Family Business: How to Sell the Business to the Kids

How to Sell the Business to the Kids by Frank Allen of Frank Allen Financial Group Inc.

I am a member of the Canadian Association of Family Enterprise (CAFE) and last week attended a presentation by Kristi Miller of Vancity Capital entitled “How to Sell the Business to the Kids”.

For those of you boomers who are looking to retire and transition your business to your kids, the highlights of her talk could be very valuable. Bear in mind that she is speaking from the perspective of a banker who provides funding for the buyout, along with your traditional banker and yourself-aka-The Bank of Dad-or Mum.

  1. Reasonable Valuation Obviously this is important to all bankers but particularly to the unsecured banker in the middle. Make sure that you have done your homework in determining a valuation for the sale that is reasonable to all concerned.
  2. Seller is increasingly inactive but drawing sufficient income from both the business and personal resources. If the business is being sold, day to day management should be moving to the next generation.
  3. Kids are entrenched in the business and are contributing a “painful” amount to the deal. The “kids” need to be very familiar with the day to day management and operations and be able to step into those roles. More importantly, they need to be contributing an amount to the deal that is“painful”. They need to have some “skin in the game.”
  4. The Founder or seller is willing to carry a meaningful amount. This may not be a deal breaker-if the seller can get all of their funds out, that’s great.
  5. Senior Lender willing to support the deal. Your regular business banker will be involved in the transaction and willing to carry based on the “kids” management ability.
  6. Immediate opportunities for Growth. The best deals involve an eager new set of management eyes that see opportunities for growth of the company that their parents may have been too “tired” to pursue. In summary, she concludes:

“You create more options for yourself, your kids and your business if you and your kids are well prepared for management, ownership and the sale of the business.”