Family member still in the business

January 15, 2025

by a searcher from Yale University - School of Management in New York, NY, USA

I am looking at a potential acquisition where the sellers are looking to retire and exit the business but the son is still in the organization as an employee (not an executive role or management role).

The broker mentioned the son does not want to take over the business given the hassle of running a business and have numerous conversations with the seller in the past.

Are there any reservations or concerns I should diligence with this type of scenario if the son is going to remain in the business? Does any one have any positive or negative experiences after completing a similar acquisition in the past?

Thanks!

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

From a lender perspective, having someone key to management still in the business is usually something Banks like to see. However, having worked with numerous other customers over the years that have had this same scenario, you need to be sure how involved the son is and be sure you are aligned with the son and his vision, especially if you are going to be required to give him some sort of employment agreement. So long as you are set up so you have remedies if things do not work between you and him, namely you can separate him from the business and he is not a key component to the business that you can replace, you should be fine. Just remember if you have any on-going relationship you need to maintain with the seller, it could be stressed if something does not go right with the son. Good luck.

Reply by a searcher
from Georgetown University in New York, NY, USA

I've been through this experience personally and my firm specializes in family businesses on buy-side or sell-side.

If you will inherit someone related to the prior owners, you should ensure you fully understand their roles and responsibilities. It's normal that next generation family members may be "overpaid" or simply have a lower threshold for competence to join an organization. I agree with a prior comment that there should be mechanisms to resolve disputes in a way that does not hamstring the business post-closing. Make sure you understand any responsibilities you are inheriting as the successor with regards to the employment contract, and better yet, ensure it is terminated and create a new one at close.

Happy to talk more, feel free to reach out.

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