George Malim is a freelance journalist. email@example.com.
There are several routes owners can take to sell off the family business. However, the process is not always as straight-forward as some may think.George Malim outlines the best way to please everyone and get the best price before the seller puts their feet up
Disposal of a family business is the ultimate endgame for family business owners. After years of dedication the major shareholder or managing director might be preparing for retirement and have no family member to pass the business on to. Alternatively, the business may be entering a phase where its family-owned structure cannot continue to support its development. In either case, a disposal is the logical option because it enables the shareholders to withdraw their wealth from the business, giving them the opportunity to re-invest elsewhere.
The first step, according to John Tucker, director of the International Centre for Families in Business at the University of Gloucestershire, is to make a clear strategic decision among the shareholders and family that may be interested in the business. "The decision to dispose can be harder because of the discrepancy between family members working in the business and those not working in it," says Tucker.
Tucker adds that it is critical to go through an exercise examining the options. "We're working with a fifth generation family business that looked at disposal because they couldn't foresee owning it with no family involvement in the management," adds Tucker. "However, the children not involved in the business felt an emotional tug towards it – which was revealed during the process of examining the options. That company now is looking at putting in place a different management system and non-family management."
Tucker also gives the example of a 70-year-old South African business owner who was preparing to sell up and retire with great reluctance. The owner's children did not want to work in the business but his 17-year old grandson's first question during the consultation process was: "Who's going to look after my grandfather's business until I'm ready?"
Once a clear decision has been made where there is clear consensus to dispose of the business, the real work can begin. Advisers warn that owners should not expect to put the for sale sign up on a Friday and be on their yacht sipping champagne by the following Tuesday. Tucker says grooming a family business can take up to five years, while Hugo Haddon-Grant, joint managing director of Cavendish Corporate Finance, which specialises in family business disposals, says anything between two to three years is the norm.
"If you work on the basis that you want to be free of the business in two years' time you would need to give six to nine months to the new buyer, the sale process would take six to nine months and a grooming period of six to nine months would be advisable," says Haddon-Grant. "We're often approached by families who want to sell their business and want to have sold it yesterday, but it's worthwhile spending 12 to 18 months grooming the business. We offer a consultancy service to put in quick wins in six to nine months prior to sale but you do need a lot of time to prepare for a successful sale."
Tucker also warns families not to rush in. "It's not always necessary to make the big total disposal decision," he says. "I've come across situations where family businesses have sold part of a business or an interest. From personal experience I've seen shareholdings of companies like Morrison's, the supermarket chain, going public and the Clarks family selling some shares. However, I've also seen cash transactions at a smaller level that have seen the children of families frozen out of the family business."
The mechanics of a family business disposal are similar to the disposal of a conventional business but the nature of family businesses means that the process can take longer. For instance, financials need to be cleaned up, cash reserves dealt with and 'family assets' owned by the business removed from the balance sheet.
"The thing about family businesses is that they tend to be run for the benefit of the shareholders and not necessarily the Inland Revenue so a lot of profits are stripped out of the business," adds Haddon-Grant. "Quite often if the cash is not stripped out of the business, they're run with profit levels minimised in order to minimise the tax burden. You can value these companies but you need to get into the numbers to get a true understanding. In these cases, sustainable profitability needs to be returned to the balance sheet and that will often involve cleaning up some of the drawings the family have been taking from the business – particularly by members that aren't contributors."
In addition, Haddon-Grant warns that "quasi-family assets" such as helicopters, boats and holiday homes should be separated from the business. Cash balances, which are often substantial in family businesses, should also be addressed. Cash balances seldom receive full value in disposals so owners should look at ways of making sure the cash value is maximised. Aside from these issues there remain the usual 'common sense' issues to be addressed such as general clearing up surrounding any litigation, pension funds, property documentation and ensuring no environmental issues could come up or are covered.
There are specific barriers unique to family businesses. Concerns about the reputation of the business in new ownership and its ethos outside the family colour some vendors' judgements, as do concerns about protecting the workforce. "With a family business sale there are often softer issues to be taken into consideration," adds Haddon-Grant. "Some family business owners just want to maximise price but in other instances it is crucial the management team is looked after and the business goes to a good home. Owners often want the legacy of a life's work to be continued."
Tucker says: "Once you get into the fourth or fifth generation, it gets difficult with the legacy and heritage of a company. There are concerns regarding long-term staff – it's not an easy condition to lay down on any sale that certain employees are guaranteed employment – and it is one that I have seen regularly block a decision being made."
However, there are lot of potential buyers for family-owned businesses. "The private equity community is keen to look at suitable acquisitions. A number of them have had successful fund raisings and are awash with money," says Haddon-Grant. "For larger family businesses, there's always the IPO route or refinancing where the owner can take out some money but still retain an interest," he adds.
Haddon-Grant has spent the last 18 years advising business owners on selling their businesses and urges families to think carefully about their timing. "There are a number of cycles that will affect a business's saleability and the price achieved," he says. "The first cycle to consider is the company's own cycle. If you wait a year, will it be better? The next thing to consider is the industry's cycle. If the cycle is dipping, the perception is that the sector is in decline – even if the company itself is not."
An example of this is that in the late 1980s in the UK, people were desperate to buy estate agents but, by the early 1990s, irrespective of the health of individual businesses, they were unsaleable. Advisers warn that businesses that miss the best time in the cycles for disposal risk having to wait years to make a successful disposal.
"Part of our job is to put steel in the spines of owners in this light," concludes Haddon-Grant. "With our experience of helping more than 300 clients, I think many business owners don't expect the process to be as demanding as it is. Business owners are generally good at running their business but can be naïve about the processes involved with disposal."