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Buying A Business From A Family Member: How Advisors Can Help

A great deal

I got a call from someone who was in the process of purchasing a business from an Uncle. The Uncle wants a million dollars for the business which includes real estate, and is willing to sell to his niece on a contract for deed. The niece would pay for the business over time with the proceeds of the business. The niece, who currently works in the business, would eventually be the owner, without having to get approved for a bank loan or provide cash for a deposit. Seems like a win-win, right?

What To Consider

Not necessarily. The buyer, in her twenties, knows nothing about buying a business, let alone valuing one. The Uncle, like most business owners, thinks his business is worth much more than what it might sell for on the open market. The niece was not only afraid to ask too many questions of her Uncle, which might kill the deal and her dream, create hard feelings, or interfere with family relations; but she also didn't know what to ask, if she felt comfortable doing so.

How We Can Help

Buying a partner out, or buying a business from a family member can be emotional and tricky. The owner  wants the most they can get for their business, having worked hard and grown the business for years. The buyer wants the path of least resistance and a fair price, but may not realize the importance of determining first, if the business proceeds can cover the loan payments for the length of the loan (in this case 15 years) whether the loan is from a bank or from the seller. The parties may also not realize the importance of keeping the transaction confidential, so that employees and customers don't hear about it before the buyer and seller are ready for them to.  Having an objective third party with mergers and acquisitions experience, who can provide information and advice, is paramount to the health of the business and the relationships of the family and/or partnership.

Role Of Advisors

An Advisor can work either on behalf of the buyer, be the intermediary between the buyer and seller, or work on behalf of the seller, depending on what the parties hire them for. When working on behalf of the buyer, an Advisor will be a resource for the buyer from beginning to end.  This could mean guiding the buyer on what information to get from the seller, providing a Broker Opinion of Value using the businesses financials, industry standards and comp sales from similar businesses across the country, explaining the valuation to the buyer, and negotiating on behalf of the buyer, which helps ease the stress buyers face when working with a family member or business partner.  

Other Types Of Advisors To The Transaction

Business Advisors have relationships with commercial real estate brokers, accountants, M&A attorneys and bankers. These professionals help parties to the transaction with appraisals (when real estate is included), due diligence (verifying financials, looking at trends and considering future expenses) creating a pro forma (cash flow projection based on the business's financials), writing the offer letter or reading over the sale documents (using an attorney with M&A experience is the best course of action) understanding how risky a deal might be (if the businesses cash flow can finance the deal, plus pay the buyer a salary).

In this case, the Uncle wanted to use his business attorney to draft the transaction documents. If the attorney does not have experience with mergers and acquisitions, they may not draft the best agreement for either the Uncle or his niece.  An Advisor, who is an objective third party, will guide the parties to the transaction, keep the deal moving forward, help buyer and seller avoid unnecessary pitfalls, and make suggestions based on their experience with similar transactions and best practices.   

No Question Is A Dumb Question

If you are considering a partner buy-out or purchase from a family member, don't hesitate to contact us for help. We offer broker opinion of value, answer questions, provide insight, help with referrals, and provide questions you can ask the seller before you decide to move forward. No deal is too big or too small, and no question is a dumb one.

Lauren Altschuler
Business Advisor, Member, IBBA
Transworld Business Advisors

 

Lauren Altschuler
Lauren Altschuler
I assist buyers and sellers of privately held businesses in the buying and selling process. We help value your business for the best price, advertise it confidentially to qualified buyers, handle buyer interviews, discussions, negotiations and facilitate the due diligence investigation and the sale of the business.

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