Selling a Family Business: 3 Key Steps for a Successful Buyout

By Scott Kapp, Partner at DLA Piper and Bill Rudnick, Executive Managing Director and Chief Legal Officer at Cresset

Selling an ownership stake in a family business can be an emotionally charged, complex, and profitable process. Whether the sale is to another family member or an external investor, each buyer may have different motivations, viewpoints, and concerns, all of which can lead to friction. We consider the reasons behind a family member’s decision to sell his or her interest in the family business and provide recommendations for the subsequent steps in structuring a transaction that can facilitate a smoother transition and preserve family relationships.

Reasons for selling may include:

• Liquidity Needs. Some family members may require cash for personal expenses, investments, or retirement. Selling their stake in the business provides the liquidity necessary to meet those needs.
• Relationship Friction. Family dynamics can complicate business relationships, and vice versa. Disagreements about management styles, operational decisions, or other business practices may lead some family members to consider selling their shares to avoid ongoing conflict.
• Differing Vision of the Business. As the business evolves, family members may develop different visions for its future. Those disparities can prompt individuals to seek buyouts, allowing them to pursue their own professional paths.
• Differing Risk Tolerance. Family members may have varying levels of comfort with business risk. Those who prefer stability and predictability might choose to exit the business, while others may be more willing to take on risks associated with growth and expansion.
• Succession Planning for the Next Generation. Preparing the rising generation of family members for leadership typically involves determining who will lead the business going forward, and this may have implications for ownership. A transaction can facilitate intergenerational buy-ins, ensuring that capable younger family members have a stake in the company’s future.
• Unwieldy Shareholder Structures. In some cases, a family business may have too many shareholders, making decision-making cumbersome. Consolidating ownership through buyouts can streamline governance and facilitate more efficient management.

Once the decision to pursue a buyout has been made, it is essential to thoughtfully consider several steps that will guide the process toward a successful transition.

Steps to Structure a Buyout

1. Agree on a Process. Establishing a clear, structured process for the buyout is essential to ensure all parties are aligned. Family members should first discuss whether the buyout will remain within the family or if there will be an opportunity for third-party investment.
   • Select an Advisory Team. The family should collectively choose external advisors, such as financial planners, legal counsel, and valuation experts if necessary. Engaging the right team ensures that all aspects of the buyout are professionally managed, helping to facilitate a smoother transition for everyone involved.
   • Methodology for Valuation. When considering a third-party transaction versus an intra-family buyout, the approach to valuation should differ. In a third-party sale, the company’s value is primarily determined by market forces. However, in an intra-family transaction, the valuation is typically decided collaboratively by the family members involved, based on a mutual agreement regarding the value of your stake in the business.
2. Planning Considerations. A successful buyout requires careful planning across multiple domains.
   • Pre-Buyout Planning. Prior to embarking on a process, consider whether the financial, legal, governance and other aspects of the family business are in order and if not take steps with the family advisors to ensure that from a “housekeeping” perspective the family business is ready for a buyout.
   • Estate Planning. Consider the implications of the buyout on your family’s estate plan, particularly regarding inheritance and future ownership.
   • Tax Planning. Understanding the tax consequences of selling shares in the family business is crucial. Family members should collaborate with a trusted team of advisors to minimize liabilities and optimize the transaction.
   • Financial Planning. Selling shareholders need to consider how to effectively deploy the capital gained from the buyout. Engaging a qualified financial advisor is essential to achieve long-term financial stability and growth. Doing so effectively replicates the value earned while actively engaged in the business.
3. Enhance Communication Within the Family. Maintaining open lines of communication during the buyout process is crucial for fostering a healthy environment.
   • Address concerns proactively. Families can mitigate the risk of escalating friction by encouraging open and ongoing conversations. Family members should engage in candid discussions that delve into their individual motivations, expectations, and desired future roles within the business.
   • Create a safe space for dialogue. Establishing a judgement-free environment not only encourages transparency but also helps clarify each member’s perspective. This collaborative approach can strengthen relationships and ensure that all voices are heard, leading to a smoother and more amicable transition.

Selling a family business can be fraught with challenges, but by understanding the motivations behind each family member’s decision (to sell or not to sell) and carefully structuring the buyout process, families can navigate this transition successfully. By prioritizing clear communication, thorough planning, and an aligned process, family members can work together to achieve a result that meets their financial needs while preserving familial relationships.