War Story: When Family Complicates a Deal

Buying companies from owner-operators is a beautiful thing. As an advisor, I've seen it work out well. As a buyer, I loved it.

Essentially, an owner will work in their business for 20 years. They’ll pay mortgages. They’ll put their kids through college. Then, they eventually want to set up their retirement. In an ideal scenario for them, their children would have already been part of the business and would eventually take over. Owners often want to pass their legacy down.

That narrative is not always possible. Sometimes the children are not interested in the industry or in running a business. They might not be in the position to do so. The owner will end up needing to sell with the hope of passing their nest egg onto their children instead. That’s where we come in. We buy up the business, give the owner their nest egg, and keep building the business.

It can get messy when an owner is selling the business while still employing their children. The owner will tell you their salaries and that they want the children to stay in the business. That’s a tough decision to make as a buyer.

The seller’s children grew up in the business, possibly had their careers handed to them by their parents. The fact that the owner is selling means that there’s a reason the children are not taking over the business. The parents either don’t trust them to run the business or the children have no desire to run the business but still want a job. Consider whether this employee will work for you as diligently as any other self-motivated employee. On top of that, the children of the seller will likely never embrace you as the new owner. They will always go back to their parents for direction. You would be walking into a conflict. That’s a risk.

Most of the time in this situation, you’ll need to have a conversation with the seller where you advocate for not paying for their children’s inevitable subpar work. In the case that the children will stay, you should adjust the purchase price some amount to account for the frustration. You either need to decide--or push the seller to decide--how much they need their children to have a job under you.

After a while, you just kind of ask the seller, "So, you want me to pay for your kids but you won't?" That typically alleviates the problem.