Helping Out Our Biggest Competitors – the Kids!

By Frank Arcoleo, one of Neumann and Associates premier M&A Advisors

I’m often asked who our competition is.  There are other M&A advisors out there, some smaller and some larger.  And although I’ve met a few of them, I’ve rarely, if ever, run across any of them in dealings with prospects and clients.  So when I’m asked, I tell people I have two main competitors.  In this month’s newsletter, I’ll deal with one of them.

The biggest competitor, I tell them, is “the kids.”  Many small business owners are owned by single individuals, and generally, these owners don’t have large 401(k)s or other significant retirement savings.  In most ways, there business IS their retirement.  However, there are family members – often one or more sons and daughters – who are also active in the business, and some of these family members have historically been instrumental in the growth and success of the enterprise.

“When an owner begins to contemplate such an exit strategy,” says Achim Neumann, CEO of A Neumann & Associates, LLC, the full-service M&A advisor based in Atlantic Highlands, New Jersey, “he or she needs to balance two major factors: the need for retirement income, coupled with the desire to give part of the business to his/her heirs, both as an inheritance and as a reward for past contributions to the business.”

Balancing these factors is not necessarily easy, but it’s critical.  “I can’t tell you how many families I’ve seen split apart, broken into factions, based on perceived inequities in dealing with business transitions,” says Vincent Eades, Managing Director of the Southern Maryland Region.  “Such a situation turns a hard-earned family asset into a wedge that causes lasting bitterness.”

As business brokers, we could recommend one solution – just sell the business and deal with the allocation of proceeds in the same way as any other estate would be distributed.  And in fact we’ve seen some of these situations, most often when the next generation is only minimally interested in continuing to own and operate the business.  Such a situation is the exception, not the rule, and for most of these owners, selling is not an option.  So how can we help, even absent a sale?

“For an owner who intends to keep the business in the family,” says Gary Herviou, Managing Director of the Central New Jersey region, “we highly recommend that he get an independent business valuation, performed by a 3rd party who is not connected in any way to the family.”  Armed with a true market value of the firm at a given point in time, the owner can decide how much of that value he or she needs to fund retirement (either in a lump sum payment from the successors or paid out in installments over time) or other legacy items, such as charitable contributions, and how much can be given to the kids.  That allocation of business value may not be easy, but without knowing the fair market value of the business, it can be disastrous, both financially and for family relationships.

So how do we deal with our biggest competitor – the kids?  We don’t even try.  But we can participate in helping even intra-family business transitions to be smoother and more successful by assisting the owner to establish a true market value of the business.  And who knows?  If the kids want to sell the business someday, we’ll be there for them!