The Decision to Sell or Merge a Family Business

Organizations are facing uncertainties such as high inflation, raising interest rates, and the possibility of a recession. However, the decision to sell or merge a family business is primarily influenced by the unique circumstances of the family rather than macroeconomic conditions. Many baby boomers, who account for a significant portion of entrepreneurs, are reaching retirement age and considering a sale regardless of market conditions. The next generation often shows little interest in taking over the business, leading founders and advisors to explore alternative exit strategies.

Various scenarios can arise when owners face this critical juncture, including retirement, succession complexities, unsolicited offers, capital investments, health or marital changes, competitor transactions, and regulatory changes. These scenarios create uncertainty and apprehension, making the decision to sell or merge a significant financial choice for founders and their families.

Before considering a sale, advisors should encourage business owners to take four essential steps. First, they should organize accurate financial statements, including income statements, balance sheets, and cash flow statements. Second, owners should continue investing in the business to attract a higher valuation and position it for future growth. Third, creating a realistic three-year forecast can help potential buyers understand the company's growth potential. Finally, prioritizing sales and growth initiatives will showcase the business's potential to prospective buyers.

To increase owner wealth, strategies such as well-funded retirement plans and split-funded investment-grade life insurance programs can be implemented. Retaining key employees can be achieved through equity participation plans, avoiding the distribution of company stock. When considering an exit strategy, options like liquidation, selling to an external buyer, or selling to an internal buyer should be carefully evaluated, each with its own advantages and disadvantages.

Ultimately, the decision to sell or merge a family business is driven by personal circumstances and life experiences. Advisors should guide owners through essential steps and help them address key questions to make informed decisions that align with their financial goals and ensure a successful transition for their family business.