In recent posts, I sounded an alert about the psychological challenges of selling a family business. It’s hard to part with your “business baby” that you gave birth to and raised since infancy. To improve the odds to making it to closing, Denise Logan cautions to plan for not only the transaction but also the transition.
The family needs to recognize how day-to-day life will feel after selling their company. It will likely feel very different, not only for those who work in the business but even for those who don’t. As author Paul Sullivan describes in “What’s Left After a Family Business Is Sold?” (New York Times, Aug. 9, 2019), “A company often holds families together by giving members a shared identity and conferring a status in the community established by previous generations. Without the company, the family’s perception of itself and its purpose can change, and it is often something that members are not prepared for.”
As a prime example, Sullivan tells the story of the Malt-O-Meal family who sold for $1.15 billion to Post Cereal. John Brooks’ grandfather started the cereal business in 1919, and it gradually grew to be the fourth-largest cereal maker in the U.S. Even four years after selling, Brooks “still felt a void in his life. Since the sale, the three branches of the family have gone their own ways, Mr. Brooks said. They are no longer bound by a company or annual meetings or feel the pride of going through the cereal plants around Minneapolis.”
Aside from the void, family members also have to deal with pressure when a high-dollar purchase price becomes public. Old friends may feel intimidated and treat you differently. New “friends” emerge. Who can you trust? Sullivan describes the awkwardness Sabrina Merage Naim felt when her father and uncle sold Chef America, the maker of Hot Pockets, to Nestlé for $2.6 billion. At the time, Naim was in high school. Naim said that at school, once people saw what the business sold for, friends said, “Oh my, you guys have money.”
Here are tips to help families adjust to life after selling a business:
- Instead of passively investing the proceeds, establish a family office to actively manage the family’s investments, philanthropy, and shared family experiences. Intentionally engage in planned activities to enrich the family. A thoughtfully structured family office can help provide “glue” that the shared business used to provide.
- Focus more on shared family values than on shared money. Ideally, that process starts long before the sale. Per Sullivan, “agreeing on family values takes time. But done right, those values can become a substitute for the company.” He refers to the Deary family who sold Great Lakes Caring Home Health and Hospice: “But years before the sale, the family had been formulating a plan for its wealth that focused on family values but also held the members accountable. A family scorecard, for example, tracks their progress on 40 items that the family has deemed important, including working hard, investing wisely, and protecting its legacy.”
- To guard against dissipation of the wealth by high-living heirs (falling victim to the proverb “shirtsleeves to shirtsleeves in three generations”), recognize that passive investment returns rarely match those of a growing business. Brooks urges his Malt-O-Meal heirs to “withdraw no more than one percent a year of his share—still a large amount of money—so that the assets could continue to grow the way his family’s business did.” For future generations to adhere to such a policy requires regular family meetings to educate heirs on investing, family values, family heritage, and the purpose of the wealth. Getting “buy in” from heirs is critical.
- Join a peer group of similarly situated colleagues. I am actively involved in such a group called TIGER 21. Attending meetings with like-minded peers in a confidential setting allows you to experience lifelong learning, share concerns, and get candid feedback. For me, TIGER 21 serves as my personal Board of Directors. Such a group can help business sellers adjust to life after a liquidity event.
If selling a business is in your family’s future, estate planning advisors can help you plan for all the post-sale challenges. The earlier you start, the better.
Marvin E. Blum
Marvin Blum cites the Malt-O-Meal family as an example of the challenges a family faces after selling a business, offering tips to help such a family adjust.