Campden FB conducted an online "selling the family business" survey to get the views of families from all over the world on this crucial topic.
Analysis is provided by Jonathan Pellegrin below. To view a full breakdown of the results click here.
In the face of a ruthless, unforgiving business environment, considering the possibility of selling the family company can still have negative overtones of disloyalty, disrespect for the family legacy and tradition, and even failure. Some families feel threatened, believing that the sale of their family business can mean the end of their family, while others have found that selling can mean the beginning of an exciting new era. However, every family business leader who is committed to responsible stewardship must continually scan the horizon for developments that can impair or potentially destroy the value of their family companies.
The results from Campden FB's selling the family business survey are in some cases contradictory. For example, 52% of the respondents have planned for the possibility of selling but 48% have not. However, nearly all have identified their preferred exit option: trade sale (31.3%); sale to an institution such as private equity (25.2%); IPO (19.1%); management buyout (16.5%); liquidation (7.8%).
Planning with regard to selling for most respondents has been limited to hypothetical discussions (71.7%), or response to an offer (20%). Only 8.3% have engaged in formal planning for the future.
Nearly half of the respondents have been approached by a prospective buyer and less than 30% indicated that a sale is likely or possible.
The principal reason for selling the business was equally divided between "receiving an offer you can't refuse" and "no other family members willing/able to take over." And the biggest single drawback to a sale was "getting the right price." Other reasons for not selling were divided among: "family issues"; "desire to create a legacy"; and "desire to give the next generation more than just money". Survey results did not differ either by geographic location of the companies or age of the companies.
What did become clear from analysing the results was the lack of a process – a template or structure – for approaching the "elephant in the room" and exploring the topic of selling in an informed, objective, and non-threatening way.
Therefore, I will briefly summarise some of the results from my decade-long research on selling family companies. At the outset, it's important to understand that exploring the topic of selling the family business does not mean the company must be sold. Furthermore, being in a state of readiness to sell actually enhances the value of a company.
Ownership of every family business will change over time. Mortality dictates it. Trusts designed to control future ownership outcomes are no longer reliable instruments and have been easily broken in the name of "protecting assets." When there are no longer interested, committed and competent family members to carry on effective leadership and responsible ownership of the firm, the only sagacious alternative is to sell the firm. Serious dialogue and consideration of future ownership options should be a critical and ongoing component of strategic planning for every family business.
My previous research has revealed that there is never a single reason for selling, but rather a confluence of many factors. All of them can be categorised as business, family or ownership issues. The reasons for selling identified in this survey are as follows:
- Industry consolidation.
- Too much paperwork, too many restrictions.
- Needing capital to grow and compete.
- No longer a viable business.
- No other family members willing/able to take over.
- Problems among family members.
- Frustration about the family (eg, conflicts of interest, lack of trust, emotional and false allegations).
- Generational rift in the family.
- Lack of family governance.
- Personal liquidity issues.
- Desire to do something new.
- Receiving an offer you can't refuse.
- Individuality and personal planning of shareholders.
- Mitigating risk.
Thirty percent of survey respondents cited "getting the right price" as a drawback for selling. Owners of family companies who formally explore the possibility of selling are often amazed at the value of their companies in the marketplace. Families traditionally view their companies as an extension of the founder's craft – "it's what we do" rather than as a high value asset that can be sold in the marketplace.
Professional investment bankers, accounting firms and financial advisors can provide reasonably accurate company valuations and can provide creative ideas for maximising the price of the company in a sale.
There are many ways value can be enhanced. Two important ones are properly positioning the company and carefully selecting the optimum prospective buyers. Experienced professional advisors can be extraordinarily helpful in this process.
After studying hundreds of companies that have evaluated whether or not to sell, a pattern emerged that has been diagrammed into a process families can follow. There are four stages in selling family companies:
- Post-sale aftershocks to the business, the family and the owners.
Understanding the elements of each stage can profoundly affect the outcome of whether the company is sold or not.
The exploration phase involves establishing a realistic market value for the company and thoroughly investigating all of the business issues, family issues and ownership issues that could influence the decision to either sell or keep the family company. In addition, all of the selling alternatives, ownership change strategies (ESOPs, recapitalisations and generational ownership transitions) and other liquidity possibilities should be studied in this stage.
Making the decision involves evaluating and weighing the importance of all the data points discovered in the exploration phase and deciding whether to sell or not. It also includes the process of reaching consensus among the controlling shareholders and the stakeholders they want to involve in the decision.
Executing the decision to sell involves the mechanics of preparing and taking the company to market in order to achieve the desired outcome. It is a complicated, technical and time consuming process. Others who have experience going through it can be valuable resources in sharing their knowledge about the steps and obstacles.
Typically, acquiring companies have far more experience in the merger and acquisition business than sellers. Therefore, it's not a level playing field for families having one big opportunity to sell their most valuable asset. The most successful outcomes have resulted when the selling family – particularly the family business leaders – play an active role working with the professional advisors in the sale of their companies. The family business leaders are able to provide insight into the nuances of the business that can add tremendous value in a sale.
Post-sale aftershocks can be severe. It's best to be able to anticipate and understand what is likely to happen after selling to the company and employees, to family members – both those involved in the company and those who are not – and to the owners who have had significant illiquid wealth and who now are faced with a different set of stewardship issues for their new liquidity.
Family members who have gone through the experience themselves find it cathartic to share their experience with others. Anyone considering the possibility should not be shy or reticent about reaching out to others to learn about everything involved with selling their companies. And it's best to do this exploration at the earliest time possible – before becoming enmeshed in the exigencies of consummating a sale.
Remember, families have one big shot – one company to sell – most often the family's largest single asset. It's never too early to start learning, understanding and preparing. It can mean the difference between a successful outcome or a botched deal.
Click here to read LiquidNations, a review of family business liquidity events from around the world.