Family businesses across the UK make a huge contribution to the economy, with recent research by Oxford Economics for the Institute for Family Business (IFB) Research Foundation revealing they employ 11.9 million people and make up 87% of all private sector firms in the UK. Whilst growth and expansion are top priorities for many family firms, a sizeable proportion are also considering exit routes and looking into opportunities to sell their family businesses.
At a recent forum over a private dinner in partnership with Family Business Place*, we talked to a number of business owners considering selling their family businesses who raised the following interesting point.
How do you value a family business?
Family business owners are not just keen to get the highest price for their business but also prioritise finding a buyer with the right fit. The owners feel a loyalty to their employees and, having built the business through a number of generations, place a high value on ensuring it will thrive after the sale and the cultural values of the business will continue.
The general consensus was to use professional advisors with a track record in the sector and experience working with family businesses. Private equity firms are excellent in providing a realistic value. They are most interested in backing businesses with strong financial results and an excellent management team.
When selecting your advisors to help you with the sale of your business, make sure you ask them about their track record and success rate in selling similar businesses. Involve your legal advisor and financial/ tax advisor in the process from the outset as they can give you impartial and professional advice about the value and terms you are being offered.
When’s the best time to sell?
One delegate suggested that an ideal time to sell is when you have to reinvest substantially in order to grow the business to the next level. Others highlighted the dilemma that it’s best to sell when the business is most profitable which typically coincides with a time when the owners are enjoying it and don't necessarily want to sell. The key thing to remember is that it takes time to sell a business – there’s a huge amount of due diligence involved. You are likely to get a far better price and a more suitable owner for the business if it’s a planned sale. A buyer may want one family member to stay on when everyone else in the family gets to move on and enjoy the next stage of their life/career. It’s important to discuss the implications of this with the family as part of the sale strategy. Don’t forget, if you are asked to stay on, you may not like how the company is run but will have little influence in its future direction.
How do you prepare a business for sale?
Make sure your ‘house is in order’ before the due diligence process begins and ensure your client and employee contracts are all in place. Sometimes clients stipulate in their contracts that, should the company be sold, the contract will be null and void. This is called a change of control clause and can have a significant negative impact on the price you are offered for the business. Make sure that you disclose such clauses at the start of any due diligence. The due diligence process itself is extremely time consuming. Take time to do it accurately and be very honest with potential buyers – for example, alert potential buyers to client contracts which are not being renewed and don’t inflate your pipeline of prospects.
It’s easy to become side-tracked by the amount of work involved in preparing a business for sale. Make sure you and your management team have sufficient time to continue to drive the business forward. You don’t want to lose clients or employees because you have diverted your focus from the day-to-day running of the company.
In order to protect your business during the sell process, ask the potential buyer to sign an NDA before disclosing any information. Anonymise your clients and never rush into a deal. Only give away all your confidential information once you are sure the buyer is certain and has the money in the bank. You can ask the buyer to make a financial deposit which could be forfeited if they pull out. Make sure that you are in control during the sales process and are always in a position to pull out should you not be happy with the terms on offer or if you simply change your mind about the sale.
Where do deals fall down?
The delegates at the workshop who had experience of deals falling through suggested that problems occurred for three reasons: firstly, they were expecting a higher price than they were able to achieve for the business; secondly, they were given poor advice from lawyers or tax advisors and finally, the shareholders in the business all had different expectations from the sale and couldn’t agree on terms in order to progress the deal.
One delegate made a valid point about the importance of selecting advisors with relevant experience. She said, ‘You wouldn’t ask a criminal lawyer to do your will’ and highlighted that professional advisors with expertise in selling businesses and dealing with family firms are an essential part of the team.
In summary, our top three tips for anyone considering selling their family firm are:
- Plan well in advance
- Don’t underestimate the time involved in selling a business
- Appoint lawyers with relevant experience who are able to drive the sale forward and execute a clean exit.