Preparing for the Sale of a Family Business

This is the first of a series of blog posts on family businesses.

Preparing for the Sale of a Family Business

When contemplating the potential sale of a family business, there is often a rush to focus on valuation, transaction details, and deal structure. While these elements are important, they  are secondary, or even tertiary. What should come first is thinking through the "why and what" and the consequences of a potential sale. I have discussed this in the estate planning context here. Starting with the “why” and taking the time to think through all the implications is absolutely critical to achieving a successful outcome. By "success" I mean achieving the “what” objectives of the seller in a way that does not destroy the family, the business, or both.

Thinking Like a Philosopher - Taking Your Time

In the Theaetetus, Plato writes that a philosopher is one who takes her time, and then compares philosophers to lawyers, who are always under the pressure of time:[1]

Socrates:  In the leisure spoken of by you, which a freeman can always command: he has his talk, out in peace, and like ourselves, he wanders at will from one subject to another, and from a second to a third, if the fancy takes him he begins again, as we are doing now caring not whether his words are many or few; his only aim is to attain the truth.  But the lawyer is always in a hurry; there is the water of the clepsydra (water clock) driving him on, and not allowing him to expatiate at will: and there is his adversary standing over him, enforcing his rights…Theodorus:  … you truly said we belong to a brotherhood which is free, and are not the servants of the argument; but the argument is our servant, and must wait our leisure.

When contemplating a business sale, this philosophical taking-of-one’s-time is an important discipline to utilize. By doing so, the family will not be the servant of the sale, the sale will be the servant of the family. Also, it will avoid many difficulties later, make decisions easier, and save money as the advisory team grows. Furthermore, the sale of a family business has large psychic and financial implications that simply cannot be fully thought through in a short amount of time. It must be done in a leisurely manner.

Phase One - The Right Questions

It is absolutely critical to begin with a good set of questions. Once the right questions have been identified, they can be thought through and answered. This will create a foundation for all that follows. While each family business is different and will have a unique set of questions, some universal questions include:

• What is the rationale for a potential sale?;
• What are the objectives of a potential sale?;
• How will a sale affect all the businesses stakeholders?;
• What will the financial consequences be for the sellers and other stakeholders?;
• Are all the family members mature enough for a liquidity event?;
• What will the seller’s life consist of after selling the business? (And will they be happy with such a life?)

Answering these questions will likely take six months, and some could continue to be tweaked throughout the process leading up to a sale. The outcome of this initial questioning is a “Why and What Document” that can be shared with other advisors to make sure everyone understands the core rationale and objectives of the business owners. Having these questions clearly articulated, and answered, will save a lot of time and money down the road as additional advisers are added to the team. For instance, certain objectives could eliminate many options that would otherwise require a lot of time and energy to evaluate. Being able to reduce potential avenues will save significant time and money, and streamline the process. Also, a thorough Why and What Document will help when the family’s advisors present different strategies. In such a situation, the family can fall back to the already articulated first principals and evaluate the various strategies in light of their ultimate objectives and desired outcomes.

Phase Two - Preparation

One of the most important aspects will be preparing the family and firm for the sale. Preparing the family will include a number of aspects, including:

• Identification of family issues that must be resolved before moving forward;
• Establishing a timeline for whom to tell about the sale and when, and when to bring in outside advisors;
• Educating the family as to the process;
• Preparing the family to speak with potential buyers doing due diligence, and;
• Evaluation of the post-sale finances of the owners.

Similar work must also be done to prepare the firm for sale, including:

• Getting the books in order. (This will typically include additional focus on the balance sheet.);
• Reviewing all contracts;
• Evaluating all managers and staff;
• Identification of corporate weaknesses;
• Establishing a timeline for telling the employees and implementing any sale incentives;
• Creating a document to share with employees explaining the potential sale, how it will affect them, and what will be asked of them;
• Educating employees on how to speak with potential acquirers doing due diligence, and;
• Drafting a pitch deck to explain the business to potential acquirers.

This process will likely take two years and should include two accounting cycles with the books in a buyer-friendly format. Early on in this phase, additional team members will need to be added, likely including a CPA with transactional experience, a corporate attorney with transactional experience, and a valuation consultant.

Phase Three – Listing and Sale of a Family Business

Officially listing the business for sale is an emotional exercise. Excitement and dread can be present at the same time, or alternate.  It can also be an exhausting gauntlet for owners to run. Answering the same questions to many potential buyers for six to 12 months is a tedious and tiresome process. Everyone has to be prepared for, and committed to, the sale of a family business before it begins. Most people have been through something like this with the sale of a house. However, real estate agents handle most of the heavy lifting in home sales. Owners are not usually grilled over the useful life of every toilet and fixture in the house, or their accounting for capital improvements.In my next post, I will discuss some of the challenges in shifting from a family business to a business family. To access the podcast version of this and all my blog posts, please visit iTunes.