There’s a mom and pop store that I like to go to when I’m shopping for groceries. If I was simply shopping for the cheapest price, I would go to the megastore where they have the best deals but I like this place instead. The local store was established 40 years ago and has now been passed down from father to son. Its still has that old world feel to it and there is always a meaningful smile at the checkout. The new proprietor really understands what the business is all about. They don’t want the whole city flocking to the shop; just the regular custom of regular customers is good enough for them. This formula has worked for years.
This family loves their store. It has been with them through good times and tough times. It’s the same for the people that we help. Almost all of our clients ask about Internal Perpetuation before ask about selling to a third party. A business is a large part of anyone’s life and it’s difficult to let it go when there could be a chance of keeping it in the family. We often ask a very simple question: Does your son or daughter actually want the business? We’ve talked to people that have said they wanted to sell their business to their family without even talking to the potential new owners about it first!
The reason most sales end in external perpetuation is because of the ability to take all of the risk out of the sale. For your son or daughter to buy the business, they’re going to have to take out a bank loan. Most people are either unable or unwilling to put themselves in that financial position. Alternatively, they could borrow the money from you, the seller. Assuming that obligation is risky for the new owner if the business model changes. If it is risky for them, it is even riskier for the seller who could have received their proceeds at closing.
Different people have different goals and assuming the risks of ownership isn’t for everyone. We ask another question of someone considering an Internal Perpetuation. Your heir has two choices. The first choice is that they could buy a company that is worth $8 million for $6 million since Internal Perpetuations often are done at a discount to a third party sale. The second choice is that the owner could sell the company for $8 million and give $2 million to the legacy. The seller gets the same amount of money in either option. By asking this question, we often find out how the new owner feels about the risk they are undertaking.
Businesses do well when the people running them, care about them. It might be a nice idea to have your family continue on with your insurance agency, but is it really the right thing for them, or even the business?
Sukay & Associates have a track record of taking under-performing agencies and turning them into a much more profitable and marketable commodity. We work with the company’s management to put the agency in a much better financial position. This not only increases the sale price but also the salability. Buyers are a lot more willing to part with their money when they see a product that already works, even if the cost of that success is a higher purchase price.
