Small business ownership is a family affair. As a 2016 BizBuySell survey of small business sellers revealed, 55 percent of respondents had a parent or grandparent who also ran a business. Often, ownership of these small businesses stays in the family. But what happens if you’re an interested buyer who isn’t a family member?
For business purchasers, family businesses can be a lucrative buy. First, they tend to enjoy greater financial returns: according to research from the Conway Center for Family Business, family businesses in the S&P 500 earn 6.65 percent more ROI their non-family-owned counterparts. In addition, family enterprises are positively associated with longevity; nearly one-third last into the second generation of family ownership.
But purchasing a family business as a non-family member presents unique challenges to the buyer. After all, a family business’ reputation and success is largely tied to the family behind it. As a 2016 PwC survey found, what most sets family businesses apart from non-family organizations is a stronger culture and set of values. But when a family business changes hands to a non-family owner, it risks losing the elements that employees and loyal customers value the most. Here are some key steps purchasers should take as they approach a family business purchase:
- Get to know the family: As a family-owned business grows, it develops its own distinct culture, values and ethos. Together, these elements form a business identity – and more than any other type of business, family-run organizations are driven by a powerful sense of identity. Therefore, it’s imperative for prospective buyers outside of the family to absorb the unique identity of the business they’re considering purchasing – and that means getting to know the family.
Far from being a formality, developing a strong relationship with the members of a family business is an indispensable part of the buying process for non-family buyers. In addition to providing key insights about how the business functions – which can help guide the buyer- this relationship-building also instills confidence in the family owners that they’re selling to the right person. During these discussions, consider asking if the current owner would be willing to stay on as a post-sale consultant for a set period of time after the sale. This often helps ensure a more successful transition of ownership.
- Get to know the customers: A small business is only as successful as its customers are happy. For patrons who frequent family businesses, their satisfaction may be largely tied to their trust of the family behind it. And if that family sells the business, that could jeopardize the earned loyalty of their customer base. However, non-family buyers can preempt this decline by getting to know a family business’ customers – and earning their trust – sometimes even before purchasing a business. This familiarization process will be much easier for buyers who’ve made an effort to get to know the family owners first.
See if the current owner can make personal introductions to key customers and help reassure them that they will continue to receive the same level of attention and service. Once loyal patrons recognize that a non-family purchaser has respect for – and the support of – the family, they’ll be more likely to extend their loyalty to new ownership.
- Preserve what’s worked: As an outside buyer of a family business, you’ll naturally bring your own energy and ideas to running it. But as a leader, it’s also your responsibility to identify the successful elements of the family business that were established over the years, and ensure those characterizing features remain intact. Determining these features will come out of conversations with family owners and their loyal customers.
Preserving the reputation and success of a family business under new non-family ownership is a challenge for any purchaser. But by following these steps, non-family buyers can position themselves for success when taking the reins.