Planning to sell your family business? Know your options

For a family that owns a business, the attention given to building and growing the operation at some point may give way to a discussion on how and when to sell it. As founders age, they might conclude that their children have neither the interest nor the skills needed to take over. Or perhaps the next generation wants the freedom to pursue their own endeavors. 

Whatever the reason, any sale takes thoughtful preparation. Getting started on a strategy and process for exiting a business is an important step. It can ensure the long-run viability and stability of the enterprise you or your family have created. 

“Every business has its own range of options, depending on its industry, profitability, growth prospects and assets,” explains Jeff Porphy, senior managing director of mergers & acquisitions at Capital One Securities. “Sellers may also need to balance their own considerations: Do they value getting the highest price or want long-term control of the company and its legacy?” 

First, get to know the possibilities.

Private equity (PE) firms have a lot of capital ready to invest in small and medium-sized private companies. Funds raised by PE but not yet invested totaled a record $2.6 trillion in July 2024, according S&P Global. 

Advantages: Financial buyers, known as sponsors, can offer flexibility. Whether you want to sell a piece of your company or all of it, a PE firm may be willing. What’s more, if you retain a stake, you can get the benefit of any increase in value that the new owners help achieve—a second bite of the apple, so to speak, when the PE firms themselves exit. 

Compared with other options, a PE buyer may be less likely to simply fold your business into a larger entity. You may be able to keep running your company, if that’s your goal. 

Disadvantages: You will be reporting to someone else now, with the PE firm controlling your board and actively involved in management. If you have operated with no debt, or very little, you will have to get used to making payments on the borrowing the PE firm likely took on to fund the purchase.

Another company in your industry—a competitor—will often be the logical purchaser when you’re ready to exit. Indeed, owners of private companies sometimes start to explore their options after an unsolicited approach by a rival. 

Advantages: A strategic buyer like this may be the best option to get top dollar. With similar operations, the buyer may be able to create synergies—and may factor that into the price. An established company may have a lower cost of capital or a longer time horizon and perspective compared with a financial buyer, which also makes a higher price possible. 

Disadvantages: On the flip side, a competitor may be less likely to keep your business as an independent entity: The name of your company or its brands may be retired, the headquarters may be shut or moved. You will be less likely to have any ongoing role, beyond perhaps a short-term transition as a consultant. For some families, this is fine and may even be the goal, but some private business owners hate to see the company they built subsumed in another.

If selling to a larger company is fairly common, an initial public offering (IPO) is a fairly unlikely way for a family to exit—especially in recent years, when relatively few new companies have been able to sell shares in the public markets. This is a more suitable option for a larger company with strong earnings or significant growth potential. 

Advantages: For the right company at the right time, selling shares in an IPO can maximize the value of the founders’ shares. It also raises capital that can help a company to grow and may make future acquisitions easier. An IPO can launch a company onto a bigger stage with better access to capital markets.

Disadvantages: The company and its management must be ready for increased scrutiny and oversight, providing audited financial results and regular reports to shareholders. There are significant up-front costs in the IPO process, and longer-term costs for reporting and governance.

The creation of an employee stock ownership plan (ESOP) is another avenue for owners of a private company to monetize their exit. Specific rules govern the structuring of an ESOP and this may only be a viable path if the company has strong controls in place amongst the active management team and can operate successfully without the departing owners present You will need specialist advisors and an independent trustee to oversee the plan. 

Advantages: An ESOP may be a mutually beneficial way to align incentives among a company’s founder or family owners and long-term employees. Owners can sell anywhere from 30% to 100% of the company in one or more liquidity events over time.It may create a smooth succession for the company and preserve the legacy of the business. There may be tax advantages. 

Disadvantages: Determining the fair market value of the business can be tricky, and it sets the price at which shares can be sold back to the company, so owners may be foregoing an opportunity to sell for a higher price.

This doesn’t allow owners to fully exit, but it can be a useful tool to partially monetize a company. It may make sense when a company has excess cash or valuable assets and the owners don’t want to entertain an outright sale. 

Advantages:  This is a way to finance the payment of dividends to existing owners and it may come with added tax benefits depending how the deal is structured. As such, it may help to facilitate the transfer of a company to a younger generation or among family members. The company may benefit from having greater liquidity. 

Disadvantages: There may be unforeseen consequences when adding leverage to an existing company. It also may be difficult for a family-owned company to obtain the financing it needs for operations alongside this type of transaction. 

What matters more than choosing among these exit options is recognizing that founders and families need to have a sound strategy for the future—for when they are no longer around. Getting a plan rolling with your partners may be the most important thing you do to preserve the legacy and value of the business you have worked so hard to build.

Capital One has expertise in working with family owned businesses to help them navigate the complex issues of exiting or selling their business.  Please contact your Capital One relationship manager to schedule a discussion.

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