Can I afford to sell the family business?

Family Business

Of the entire host of issues a family business owner must consider when preparing to sell, the question of “What about the Packers tickets?” may seem trivial.

But for some families, the uncertainty surrounding the potential impact of the sale on the quality of life they have grown to enjoy – from season tickets to vacation homes and other perks – can create big waves.

Families should consider issues such as who would get the Packers tickets in a business sale.

“I’ve had a business owner say the No. 1 fight (in their family business) was not about titles or compensation, but about Packers tickets,” said Alex Kramer, market leader for U.S. Bank Private Wealth Management in Milwaukee. “It had to do with sibling rivalry and who was getting preference, and who could actually afford those tickets if they were left to buy their own. That was a big thing.”

Those strong reactions underscore the emotional family dynamics that can complicate the process of selling a family business either within the family or to a third party.

First, a seller must consider their own post-sale financial needs, including how much income will be required to support their current lifestyle or whether they are willing to make sacrifices. The costs often soar beyond just their salary when expenses like car leases, phone plans and club memberships – those that often run through a business – are factored in.

“The company might be generating $1 million a year for an owner,” Kramer said. “And the owner may have a house in Oconomowoc and Florida, and they may take a vacation every year. When you add it up, they have to generate $1 million a year to support that lifestyle. Something to consider is, in a post-sale world, can you generate enough income to support that level of spending?”

Meanwhile, successful family businesses often provide a standard of living not only for the owners, but also for various family members. An owner looking to sell also has to consider how the sale could affect everyone benefitting from the business, including children, nieces, nephews and in-laws.

“It’s not unusual that family members run expenses like car leases or cell phones through the company,” Kramer said. “Companies often own season tickets for the Badgers, Brewers, Packers. When you add those things up, and ask if you can afford to sell the business that’s supporting all of those activities, those are really hard and emotional decisions, as it turns out. And family members have very strong opinions about that.”

Kramer

Family members employed by the business, meanwhile, may enjoy higher salaries in those positions than they would elsewhere in the open market. And when the business sells, particularly to a third party, it could have implications for their compensation or even their employment with the company.

Those who aren’t owners in the company won’t see the same windfall post-sale as those with primary ownership.

“You (the owner) might walk out of the business, but how do you feel about your nephew Johnny currently making $110,000, but his market rate is only $80,000 working for a different company?” Kramer said.

Selling the business within the family brings its own challenges. Often when a next-generation leader is looking to purchase the business, they don’t have the financial means to pay top market price.

“Next-generation family members aren’t typically cash flush,” said David Borst, executive director and chief operating officer of the Milwaukee-based Family Business Legacy Institute. “Much of their own capital might be involved in the business already and capital isn’t readily accessible. Even if the next-generation 30-something is ready to take over the business for Mom or Dad, it’s going to be pretty difficult to come up with a cash contribution.”

If unaddressed, those conflicts can lead to significant family rifts and even fallouts after the sale.

“Families who run a company have something that keeps them together – that’s the business,” Kramer said. “They make decisions with the benefit of the family in mind. Once you sell the enterprise, there’s not that binding tie and, if there are fissures in the family, they tend to grow wider post-sale because there’s nothing to bind them together.”

Mitigating those issues involves communicating often and diagnosing potential pitfalls, long before the owner starts the sale process, Kramer said.

“We inventory these kinds of issues,” he said. “Just like we’d inventory the value of a company and marketability and might find ways to improve market value, we also will focus on where the family landmines and the emotional hotspots for this particular family enterprise are.”

He chalks up the oft-cited statistic that 70 percent of family businesses never make it to the next generation to a lack of education among the family members about the business.

Borst

Borst said it’s important for family businesses to be transparent in discussing company finances.

“Yes, communication is important, but it has to be meaningful. It has to be open,” Borst said. “It’s important to share with kids early on what the financial picture is.”

Regarding the ancillary benefits a family business provides beyond salaries, it’s also important to take inventory of all of those expenses and communicate about the expectations of maintaining that lifestyle after the sale, Kramer said.

“Those shouldn’t be surprise conversations,” he said.

When it comes to deciding who gets what, Borst said, those are never easy calls to make.

“You’re never going to get to a point, when it comes to divvying up assets, where it’s equal,” he said. “Fair isn’t always equal. Not everyone is going to get exactly the same. But what people should hopefully be receiving is what is fair and just. So you do have to take into consideration the work product someone is bringing to the organization.” 

Of the entire host of issues a family business owner must consider when preparing to sell, the question of “What about the Packers tickets?” may seem trivial.

But for some families, the uncertainty surrounding the potential impact of the sale on the quality of life they have grown to enjoy – from season tickets to vacation homes and other perks – can create big waves.

Families should consider issues such as who would get the Packers tickets in a business sale.

“I’ve had a business owner say the No. 1 fight (in their family business) was not about titles or compensation, but about Packers tickets,” said Alex Kramer, market leader for U.S. Bank Private Wealth Management in Milwaukee. “It had to do with sibling rivalry and who was getting preference, and who could actually afford those tickets if they were left to buy their own. That was a big thing.”

Those strong reactions underscore the emotional family dynamics that can complicate the process of selling a family business either within the family or to a third party.

First, a seller must consider their own post-sale financial needs, including how much income will be required to support their current lifestyle or whether they are willing to make sacrifices. The costs often soar beyond just their salary when expenses like car leases, phone plans and club memberships – those that often run through a business – are factored in.

“The company might be generating $1 million a year for an owner,” Kramer said. “And the owner may have a house in Oconomowoc and Florida, and they may take a vacation every year. When you add it up, they have to generate $1 million a year to support that lifestyle. Something to consider is, in a post-sale world, can you generate enough income to support that level of spending?”

Meanwhile, successful family businesses often provide a standard of living not only for the owners, but also for various family members. An owner looking to sell also has to consider how the sale could affect everyone benefitting from the business, including children, nieces, nephews and in-laws.

“It’s not unusual that family members run expenses like car leases or cell phones through the company,” Kramer said. “Companies often own season tickets for the Badgers, Brewers, Packers. When you add those things up, and ask if you can afford to sell the business that’s supporting all of those activities, those are really hard and emotional decisions, as it turns out. And family members have very strong opinions about that.”

Kramer

Family members employed by the business, meanwhile, may enjoy higher salaries in those positions than they would elsewhere in the open market. And when the business sells, particularly to a third party, it could have implications for their compensation or even their employment with the company.

Those who aren’t owners in the company won’t see the same windfall post-sale as those with primary ownership.

“You (the owner) might walk out of the business, but how do you feel about your nephew Johnny currently making $110,000, but his market rate is only $80,000 working for a different company?” Kramer said.

Selling the business within the family brings its own challenges. Often when a next-generation leader is looking to purchase the business, they don’t have the financial means to pay top market price.

“Next-generation family members aren’t typically cash flush,” said David Borst, executive director and chief operating officer of the Milwaukee-based Family Business Legacy Institute. “Much of their own capital might be involved in the business already and capital isn’t readily accessible. Even if the next-generation 30-something is ready to take over the business for Mom or Dad, it’s going to be pretty difficult to come up with a cash contribution.”

If unaddressed, those conflicts can lead to significant family rifts and even fallouts after the sale.

“Families who run a company have something that keeps them together – that’s the business,” Kramer said. “They make decisions with the benefit of the family in mind. Once you sell the enterprise, there’s not that binding tie and, if there are fissures in the family, they tend to grow wider post-sale because there’s nothing to bind them together.”

Mitigating those issues involves communicating often and diagnosing potential pitfalls, long before the owner starts the sale process, Kramer said.

“We inventory these kinds of issues,” he said. “Just like we’d inventory the value of a company and marketability and might find ways to improve market value, we also will focus on where the family landmines and the emotional hotspots for this particular family enterprise are.”

He chalks up the oft-cited statistic that 70 percent of family businesses never make it to the next generation to a lack of education among the family members about the business.

Borst

Borst said it’s important for family businesses to be transparent in discussing company finances.

“Yes, communication is important, but it has to be meaningful. It has to be open,” Borst said. “It’s important to share with kids early on what the financial picture is.”

Regarding the ancillary benefits a family business provides beyond salaries, it’s also important to take inventory of all of those expenses and communicate about the expectations of maintaining that lifestyle after the sale, Kramer said.

“Those shouldn’t be surprise conversations,” he said.

When it comes to deciding who gets what, Borst said, those are never easy calls to make.

“You’re never going to get to a point, when it comes to divvying up assets, where it’s equal,” he said. “Fair isn’t always equal. Not everyone is going to get exactly the same. But what people should hopefully be receiving is what is fair and just. So you do have to take into consideration the work product someone is bringing to the organization.” 

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