skills, talents, and interests.

As you consider whether and when to sell your family business, remember that all businesses go through life cycle stages. A company that is competitive at one stage might need different management, technology, and capital to successfully compete at another stage. To remain competitive across generations, a business must continually retain the talent and financial resources needed to adapt and survive.

One common reason for family business failure is the inability to adapt to dynamic market conditions, whether it be changing consumer preferences or disruptive technology that transforms industries. Another considerable challenge is the changes that naturally occur in families over generations.

Next-gen family members may be unwilling or unable to take over the leadership reins of the business. This makes it all the more critical for the current ownership generation to realistically assess whether the next generation possess the skills, talent, and interest required to run the business, and then plan accordingly.

Here are three questions that can help you determine whether to sell or hold on to your family business:

1. Is your family still capable of managing the business successfully? If the answer is no, you could hire someone with the skills and experience necessary to manage the business. In this scenario, your family could maintain business ownership and oversight while delegating day-to-day management responsibilities to someone else.

2. Is your family still well suited for business ownership? For example, do the family members involved possess the capital and know-how needed to drive business growth and expansion? If not, this might be a good time to consider selling the business to an owner who can effectively take it to the next level. Don’t let pride or preconceived notions prevent you from making the decision that’s best for the business and all its stakeholders.

3. Does the business provide adequate returns for your family? In other words, are the financial and emotional benefits of owning the business greater than the costs? This includes not just financial costs, but emotional and psychological costs as well. Could your family generate higher returns (whether financial or emotional) by investing their time, energy, and resources in something else?

The Role of Strategic Advisors

For family businesses, the decision of whether to sell is often based as much on emotions and family dynamics as it is on financial considerations. Therefore, it’s wise to bring in strategic advisors – such as the professionals at Dembo Jones – who can help you make an objective decision by providing a comprehensive analysis of the company’s financial health and potential implications of a sale.

We can help you make the right decision while facilitating difficult conversations among family members.

We’re ready to work with the leadership at family businesses to consider all the relevant issues and to outline an appropriate process for selling a business. Call us to explore how we can help.