Why we sold our family business

After a 28-year career with the federal government, I retired in 1985 with an eye toward starting a second career. Within a few months, I had started a company—Diplomatic Language Services in Arlington, Va.—to provide foreign-language services to private industry and federal government agencies.

My original objectives for my company were modest. I used to joke that the main reason I started the company after retirement from the federal government in my early 50s was “to keep me out of the pool halls.” I had no business experience and grossly underestimated the potential market (which, of course, was far better than overestimating it).

The company’s success was far beyond any I could have imagined. I found the rapid growth to be energizing and invigorating. We worked many weekends around the clock to be ready for new business the following week.

Although I had no thought of developing a family business, family members began joining the company. In 1988, my wife and oldest son were the first to come on board as vice president and controller, respectively. At one time or another, the company employed three of our four sons and two of our four daughters-in-law as well as my wife and me. We were proud of what we accomplished both as a family and as a family business.

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The company continued to grow and eventually achieved an annual revenue exceeding $6 million. There came a time, however, when the business began to be a little less fun. An increase in competition and pressure on both prices and expenses began to take their toll on my energy level and enthusiasm. By 2000, I had turned 65 years old and had been in business for 15 years. It seemed like a good time to begin seriously thinking about retirement. In hindsight, I should have developed an exit plan when I started the company, but at the time it didn’t seem as important as continuing to grow the business and serving the clients.

I began discussing our options with my wife and our oldest son, who by this time had become chief financial officer and was the logical choice to run the company after my retirement. We began to examine the factors that would help us make the decision as to whether to keep the family business or sell it to an outside buyer. We weighed each factor to determine whether it made the case for selling the company or keeping it in the family.

•  Competitive environment and market potential. Because of our good reputation and strong quality control, we had been able to hold on to our client base in spite of increased competition. However, as a result of revenue growth, we had “graduated” out of our “small business set-aside” eligibility to compete for government contracts, which could conceivably make it harder to compete in the future. Our marketing efforts continued to be solid but lacked new ideas and new targets. Sell or keep? Sell!

•  Successor experience and entrepreneurial spirit. Our oldest son, John—the CFO—had been with the company for 12 years. He had a master’s degree in international business and knew the company inside and out. His skill in pricing had helped us win more than $50 million in competitive government contracts. He consistently provided the financial information and advice necessary to grow the company responsibly, while minimizing risk. He ran the company when I was away on travel and was respected by the key managers, with whom he worked smoothly. I had assigned him the additional duties of chief operating officer, to enable him to develop broader managerial experience. If we decided to keep the business in the family, he was the logical choice to be the CEO. But as we discussed the possibilities, he expressed concern about going it alone in an increasingly competitive environment. We had worked well as a team. My talent for generating entrepreneurial ideas and my technical language services expertise complemented his analytical, management and systems expertise. Yet our success had come in the small-business market. In the far more competitive open market, he felt it would be better for the long-term success of the company to inject new entrepreneurial ideas and spirit from the outside. Sell or keep? Sell!

•  Ability of the company to meet our financial requirements in retirement. Although we had developed a personal retirement plan with the help of our CPA, we were not always able to fund it at the maximum level. As a result, we did not feel comfortable that we had enough in savings or investments to retire unless we continued to draw on the financial resources of the company. We were concerned that the loss of my services to the company, combined with our need to draw some sort of pension from company revenues, might create too great a strain on corporate finances. If the company fell on hard times in the future or, in a worst-case scenario, failed, our plans for a comfortable retirement might be jeopardized. Sell or keep? Sell!

•  Resources for growing the company. I started the company with a $50,000 home equity loan. As the company prospered, it needed additional funds for expansion, and so I made personal loans to the company. After a few years, our CPA recommended that we seek a bank line of credit and repay my personal loans. The bank approved an initial amount of $100,000; eventually, the line of credit was increased to $600,000. At the time we began looking at our options for the company’s future, we owed less than $100,000 on the line of credit because of skillful management by my son John. However, the line of credit was secured by our personal financial statement and personal guarantee. If I walked away from the company, who would provide the personal guarantee? My son was not in a position to do so, and I was afraid of the risk of continued financial exposure after retirement. Sell or keep? Sell!

•  Current vs. future value. In hindsight, we realized the company had reached its highest value a few years earlier, when we were awarded a five-year government contract with a new client in excess of $5 million. With that contract on its last legs, the company was still valuable, but not quite as much as previously. On the other hand, the estimated sale price of the company would be sufficient to meet our financial requirements in retirement, as well enable us to share some of the sale proceeds with our children. If we decided to retire and keep the business in the family, we could not safely predict the future value of the business should a decision to sell in the future become advisable or inevitable. Sell or keep? Sell!

•  Continued employment for family members. Although my wife, one of our sons and one daughter-in-law had left the company, two sons and one daughter-in-law were still working there. Any sale of the company would have the potential to jeopardize their long-term employment prospects at the company. Sell or keep? Keep!

After examining these factors (five in favor of selling the business vs. only one in favor of keeping it), we concluded that it was in our best interests to sell the company to an outside buyer. We hoped to sell the business to someone who had the entrepreneurial spirit, resources and marketing savvy to grow the company beyond where we had been able to take it, while maintaining the business as a hospitable place for family members to continue realizing their career goals if they so desired. As it turned out, all family members were gone from the company within three years of the sale. The daughter-in-law left voluntarily within six months to accept another position, our CFO son was terminated within a year so the new owner could bring in his own person and the other son’s marketing position was abolished three years after we sold. Both sons received generous severance packages and have gone on to find satisfying employment with other companies.

With the assistance of a certified business intermediary, we listed the company for sale and within six months had sold to the buyer who offered the most attractive price and terms. Moreover, with the help of a good financial planner, we were able to develop a retirement and estate plan that, together with long-term-care insurance, would provide us with income in retirement and at the same time preserve our estate (including the invested proceeds of sale) for our heirs.

Lessons learned

When we began the analytical process, we had already come to grips with the emotional issues. Although we recognized that an enterprise that we had all worked so hard together to nurture would be forever lost to us, our growing dissatisfaction had helped us to prepare psychologically for the decision to sell, if that was where the analysis took us. We had had a good run, but were prepared to move on with our lives.

Once we had dealt with the emotional issue, we found the analytical process to be an objective—in fact, rather mechanical—exercise with the factors making the decision for us. Based on our experience, here is my advice to other business owners.

1. Manage your business so you always have the option to either sell it or keep it in the family. Examine the “state of the company” every year or so to determine whether the firm is still viable as a family business. If not, sell while you still have a valuable business and are under no pressure to sell. That is, don’t wait until you’re 65!

2. Develop a plan for retirement, and fund it faithfully, so you are not forced to sell to ensure your financial future.

3. Do your best to ensure that family employees have the necessary skills and experience to run the company. In addition, make sure they have marketable skills, in case a decision to sell results in the need to seek other employment.

4. Don’t wait until you suffer business reversals or employee morale problems that can hurt the potential sale price.

5. If you decide to keep the business in the family, take justifiable pride and satisfaction in what you have accomplished.

Impressed with the professionalism and success of the business intermediaries in finding qualified buyers and negotiating an advantageous sale of his company, John Ratliff joined the firm—CO Group Inc. of Reston, Va.—in 2002 as director of business development. He can be contacted at john@cogroupinc.com.

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