Here’s a common scenario: Your father or mother started a business from scratch several decades ago, and turned it into a respectable success. As the business grew, you or one of your siblings joined in the operation of the business, and is an obvious successor, while the other siblings have no real interest in the business. And now, your parent has died, and the time has come for the successor to buy out the rest of the family and take full ownership of the company.
But here’s the problem. The successor doesn’t have the liquid assets needed to pay everyone off—perhaps they have $100,000 on hand, but the business is worth $2 million, and the business is split between four heirs. Mom or dad had a fantastic financial track record and could easily have gotten a loan, but that financial history died with the business’s founder, and is not passed down to the heirs.
The successor wants to buy everyone out, but doesn’t have the scratch. Now what?
First, it’s critical that you get a proper valuation of the business.
While family members trying to divide a business obviously care about one another, they still have opposing vested interests. The sibling trying to buy out the company will want to minimize the amount of the pay off, while the other siblings will want to receive a sizeable payout.
This is why you absolutely need to agree on a means of valuing the company. At minimum, you should agree on an independent appraiser to calculate a value for the company, with an understanding ahead of time that everyone involved will accept that valuation. Better yet, hire two valuation firms, and split the difference between their figures.
Coming to an agreement on the value of the company is just as important as actually coming up with the money to buy the company, as many families have spent years failing to come to an agreement over the fair market value of the family business—the supermarket chain Market Basket was the subject of a 30-year family feud that nearly destroyed the company.
You can save your family a great deal of heartache and hurt feelings by agreeing on a means of valuing the company, and then abiding by it once the figure is in hand. Depending on the size of the business and the complexity of your circumstances, it may be advisable to hire an acquisitions attorney to help negotiate the details of the buyout.
Understand that securing a loan is going to be difficult.
As we noted above, when the founder of a business dies, their credit dies with them. Thus, no matter how strong the business is, you are not going to be able to leverage your parent’s financial history in order to secure a loan.
The first thought of many heirs is to seek out a small business loan, or even an SBA loan. The problem is that business lenders seek to make loans in which the funds will make the business more profitable, and thus increase the likelihood of the loan being paid off. Unfortunately, buyouts do nothing to change the profitability of the firm—and frankly, the succession process represents increased risk for the business, and thus the lender. Because of this, it is often difficult to secure a business loan. The same is often be true of traditional equity based lenders, for the same reason.
One alternative approach is to draft a payment plan, in which the other siblings’ shares will be paid off from the business’s profits, over time. Depending on how close you are with your siblings, this may require building in a certain amount of interest into the payments, or it may be possible to negotiate a “friends and family” rate that is lower than what would be charged to an unrelated third party.
Some banks and business lenders will structure creative loans, but the person buying out the company often ends up with a confusing patchwork of overlapping loans that can cause a lot of stress.
Many business owners have discovered that unconventional lenders like Socotra Capital are the most approachable and accommodating lenders. We are able to make equity-based loans to businesses that struggle to secure funding from other sources, and have worked with a number of individuals seeking to buy out inherited businesses.