Selling business to your kids? Consider a private equity partnership

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Selling business to your kids? Consider a private equity partnership

Years ago, when we were marketing a business for sale, we used to include a short note about why the business wasn’t transitioning to the owner’s kids. After all, if it’s such a great opportunity, why don’t the kids want it, right? 

There are lots of reasons actually, and buyers don’t blink when they hear the owners kids won’t be taking over. In fact, it often strikes them as good news that there’s a second generation working in the business and planning to stay after a sale. That usually means they’re getting someone with significant experience and relationships who will help keep the business operating successfully after the owner is gone.  

Next-level management: Businesses in the lower middle market are attractive to large corporate buyers and international investors. It’s a sign of the times, and competition is going the same way.  

Many second-generation leaders aren’t ready to compete on that scale.  

Time and dedication: By the same token, many kids don’t want to make the same kind of sacrifices they saw their parents make. After seeing their parents deal with the demands of ownership, many children opt for a simpler way of life.  

I worked with one business owner who assumed his son would take over the business. When he finally brought the issue up, the son said, “Dad, I love working for the company, but I don’t want to own it.” 

Just two summers earlier, this business owner had purchased a lake house for his family. As they talked the son asked his dad, “How many times have you been up to the cottage?” “Five weekends,” the dad said.  

“No really. How many times have you come up and stayed the whole weekend—without being called away for a work issue?” “Well, maybe just three,” the dad admitted. 

“I’ve been here with my family all but four weekends over the last two summers,” the son told him.  

“Why would I want to give that up? I’m fine just to be an employee for you or anyone else.”  

Those were tough words for this guy to hear. But entrepreneurs are wired differently, and not everyone can have that same drive. We helped him sell the business, and the son did indeed stay on as an employee. 

Financial risk: If your kids are considering stepping up, you need to have a frank conversation about money. Make sure they understand the pressures of ownership, including the financial obligations they’ll need to make.  

There are a lot of buyers looking for strong, quality businesses and that means valuations are high. Parents who sell to their kids often do so at a discounted price, leaving money and opportunity on the table.  

Plus, transferring a business to the kids typically takes longer. They usually need 7 to 10 years to pay you the full business value. And the longer the buyout period, the longer your financial security is linked to the business. That’s a lot of pressure—financial and emotional—for a family to take.  

Another option: If your exit strategy is to transition the business to the next generation, consider selling part of the business to a private equity firm as a majority or minority partner. Selling to a PE firm can eliminate a lot of the financial risk that comes from a family business transition.  

A PE firm will bring cash to the table, providing you with liquidity and security as the outgoing owner. Plus, with private equity involved, your family probably won’t be asked to hold any personal guarantees—guarantees your kids may not have the collateral to assume.  

What’s more, private equity may be able to secure more favorable debt terms due to their track record and lender relationships. That means less debt weighing down the business and slowing growth.  

You can sell majority or non-controlling minority interest to an outside investor. Either option can be a way for the next generation to enjoy the benefits of ownership, but with less risk. As parents, you can get more of your money at close and lessen your risk as well.  

If the business continues to be a success, your kids can work to buy out the investor at a later date, returning the business to full family ownership.  

By Scott Bushkie

Scott Bushkie is Managing Partner and Founder of DealCoach.

With more than 20 years in the Mergers and Acquisitions (M&A) industry, Scott is a recognized leader in the field, providing exit strategies, business valuations, and M&A advisory services to business owners in the lower middle market. He has successfully executed sales to domestic and international buyers, private equity firms, family offices, and strategic buyers. Follow DealCoach on Linkedin

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DealCoach is headquartered in Green Bay Wisconsin with an office in Milwaukee Wisconsin and helps customers find out how much their business is worth with online business valuations and advisory services. Our business valuations also known as an Estimate of Value (EOV), help prepare buyers and sellers for the sale.  DealCoach also helps business owners grow value with a Business and Market Analysis and plan for retirement, estate & financial planning, benchmarking, and strategic planning. DealCoach servers and has provided business valuations for businesses located in the United States and Canada. 

We are here to tell you what you need to hear in order to make a well-informed decision with most likely the largest financial transaction of your life. Our team has over two decades of M&A experience, and we have been completing Estimates of Value for our clients for over nine years.

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