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Danny Feltham advises publicly traded and privately held companies on a broad range of business issues, including securities offerings, mergers and acquisitions, private equity and venture capital transactions, corporate reorganizations, financing transactions, and general corporate matters. View articles by Danny

Transitions in the Family Business, Part III: A Successful Sale This post is Part III in a three-part series summarizing and exploring Transitions in the Family Business: A Conversation with Family Business Owners and Leaders, a recent event for family-owned-business leaders that Bradley’s Family Business Advocates team co-hosted with Warren Averett. The event consisted of three panel discussions: Transitioning to the Next Generation, Transitioning to Nonfamily Executive Management, and Transitioning to a New Owner. See Part I of this series on Transitioning to the Next Generation, and Part II on Transitioning to Nonfamily Executive Management.

This post highlights the third and final panel’s discussion on Transitioning to a New Owner. In this panel, our speakers discuss their families’ experiences in selling their businesses. Selling a family-owned business is at the same time a complex business decision and a complex emotional decision. Depending on how ownership and control of the business are held within the family, realizing the rewards of a multigenerational effort through a sale will likely require the approval of multiple family members. Any number of factors may play a role in a family’s decision to sell its business — a new generation may be unavailable to take over, the family may want to pursue a new or different venture, or an offer may be too good to refuse.

Whatever the motivating factor, selling a business, especially a family-owned business, is almost always a once-in-a-lifetime experience. What may have taken several generations to build can easily be squandered in a bungled sales process. For this reason, families should engage competent advisors as soon as possible. A typical transaction requires input from a transactional lawyer, investment banker and accountant, among others. This team should add value by working together to structure a deal that accomplishes the family’s goals, whether that is protecting the family’s legacy, maximizing sales proceeds, facilitating a tax-efficient transfer, or limiting the family’s post-closing liabilities. When the time comes, experienced advisors help families analyze competing offers, which can include comparing different kinds of buyers (e.g., private equity versus strategic buyers) or different types of considerations (e.g., cash versus shares of the buyer’s equity).

Sellers have a natural tendency to underestimate the time and resources that will be required to successfully close a transaction. Although the due diligence required for every transaction varies, with few exceptions, buyers require a thorough evaluation of the seller and the seller’s business prior to signing on the dotted line and wiring funds. Throughout this process, families are challenged to maintain their business’ value, while negotiating and executing a handoff to the new owner. Deal fatigue is a serious threat not only to the proposed transaction, but also to a family’s existing business operations. A terminated sales process may disrupt existing relationships with customers and suppliers, open the door for competitors, and frustrate future opportunities to sell the business. Families aware of these challenges at the outset are better able to prepare for them as they may arise.

 

For related discussions, see ESOPs: An Alternative Exit Strategy for Family-Owned Business, a post on using an ESOP transaction as alternative to the traditional sales process, and Should You Hire An Investment Banker To Sell Your Family-Owned Business?, a post on the benefits of engaging an investment banker.

Transitions in the Family Business, Part II: An Outside PerspectiveThis post is Part II in a three-part series summarizing and exploring Transitions in the Family Business: A Conversation with Family Business Owners and Leaders, a recent event for family-owned-business leaders that Bradley’s Family Business Advocates team co-hosted with Warren Averett. The event consisted of three panel discussions: Transitioning to the Next Generation, Transitioning to Nonfamily Executive Management, and Transitioning to a New Owner. See Part I of this series on Transitioning to the Next Generation.

This post highlights the second panel’s discussion on Transitioning to Nonfamily Executive Management. In our second panel, each of our speakers had a role in a family-owned business that successfully transitioned to nonfamily management.

An initial challenge these businesses face is to identify a manager the family trusts to write their business’ next chapter while maintaining the family’s legacy. Some families feel most comfortable looking to their existing relationships with employees and service providers when transitioning to new leadership. One of our panelists discussed his business’ transition of managerial control to a long-time outside advisor. In this case, the family’s business was placed on a firm foundation with an advisor who had worked for decades with the family in connection with their business and personal affairs. Here, the “trusted advisor” became the trusted leader.

Another panelist discussed his family’s nationwide search for a new manager that involved interviewing numerous candidates and resulted in the business hiring a true outsider as its chief financial officer. This solution uniquely addressed the family’s need for a fresh perspective while also adding a veteran administrator with significant industry experience to help manage the business’ rapid growth. Ultimately, the family was able to rely not only on the candidate’s proven track record at a large public company but also on the confidence the family gained from an extended search and interview process.

After gaining the family’s trust, nonfamily members face unique challenges in being integrated into the day-to-day operations of a family-owned business. One panelist cautioned new managers from immediately implementing disruptive changes to the business. In a closely held family business, new managers must balance the benefits of such changes with the risk of alienating existing employees (and, perhaps, the family owners).

On the other hand, new managers must establish their authority. There is no one way to maintain this delicate balance, but consistent communication and engagement by the family, the new management and other stakeholders is crucial. New managers need both the unambiguous support of the family and the latitude to manage the business.

Stay tuned for our next post addressing the third panel’s discussion on Transitioning the Family Business to a New Owner.

Business man giving a presentationMany family-owned businesses are organized as corporations to protect the owners from personal liability for business obligations. One consequence of organizing as a corporation is the legal separation of ownership and management. In order to secure protection from personal liability and to assure effective corporate governance, it is important for family-owned businesses to manage the inherent overlap that exists in their ownership and management. This blog post provides an overview of the different legal roles played by shareholders, directors and officers.

Stockholders

Stockholders are individuals or entities that hold an ownership interest in a corporation. The ownership interest is represented by shares of stock. An ownership interest does not, however, give a stockholder the right to control the day-to-day affairs of the corporation. Typically, the most important right that a stockholder has is the right to vote. Voting rights provide stockholders with limited control over the corporation’s affairs by allowing them to, for example, elect the individuals that will serve on the corporation’s board of directors and approve the corporation’s bylaws. Stockholders exercise their right to vote at annual meetings or special meetings that are called by the corporation. Stockholder’s voting rights are subject to the terms and conditions set forth in the corporation’s organizational documents (i.e., articles of incorporation and bylaws) and other agreements between some or all of the stockholders.

Directors

The board of directors of the corporation is made up of members who are elected or appointed by the stockholders. Membership on the board is not usually limited to stockholders or employees of the corporation. Directors govern the corporation on behalf of the stockholders and owe fiduciary duties to the stockholders and the corporation. The board of directors’ duties usually include hiring and dismissing the corporation’s officers, establishing and assessing the overall direction and strategy of the corporation, and approving annual budgets and corporate policies.

Officers

Officers are appointed and removed by the board of directors.  Officers manage the day-to-day affairs of the corporation and carry out the policies adopted by the board of directors. The structure of management varies widely between corporations.  In many instances a single individual may serve in multiple offices. For example, many boards of directors choose to have the top manager serve as both the president and CEO of the corporation.

With this background, it is important for family business owners to review the roles that various individuals are playing within the corporation.  Over time, as a business grows and develops, changes may begin to occur organically, and corporations must consider what corresponding legal formalities need to be observed to keep pace.