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Jennifer Commander’s practice includes advising public and private companies in a variety of corporate transactions, including securities offerings, mergers and acquisitions, business entity formation, private equity transactions, corporate reorganizations, and financing transactions. Jennifer also assists public companies with 34’ Act reporting compliance, public debt and equity offerings, and corporate governance matters. View articles by Jennifer

Transitions in the Family Business: Hope Is Not a StrategyIf last week’s post summarizing the third panel from the Transitions in the Family Business: A Conversation with Family Business Owners and Leaders event piqued your interest in selling a family-owned business, you may have more questions about the sale process. As part of the Transitioning to a New Owner panel, Frank A. McGrew IV, managing partner of McNally Capital, shared his top 10 questions that family business owners and leaders should ask before pursuing a sale of their business.

  1. Is your business ready to sell? Any buyer’s due diligence process requires a thorough evaluation of the seller and the seller’s business. Is your business ready for this examination?
  2. Are you personally and mentally ready to sell your business? It is easy to be consumed by the immediacy of the sale process. Before exploring a sale, ask yourself: What would I do next and for how long? How much money do I truly need to live on if I sell my business?
  3. When is the right time to sell? How will you know when the time is right? What are the trigger points to watch for, and how do you measure those?
  4. How much is your business worth to you? How much will another buyer want to pay? What is the likely range of these values?
  5. Who is the best and/or the right buyer? Are there certain buyers you do not want to approach or sell the business to? This could include competitors.
  6. How can you increase the odds of success in your favor during a sale and transition process?
  7. How can you maximize the purchase price and net proceeds from the sale?
  8. How can you quantify and better understand the principal risks for your business and a transaction process before you begin?
  9. What issues must be addressed before beginning a sale process?  For example, these could include legal, environmental or customer/supplier issues.
  10. Who and what are the most appropriate outside experts and resources you need to utilize for a successful outcome? Frequent players include a transactional attorney, a banker, a wealth management advisor, and a trustee. Perhaps most importantly, who will “quarterback” this process as your client consigliere?

After reflecting on and answering the questions above, potential sellers will be better equipped to succeed in a sale transaction.

This blog post was co-authored by Frank A. McGrew IV of McNally Capital. Frank is a Managing Partner and leads the Merchant Banking efforts at McNally.

Last week, Bradley’s Family Business Advocates team co-hosted Transitions in the Family Business: A Conversation with Family Business Owners and Leaders with Warren Averett. The event consisted of three panel discussions: Transitioning to the Next Generation, Transitioning to Non-Family Executive Management, and Transitioning to a New Owner. This three-part series of posts will summarize and explore each of these panels.

Transitions in the Family Business, Part I: Caring for the Goose
Attendees of “Transitions in the Family Business: A Conversation with Family Business Owners and Leaders” look on.

The first panel focused on how to plan and execute the intra-familial transition of leadership and control of the family business. One panelist analogized the family business to the famous goose from Aesop’s fable The Goose with the Golden Eggs. You know the story: One morning, a countryman goes to the nest of his goose and finds a glittering egg made of pure gold. This pattern of behavior repeats itself daily. Then, as the fable says, “As he grew rich he grew greedy; and thinking to get at once all the gold the Goose could give, he killed it and opened it only to find nothing.” The wisdom of this fable was not lost on these panelists; teaching younger generations the desire and skills to care for the goose may prevent them from killing it. How can the older generation instill in the younger generation these values?

First, the family can draft and use a mission statement to organize multiple generations around a common goal. This statement gives purpose and focus to the operation of the family business and the family’s management of it. Involving younger generations in the drafting of a mission statement can create buy-in at an early age, which may ward off a “kill-the-goose” mentality.

In addition to mission statements, families can also draft and implement specific policies to help align the generations. For example, some families may have an employment policy that requires family members to work outside of the family business for a certain amount of time or at a certain level of success prior to working for the family business. Family members then must prove themselves outside the family business, which may ease an intra-family management transition at a later date.

Other families may have a policy requiring a certain number of all-family meetings per year. A policy addressing how equity in the family business will be divided at each generational level could also be important. An independent family consultant may be hired to assist in drafting these policies. Having pre-determined policies in place can help prevent conflict down the road.

Using Different Classes of Stock in a Family-Owned BusinessRecently, Facebook announced that it would withdraw its plan to issue Class C no-vote stock. Facebook had proposed issuing a new class of Facebook stock that would have had the same economic rights as the existing Class A and Class B shares but would have no voting power. Facebook, however, already uses a multi-class stock structure, with Class A shares (which trade under the ticker “FB” on Nasdaq) having one vote per share and Class B shares (which are owned by Facebook insiders, such as Mark Zuckerberg) having 10 votes per share. While Facebook is a public company with many shareholders, family-owned businesses may also benefit from having different classes of stock.

A class is one group, or type, of stock that has identical rights; every share within a class is the same as every other share in that class. It makes sense, then, that issuing different classes of stock allows a company to give different rights to different groups of shareholders. Most notably, a company can concentrate voting power in one class of shares, which allows the holders of that class to retain control, while giving the economic benefits of stock ownership to all shareholders.

In a family-owned business, multiple classes of stock can enable certain members of the family to maintain voting control over the company. By issuing to themselves a class of voting stock (with either one vote or multiple votes per share), the first generation family owners can preserve their power to elect the board of directors and therefore control the company. A different class of stock with reduced or no voting power can then be issued to second- and third-generation family members without worrying about how they will vote in director elections. Therefore, while the founders may be economically diluted over time with the issuance of a different class of stock to children and grandchildren, their voting power remains concentrated. This multi-class stock structure can assist families in transitioning the business to younger generations.

One cautionary note: If your family-owned business is taxed as an S-corporation, consult with an attorney and an accountant before issuing a different class of stock. While voting and non-voting stock are permitted in an S-corporation, both classes of stock must have the same economic rights. If the classes of stock have different economic rights, the company’s S-election may be terminated.