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Tips on Selling a Family Business to Family Employees

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It is not unusual during the sale process to receive an expression of interest from a group of key employees, including family members. Indeed, the owner may, through feelings of family loyalty and camaraderie, prefer that his or her key employees, particularly other family members, are the buyer, even when they are not necessarily the highest bidder.

The primary difficulty in selling to key employees (whether family or not) is that they usually lack the capital and require the owner to finance them. Moreover, once the owner's key employees become active bidders, they will not necessarily be as cooperative with other potential buyers who are willing to pay a higher price and do not need the owner to finance them.

There are three major problems in selling the business to other family members:

1. Agreeing upon a fair purchase price.

2. Financing the payment of that purchase price if the other family member does not have cash.

3. Negotiating what warranties and representations, if any, will be made by the seller.

It is typical for the buying family members to want financing from the selling family members if they do not have sufficient cash to close the transaction. In dealing with a request for financing, typically in the form of a purchaser's note, the selling family members should obtain the same protections they would receive if they were providing financing to a non-family member. These protections include the following:

1. Collateral for the purchase price note, which should preferably include, at a minimum, any stock or other equity that is sold and preferably a lien on the business assets that is possibly subordinate to any bank financing.

2. Personal guarantees by the purchaser and its equity-holders and their spouses.

It is also important that the collateral not be released until the seller has been completely released from all personal guarantees with respect to the business that the seller has given before the sale closing.

These safeguards are important to protect the seller from any subsequent failure by the family member buyer to pay the purchase price note and any failure to have the seller released from any personal guarantees that were given with respect to the business.

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