Selling a family-owned business will typically be a once-in-a-lifetime event. Throughout the transaction, owners of a closely-held company must concurrently maintain the ordinary course operations of the business, while at the same time negotiating the sale with the buyer in strict confidence. The stakes are high, with major financial and emotional implications for sellers and their families. This makes navigating the sale process both an exhilarating and arduous experience. Below are five tips for family business owners to ensure they are well-prepared to court prospective purchasers and close a deal.
1. Know Your Business Inside and Out
Most family-owned businesses have a core group of controlling decision-makers who are directly involved in negotiations with prospective purchasers. While these owners may be well-informed about the high level issues that affect the company as a whole, they may not be engaged in day-to-day operations. Understanding such details will be vital to a strategic acquirer seeking to successfully integrate the company into its existing business.
Buyers presume that owners, as the principal negotiators, are well-versed in all such matters and can offer guidance on how issues were handled in the past and should be handled going forward. Whether sellers can thoroughly address the buyer's concerns may determine how interested the buyer remains in the acquisition and the purchase price offered. As a result, it is important for sellers to have broad and detailed knowledge of all aspects of the business before engaging in discussions with potential buyers. A well-informed seller will be better equipped to pitch the strengths of a business, as well as explain, and perhaps remedy, its perceived weaknesses. Moreover, sellers often wish to keep the transaction confidential within their company and, accordingly, may not be in a position to look to management for support.
2. Gather Company Records and Documents Early On, and Keep Them Updated Throughout the Sale Process
Sellers should expect buyers to conduct highly detailed business, legal and accounting due diligence on their acquisition targets. At various stages of the process, buyers will likely request copies of all documents, records and files related to the business, including key contracts and agreements. Assembling these materials can be a difficult administrative task, especially for a small in-house deal team. Because signing a definitive agreement will be conditioned on a buyer's satisfactory completion of due diligence, being able to gather and provide the required documents can be a gating item. To retain maximum control over timing of the transaction, sellers should coordinate with their advisors to anticipate a buyer's due diligence requests, gather materials as soon as possible and strategize how and when to make those materials available.
As the business continues to operate during the sale process, the company may enter into new agreements, and information previously furnished will require updating. Sellers should work with advisors to establish procedures to keep buyers apprised of developments in the business and provide new information and materials as needed. Organizing these efforts early can prevent unnecessary delays and "fire drills" later on.
3. Make Sure Your In-House Team is Appropriately Incentivized to Close the Deal
Although the owners of a family-owned business and their advisors will be the principal negotiators of the sale, owners will inevitably require assistance from employees at various levels to complete the transaction. Many times, contributions made by management and other personnel who participate on the owners' behalf can impact whether the sale is ultimately successful for the sellers.
Sellers should recognize that these employees who are brought "over the wall" are in a precarious position. On the one hand, they are being asked to take on additional duties related to the sale in addition to their present jobs; at the same time, the buyer will be their employer going forward, and the change in ownership brings with it greater uncertainty about their future with the business. Buyers may replace management, streamline the workforce to improve efficiency or exploit synergies. As such, sellers should ensure that their in-house deal team is financially motivated to close the transaction and secure the best possible result for the sellers. Some possibilities for aligning employees' interests with owners include granting options or other equity incentives, or negotiating transaction bonuses, change of control payments or other severance arrangements. Advisors are a good resource to help determine which of these tools will be effective and appropriate.
4. Understand the Forms of Consideration Prospective Buyers are Offering
While the amount of the purchase price for a business is generally the most important feature of a bid, sellers should pay particular attention to the form of consideration being offered and how and when the consideration will be paid. Buyers often propose attractive consideration packages that may require the sellers to take on some risk to obtain a greater purchase price. Some payments, such as earnouts, may be contingent upon the company's performance post-closing, or upon the company's attainment of certain milestones. A buyer may ask that the sellers finance a portion of the purchase price through a loan secured by the assets of the company, to be repaid over time. Another approach, especially for buyers listed on national exchanges, is to offer sellers all or a portion of the purchase price in equity securities in lieu of cash. Sellers entertaining such prospects should discuss all risks associated with taking equity, including the effect of compliance with securities laws and regulations (for example, limitations on transferring restricted stock), with their advisors. Most importantly, the form of consideration will have an impact on tax ramifications, and will also affect sellers' estate planning. All of these factors should be taken into account when evaluating and comparing prospective buyers' offers.
5. Involve Your Legal, Financial and Accounting Advisors Early On in the Process to Develop Comprehensive Strategies
As stated above, orchestrating the sale of a family business is a rare opportunity for many family business owners, and has its own pitfalls, even for owners who have steered their companies' major transactions in the past. Assembling a team of trusted counselors and advisors who handle these matters on a daily basis – including lawyers, accountants and investment advisors – is an important first step towards completing a successful sale. Together, an experienced advisory team can develop strategies to find a motivated buyer, evaluate offers made, negotiate definitive agreements, coordinate closing of the sale and handle family financial matters post-closing.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
