The Legal Challenges of Selling a Family-Owned Business

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So, you’ve decided it’s time to sell your family business and start a new chapter for you and your family. You must understand that this process is a complex and emotionally charged one.

The intertwining of family dynamics, personal relationships, and the legacy built over generations adds layers of complexity that require careful consideration. It’s not uncommon for family business owners to have invested their capital, time, energy, and even their identity into the company. Letting go can be an emotional rollercoaster.

Furthermore, certain legal challenges need to be addressed with careful planning and caution to avoid severing family relationships, the M&A process, and more. What are these legal challenges and how do you tackle them?

What Exactly is a Family-Owned Business?

When we talk about a family-owned business, we’re referring to a company where most of the management and ownership are held by members of a single family or a small group of relatives. These businesses can be small local operations or large multinational corporations in various industries.

What differentiates family-owned businesses from other types of companies is the combination of family relationships and business operations. Family members often partake in running the business and making important decisions.

The family business is often beyond just making money. It prioritizes preserving the family’s legacy, providing employment opportunities for family members, and maintaining a positive reputation in their community. These can further make it harder to sell.

What Common Legal Issues Arise When Selling a Family Business?

Below are some of the legal issues to expect from selling a family business:

1. Ownership, Decision-Making, and Control

In some cases, family businesses may have multiple owners, including active and passive shareholders. Disputes can arise over the division of shares, who makes business decisions, and which family members can be involved in the business.

For example, family members may disagree when some family members want to sell the business while others want to continue its operations. These disputes can be resolved through legal agreements like shareholder agreements or buy-sell agreements, to outline the rights and responsibilities of each family member.

2. Succession Planning

Planning to transfer leadership and ownership to the next generation is a critical aspect of selling a family business. Determining who will take over the business and how the transition will occur can be complex.

Issues can arise when multiple family members have different aspirations or lack clarity regarding roles and responsibilities.

The Campbell Soup Company, a well-known family-owned business, experienced a significant legal issue during its sale in 2011. In this case, the descendants of the company’s founder, John Dorrance, held a significant portion of the shares.

However, some family members disagreed with the decision to sell the business. The dissenting family members filed a lawsuit against the company. The legal dispute highlighted the challenges of balancing the interests of different family members.

3. Valuation and Financial Matters

Valuation can be complex, involving tangible assets, intangible assets, historical financial performance, and future earnings potential. Disputes can arise when family members aren’t aligned on the value of the business, affecting negotiations and potential buyer interest.

4. Emotional Considerations

Selling a family business can involve emotional attachments and sensitive family dynamics. There may be personal relationships, family traditions, or emotional ties associated with the business that may not be immediately apparent or documented.

Proper due diligence and disclosure practices should address these emotional considerations to provide a comprehensive understanding of the business to the buyer and mitigate potential legal risks stemming from undisclosed emotional factors.

5. Informal Business Practices

Family businesses may have informal or undocumented business practices, operating agreements, or understandings that have developed over time within the family. These informal arrangements can impact the business’s operations, financials, or legal obligations.

Running a family business with this informal approach may work but when selling it, the buyer has to be fed all the details, which may be difficult to find.

6. Employment and Employee Contracts

Ensuring compliance with employment laws, addressing employee concerns, and managing potential workforce reductions or transfers are important considerations. when selling a family business.

If a family-owned manufacturing company is sold, the acquiring company must comply with labor laws, including employee rights and possible redundancy obligations.

Also, family members may make up part of the workforce, and selling the company could potentially lead to the unemployment of some family members and relatives. This can make it even more difficult to conclude the sale.

7. Tax Considerations

Tax planning is crucial to minimize tax liabilities and maximize the after-tax proceeds from the sale. Complexities can arise when dealing with capital gains tax, estate tax, and potential tax benefits.

Valuating assets, determining adjusted cost basis, allocating purchase price, and estate tax planning can be challenging in a family business sale because of a lack of clear documentation, unique characteristics of non-marketable assets, and difficulties in determining fair market value.

These challenges can make it difficult to sell the company but with the help of a financial advisor and a specialized team of attorneys, you can seamlessly scale through it.

How to Deal With these Legal Challenges and Reach Agreement

Family-owned businesses require a lot of due diligence, patience, and a proactive estate plan to sell. Whether it’s a small business or a multinational venture, you’ll need to follow these steps to make it easy.

1. Engage Professional Advisors

You must understand that you can’t do it alone. You need the assistance of experienced attorneys, accountants, and business valuation experts to safeguard the interests of the family and shareholders. These professionals can guide you, identify issues that can lead to legal disputes, and help formulate strategies to address them.

2. Conduct Comprehensive Due Diligence

Conduct a thorough due diligence process to identify and disclose all relevant information about the business. This includes financial records, family business assets, contracts, intellectual property, regulatory compliance, and any potential legal liabilities.

3. Negotiate Clear Terms and Agreements

Clearly define the terms of the sale, including the purchase price, payment structure, and any contingencies or warranties. Address specific legal issues related to intellectual property, contracts, and regulatory compliance. Negotiate in good faith, considering the interests of all parties involved, and seek the help of legal advisors.

4. Address Family Dynamics

Family relationships and emotions can complicate negotiations. You must establish open and honest communication channels among family members and consider involving a neutral third party, such as a mediator or family business consultant, to facilitate discussions and help manage conflicts.

Maintain family harmony while finding mutually beneficial solutions.

5. Document the Agreement

Once you reach an agreement, document it in a legally binding contract. Ensure that all terms and conditions are clearly stated, and both parties fully understand and agree to them. To ensure the contract agreement is enforceable and irrevocable, have it reviewed and approved by legal counsel representing all parties involved.

6. Seek Dispute Resolution Mechanisms

Include dispute resolution mechanisms like mediation or arbitration clauses in the agreement. These mechanisms provide a structured process for resolving any future disagreements or disputes that may arise during or after the sale. They can help avoid lengthy and costly litigation while preserving family relationships.

7. Comply with Legal Requirements

Adhere to all legal requirements, including regulatory filings, approvals, and transfer of assets following applicable laws. Non-compliance can lead to legal complications and potential disputes.

Understand that every family business sale is unique, and the specific legal challenges may vary but can be tackled with the right help.

Different Types of Family Businesses and How to Handle the Sale

Different types of family businesses may require specific considerations and approaches when it comes to selling and handling the legal challenges involved:

  • Sole Proprietorships: When selling a sole proprietorship, the focus is on transferring ownership of the assets and liabilities.
  • Limited Partnerships: Selling a partnership requires addressing the terms outlined in the partnership agreement, including buyout provisions, profit sharing, and distribution of assets.
  • Corporations: Family-owned corporations have a more complex structure with shares owned by family members. Selling a family-owned corporation involves considering shareholder agreements, board approvals, and compliance with corporate governance regulations.
  • Family Trusts: Selling a family business held in a trust requires reviewing the trust agreement, trustee responsibilities, and potential tax implications.
  • Succession Planning: Legal considerations may involve drafting buy-sell agreements, determining the roles of family members, and addressing potential conflicts among family members.
  • Limited Liability Companies (LLCs): When selling an LLC, legal considerations may include reviewing the operating agreement, which outlines the rights and responsibilities of the members, and any restrictions on the transfer of ownership interests.

Ultimately, the main difference between selling a family owned business and a non-family business lies in the ownership structure and potential emotional dynamics.

Do You Need Help Selling Your Family-Owned Business with Ease?

Are you seeking a smooth sale for your family-owned business? Look no further than Calkins Law Firm, a trusted business law firm dedicated to assisting businesses with M&A deals across industries.

With our expertise in corporate law, we prioritize safeguarding the interests of family members, shareholders, trade secrets, intellectual property, and more. Let’s guide you through selling your business while protecting your rights.

Contact us today for professional assistance tailored to your unique needs.