Owning and running a family business can bring you great value, both from a personal and a business perspective. But what happens if the next generation does not wish to take it on?
Having family members serving as key personnel in your business can help deliver a more cohesive team dynamic, compared to non-family run enterprises. This unique level of cohesion is formed from a myriad of factors including continuity of family tradition, strong commitment, loyalty, stability and flexibility on costs and pay. These benefits result in a powerful and personal bond between the family and the business, its employees and its customers. Decisions are geared towards building long term growth in order to provide an asset that can be passed on to future generations. These compelling reasons to develop and grow a family business can however cause complications when deciding that the future success of the business would be best served by selling.
There are a number of circumstances which can trigger a decision to sell a family business. These circumstances can be external or internal in nature. Changing and challenging market forces, such as the advent of new technology, or emerging business models rendering the traditional way of running the business redundant can present compelling external reasons to consider selling.
The most common internal reasons often involve the founder of the business reaching retirement age, or in the case of multi-generational businesses, the realisation that the current generation lacks the sufficient expertise or interest to continue the business in family hands. In such cases it is necessary to look outside the family for a suitable successor.
Preparing your family business to sell for its optimum value
Selling your business offers a means of extracting the value that you have developed in the business over the years which if done correctly can be used to fund a new venture for your children. The key challenge lies in how to value your business in order to achieve the optimum value. There are many ways to value a business which we could discuss at length. However, regardless of which method of valuation is used, the guiding principle is to prepare your business such that it is of value to an outside buyer.
Many features which make a family business of value to those working within it are the antithesis of what represents value to an outside buyer. This is generally because family businesses are characterised by features and qualities that may be irreplaceable or difficult for an outsider buyer to replicate. Prominent examples come in the form of the goodwill and personal bonds developed with customers, suppliers and employees. The business may also be overly reliant on a day-to-day basis on the specific expertise and knowledge of the founder or family.
When determining the value of your family business, seeking objective, professional advice is an essential first step in gauging the position of your business in the context of your industry and wider market. Reaching the outcome of a realistic and fair valuation will involve an assessment of the strengths and weaknesses of your business, with a focus on identifying areas which may require attention in order to maximise the attractiveness of your business.
Succession
The areas which typically require close attention are invariably centred around the issues of succession and business continuity. Family businesses are often dependent on the involvement of the founder, meaning that the business can only function with the owner at the helm. A good buyer is not looking to acquire a job. It is therefore imperative in such cases for the owner to design and implement a workable succession plan, to ensure that the business can function without them.
The key outcome in succession planning is for the owner to ensure that they are not primarily responsible for resolving day-to-day issues. The more time an owner spends in day-to-day activities in the business, the less value it represents to the buyer. If the buyer has to work full time in the business, then he/she will have to pay themselves a salary.
Passing on technical expertise
A closely related issue is where technical expertise resides solely in the hands (and often in the head) of the owner. The solution here is for the owner to pass their technical expertise to the business. This process will require the owner to devote the necessary time and consideration to break down, codify and impart information to other members of staff and may also involve the formality of putting their knowledge in writing through policies or best practice documents.
Consider how a new owner without as much experience or technical know-how as you will run your business. Forming a clear operational structure is also a key element to succession planning. This can be achieved in a number of ways by recruiting or promoting a suitable successor, putting a management structure in place, or as a last resort considering providing on-going consultancy for a period of time, post-acquisition.
By opening up the availability of your business to buyers that do not have the same sector expertise, you will increase the number of potential buyers, and therefore increase the number of offers. It will also pay to develop a hand-over plan to transfer the business relationships to the buyer in an ordered way that will not disrupt your clients and cause them to consider other suppliers.
Are you the salesman for the business?
Another aspect which commonly impedes the smooth transfer of family-owned businesses is where the business revenues and sales processes are dependent on the owner. In order to ensure that the revenues and sales processes are not dependent on you, Delegate the responsibility to others within the business, enabling them to perform the complete sales function from initial enquiry, through bid and quote, to winning the contract.
It is also important to sensitively address the management of longstanding customer relationships that may be dependent on the expertise and personality of the owner. Businesses that depend on the owner to win new sales (or indeed the strong relationship between the owner and existing clients to maintain recurring business) will represent a major risk to buyers. If you do not have a sales process, develop one. Have one full time member of staff attend initial sales meetings with clients and take on your current roles in the process.
Legal considerations and staff retention
Putting formal employee and supplier contracts in place is another key area for consideration. Family businesses are often characterised by informal employee contracts with staff, who may also be family members. Your staff represents a key asset to your business, so the buyer will want to be confident that they will stay with the business after your departure. A good track record of staff retention as well as appropriate contracts go a long way in reassuring the buyer of the ongoing commitment of the staff to the business.
Setting expectations
Each stage of preparing your family business for sale must be based on a reality check on your expectations. The emotional value you attach to the business has a tendency to cloud judgement, leading you to perceive the value of your business at a higher rate than an outside buyer is prepared to pay for the financial return that your business offers. You must be prepared to think realistically, otherwise you simply will not sell the business. Think of your business from the buyer’s point of view, make it easy for them to see how they can make a return on their investment, and you will achieve the optimum value for your business.
The best outcome of a business deal is when both sides win. Helping the buyer make a success of your business will provide a suitable way to achieve this outcome. Always remember that preparation is key to achieving the optimum value and realising a family asset that can be passed on to the next generation without them having to take over the business.
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