Family-owned businesses are more common than most of us realize. According to recent estimates, family-run companies create up to 90% of global wealth, and 85% of the world’s startups receive familial funding. In the United States, over 5.5 million family companies contribute nearly 60% of the nation’s GDP and employ nearly two-thirds of its workforce. There’s no disputing that family-owned businesses are profitable and beneficial to the community, but those considering a takeover should first consider the benefits and drawbacks. Could buying a family-owned business be the answer for you?
There’s No Building Phase
Starting and running a successful business is a bit like being a carpenter. Most people assume it’s cheaper to build something from scratch than it is to buy it—but that’s not true if you lack the equipment, skills, and tools. The same philosophy applies to family business sales.
If you’re getting into the business world for the first time, buying a company means that most of the work has been done. Those who buy family-owned businesses get established brands, solid business models, a ready-made customer base, and steady income. They’ll also receive the benefit of pre-existing relationships with investors, banks, vendors, and the community. Everything you need is already there, which makes it much easier than it would be to build a business from the bottom up.
It’s Easier to Grow
Because family businesses are proven, new owners can immediately get to work on improving practices. There’s less of a need to create a business plan, choose a location, find a target market, and build connections with others. As mentioned above, the work has already been done. By taking over a family business, a new owner can focus on building a stronger, more resilient customer base.
Access to New Talent
We’ve all heard stories about multimillion-dollar companies that buy up small-time competitors. In most cases, they don’t do it because of an affinity for the smaller company’s services and products; they do it to access the competitor’s human capital. When family businesses are bought, the people are one of the most crucial assets.
It’s easy to see why so many people hold this view. After all, family business owners choose and train their employees because they have skills and passions that make the company stronger. If you’re taking over a family business, there’s no need to spend money and time bringing in a new team. Existing team members know the company, its vendors, and its customers, which can make transitions much smoother.
Some entrepreneurs go years without turning a profit. When a startup owner goes through lean times, they learn how to make the best of what they have—but those sacrifices aren’t always necessary.
Family-owned companies are already making money, so a new owner will have an instant salary and can then re-invest some profits back into the business to grow, if they so choose. If income is sufficient and the company has a good history, the new owner can easily access loans to perform important upgrades.
Family businesses bring with them the relationships they’ve established with community members. These companies create jobs, contribute to the economy, and become local institutions. Even if you’re not a family member, you’ll get to carry the torch—and pass it to one of your family members someday. For those stepping into their own family’s business, it’s an opportunity to carry on a legacy.
Outsiders often face resistance and resentment when they take over family businesses, even if they keep things the same. People don’t like change, and it may take time for others to warm up to the idea. If you’re taking over the family company, it’s likely that others will try to ‘help’. Money brings out the absolute worst in people, no matter how close they claim to be. Expect to feel some backlash as others make their disapproval known. So, could buying a family-owned business be the answer for you? Sometimes, it may not be.
Making a Significant Investment
While family businesses are ready-made, they still are a sizable upfront investment. If you’re not quite ready to take the plunge, or if there’s uncertainty as to the deal’s sustainability, it’s a big risk. Taking over a family business isn’t always easy, and it can be downright costly, as the new owner will have to consider fees for accountants, attorneys, loan costs, and upgrades.
Building a Better Reputation
When buying a family business, it’s important to think about the owner’s reasons for selling. Did they overextend themselves? Were customers dissatisfied with the service they received? Does the company have a poor culture, or is the inventory outdated?
A new owner should remember that they’ll be responsible for outstanding invoices, employee morale, community relationship building, and making crucial improvements. In some cases, the damage done is irreparable—which means the deal just won’t work.
Forming a Unique Identity is Nearly Impossible
This is particularly true in cases where people inherit or buy their families’ businesses. Clients, vendors, and workers won’t see the new owner as the one in charge, and they’ll have to work harder to get the respect they deserve.
Things to Consider When Buying a Family Business
If you are still weighing the pros and cons of buying a family-owned company, the following tips may make the decision easier.
- Know what you want. A business is a big investment and a lifelong commitment, so it’s important to choose wisely. Base the decision on the company’s size, industry, location, and your weaknesses and strengths.
- Do some research. Those looking to take over family companies should start in their communities. If nothing pans out, a business broker can find and screen potential opportunities.
- Perform due diligence. Once a company has been found, the work isn’t over. Find the reasons for the sale by hiring an accountant and an attorney to review the company’s financials and contracts.
- Obtain funding. If everything checks out and the deal is sustainable, get funding through an acquisition loan from a bank. This is usually in the form of an SBA loan for deals that are $5 million or less, or a conventional loan, for middle-market deals. Sometimes, these deals contain seller financing, though you should know that sellers are not huge fans of financing their own sale. However, this is sometimes a part of a sale.
- Startups. Finally, if the startup phase is still more attractive to you compared to buying an existing family business, and you have a novel and scalable idea, funding is available from the three F’s (friends, fools, and family), followed by local or national angel investors, and once the business reaches a critical mass, venture capital investors.
- Create a letter of intent, followed by a purchase agreement. After you’ve found a company, agreed on terms and conditions, and found financing, all that’s left to do is to sign the contract.
A person stepping into a family business, even if they’re a relative, has big shoes to fill. By considering the pros and cons, and by following these tips, buyers can continue these companies’ proud traditions and increase their chances of success. Could buying a family-owned business be the answer for you?