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Family Dynamics in Business Valuation

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By Scott S. Miller

For about a month, we had been patiently waiting for our client to provide us with a date and time when it would be convenient to meet with him and his father to discuss the final details of our valuation. On follow-up communications with our client in the interim, meetings were postponed because the father was not able to attend for various reasons. We ultimately received the finalization call, and our client's instructions were: "Let's go ahead and wrap up the report because I don't want you to be drawn-out any further. It has become clear to me that my father is not ready to sell the business."


This assignment began in early January 2014 when I received a phone call from this client to discuss the valuation of the business where he worked, and that his father owns. To maintain confidentiality, the two main characters in this account will be referred to in a first-person generational context – father and son (our client).

The facts and circumstances for this story begin with the father who bought into the business as a partner in the early 1960s, and ultimately acquired the remaining business interests in 1980 from the original founding family (this company has been in place and serving the same community since the 1940s). Father and his wife are in their late 80s, he owns 100% of the outstanding shares and has not been a full-time contributor to the operations of the business for several years (although he still collects a paycheck and stops by a few times during the week to look over paperwork or talk to customers).

Son is in his 50s, reports that he has worked for the business since he was 10, is currently in charge of running day-to-day operations and the business is the only employer he has ever had. Son also has two children who are carrying on the family tradition as full-time employees.

Succession Planning

This scenario is precisely the type of situation that can be aided by a business valuation. When we initially discussed this project, son explained that some years ago, father had informally approached him about buying the business, and father had a price in mind.

The price seemed equitable to son, but for one reason or another they never moved forward with the idea. Last year, the two again discussed what lies ahead for the future of the business, and son received advice to attend a business succession planning seminar. After participating in the seminar, it was clear to son that it was imperative to move forward with a succession plan and obtain an independent opinion of value for the business.

It was relatively easy for us to understand what drove the son's desire to acquire ownership of the business. Some key motivators we identified that are specific to his circumstances include:

  • Son is coming to terms with the fact that his father and mother will not be around forever, and there is uncertainty of what will happen with the business once they eventually pass away.
  • Son has a brother and a sister, neither of whom is, nor has been involved in the business.
  • Once his parents pass on, son doesn't want to suddenly find himself as a 1/3 rd owner with his brother and sister as the result of probating of his parents' estate. He expressed his desire to minimize potential problems, as he described: " I want to avoid any possible stab you in the back, and 1/3 rd is mine and I want money " situations.
  • Son's hope to be the family's second generation owner isn't solely driven by his desire to have control over his job and preserve the business. As mentioned previously, two of his children are already working full-time in the business. He also wants to have the opportunity to transfer the business ownership on to them when they are ready.

The reasons underlying father's unwillingness to move forward with transitioning the business ownership at this time may be much more difficult to identify or understand. The situation becomes even more complicated since it involves family, rather than a "hypothetical buyer and willing seller." Family dynamics can be difficult terrain for anyone to navigate – that's a can of worms that sometimes belies rational understanding.

But not all is lost. Son is sure that he and his father will resume their discussions about the purchase/sale of the business in the near future – and we hope that they do. Whether we are called in to provide additional guidance and explanation about the work we already performed, or asked to produce an updated valuation, we look forward to being of service to this family again in the future.

Over the years, we have had the pleasure to perform valuations of numerous companies, and company interests for ownership transition from one generation to the next. Most of our work has involved transfers from the first generation to the second, and occasionally we see businesses that are being transitioned to third and fourth generations. Which brings up the question – what is the life expectancy for a business? To make a short story endless, the answer to that question begins with: "It depends …"

Although actuarial life tables are not available for the life expectancy of businesses, there have been a handful of statistical studies performed to explore this area of interest. One such study was published by John J. Ward in his book Keeping the Family Business Healthy. Based on Ward's work:

  • 30% of businesses survive through the second generation,
  • 13% survive the third generation, and
  • Only 3% make it to the fourth generation and beyond.

Based on these statistics, our client's desire to continue ownership of the business into his generation (second), and possibly into his children's generation (third) isn't supported by favorable odds. The factors that may contribute to the high attrition among the generations are numerous, complicated by unique facts and circumstances, and beyond the scope of what can be effectively covered in this posting.

With that being said, and based on our experience, we do know that failure to spend time on the development and execution of a succession plan can greatly reduce the chances of a business surviving into the next generation. On the flipside, the probability of a successful transition can be greatly increased when the starting point is effective estate and succession planning.

The professionals at Convergent Capital Appraisers possess in-depth knowledge of the applicable IRS code sections, rulings (including Revenue Ruling 59-60) and court decisions regarding appraisals of all types of closely-held business equities. We are also accustomed to working with business owners and management, attorneys, CPAs and other estate planning professionals throughout the valuation process. Some general use classifications of valuations for businesses, succession planning or business transaction engagements we are regularly involved with include:

  • Gift, estate and tax valuations
  • Merger / acquisition consulting
  • General management planning
  • Buy-sell agreements

If you have questions about how we can be of service to you, please give us a call or complete our on-line contact form. We would be glad to discuss your particular situation with you, and work with you and your advisory group to help you achieve your particular estate, succession or business transaction planning objectives.

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