Most business owners start their companies to take care of their family. And a good number of them employ family members in the business. I’ve seen all kinds of models, and any arrangement can work. But when it’s time to consider selling, there are issues a seller must consider before a buyer will be willing to make an offer.
Spouses are often valuable as employees, and it’s not uncommon to see them responsible for running the entire office. When I work with a seller, I’ll help to evaluate whether the spouse’s duties and salary make sense in the current market. A buyer will need to replace the spouse’s labor, and they will calculate the cost of that based on fair market value.
A spouse who is paid exorbitantly for the work she does will need to have her salary normalized before we can estimate the true Seller’s Discretionary Earnings (SDE.) Some owners want to include a spouse’s salary as an add-back, but a new owner will have to invest in a new hire, so we’ll have to agree on how much it will cost to replace the work the spouse is doing. That means identifying each business function she performs and how many hours a week the work takes.
Likewise, if a spouse (or owner) has been paid far below fair market value, we’ll need to normalize the salary so the new owner can get a clear picture of what the labor costs will be. When I see a family member’s salary that is far too low, I recommend the owner normalize it even if selling the company is a long way off. As an owner, you’re jeopardizing the family member’s future Social Security pay (which is based on earnings throughout their lifetime) and you’re raising a red flag with the IRS.
The same goes for family members who might be in sales or out in the field as technicians. They’ll have to make decisions about whether they want to work for a new owner, and if so, whether they’re willing to work for fair market wages. In some cases I’ve seen, it has been a major adjustment on both fronts.
As a broker, I advise owners to discuss these issues with family well in advance of putting the company on the market. As soon as everyone has agreed to the plan, we can identify the work being done, create professional and accurate job descriptions, and normalize pay so that when a buyer does his due diligence, he will have a true understanding of what his labor costs will be.
Anything an owner can do to reduce risk and uncertainty makes a sale more likely and a deal more profitable.
About the author: Patrick Lange
Patrick Lange is an experienced HVAC-specific business broker with Business Modification Group based in Horseshoe Beach, Florida. He has a unique background in financial planning and has even owned an HVAC business himself. This makes him well-suited to working with some of the most successful HVAC business owners in the country. Specializing in companies with 1-10 million dollars in revenue, he maintains a network of buyers and sellers in the industry. He sells a record number of HVAC businesses every year and is currently the President of the Business Brokers of Florida (North Florida District.)
