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.

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.