The Seasons in the Life of a Family Firm: Time to Sell or Not?
by George Stalk and Ari Axelrod
Originally published by Family Wealth Report on 3 June 2013
It is neither preordained nor inevitable that a business remain competitive and in the family. This typically requires enormous effort and, oftentimes, deep personal sacrifice. So perhaps the most difficult and painful question facing leaders of a family-controlled enterprise is whether or not to sell that business. In our work as advisors to business families around the globe, working in many and diverse industries, we have been awed by the inexhaustible energy and the unwavering commitment of devoted family members who give endlessly of themselves to the continuation of the business.
At the same time, we have witnessed firsthand the struggle that business families go through, sometimes for years, trying to decide whether or not to sell. There are no one-size-fits all answers to this question, and the temptation to put off the decision is very natural, given that it can tear families apart. This is why a disciplined approach to the selling decision is necessary.
The unrelenting dedication of family members to the business is, of course, a deep and important part of any decision on whether or not to sell the family business. Concerned individuals understandably have passionate feelings about the future of their business, and this attachment must be acknowledged and appreciated. Perhaps because the issue is so charged for business families, however, they often struggle to articulate why they wish to hold on to the family business. To help them, we have compiled a list of reasons to sell—or not—that have emerged from our work with family clients over the years. These reasons are both economic and emotional.
These are the main emotional reasons for keeping the family business:
- I love this business – it’s in our family’s blood
- I am willing to sacrifice a lot for the good of the whole
- It’s important to us to provide strategic direction to the business that carries our family’s name
- Our family appreciates and values our involvement in the family business
- We enjoy/appreciate/respect the interest of our (spouse, sibling, other relatives) in the business
- Being a member of a business family is core to our/my identity
- I like the closeness that exists in my family as a result of running a business together
- I feel obliged to keep the business that we inherited from our parents in the family for the next generation; I want them to have the same opportunities that we had
- I believe that maintaining the business is important for the next generation’s identity and financial wellbeing
- I value the good my family can do in the community through the family business
- I enjoy the status that comes with being part of an important business in the community
- I am concerned about what I will do if we sell the family business
After presenting family members with these personal reasons for staying in the business, we ask them individually to rate the reasons on a scale of one to five – from strongly agree to strongly disagree. We then compile the data and break it down into the following categories:
- Owners versus non-owners
- Managers versus non-managers
- Spouses of the family members
- Beginning or middle stage of career
- Independently wealthy or financially dependent on the business
The results of the survey are then discussed both individually and collectively with the family to help them arrive at a consistent position on whether or not they wish to sell the family business.
After discussing the personal reasons, we move on to consider the economic reasons for keeping the family business. We raise two questions: “Is our family the best owner of the business?” and “Is the business the best investment for me?”
With regards to the first question – “Is our family the best owner of the business?”- we ask family members to rank on the scale of one to five whether they strongly agree or disagree with the following statements:
- We run the company better than any other manager/owner could
- We provide more insightful and better strategic direction than any other owner could
- There is synergy between the businesses and other assets owned by the family that only the family can realize
- The family is better positioned to understand and manage the risks associated with the business than any other investor
- The ultimate value of the company has not yet been reached (because of suboptimal management/inadequate strategic direction/other reasons), and the process of sale will destroy its value
- We are better capitalized than any buyer, and can grow the business faster and/or absorb more risk
- We have great ideas about what we can do with the money we receive from the sale of the family business
With regards to the second question – “Is the business an attractive investment for me?” – we ask family members to rate the following statements from one to five, strongly agree or strongly disagree:
- I realize more economic benefits (salary, bonus, perks, dividends, etc) from the business than from any other alternative
- I understand and am comfortable with the risks of staying in this business
- I am comfortable with the combined cash flow and appreciation that the business provides
- I would, subject to fair valuation, be interested in increasing my stake if any shares were for sale
- If there were family members interested in buying, I would, subject to fair valuation, be interested in decreasing my stake and/or selling out completely, knowing family members would be making a worthwhile investment
- I believe that the economic benefits (salary, bonus, perks, dividends, etc.) I receive from the business are much more than adequate to the risks my investment in the business is exposed to
- If this business were for sale, I would buy it
- I believe that the primary value of my investment in the company is driven by the management opportunities it provides to me/family members/the next generation
As with the survey on the personal considerations for holding on to the business, here again we segment the answers according to whether the family member is an owner, a manager, a spouse, near retirement age (or not), and financially dependent or independent.
Afterward, we discuss the results of the survey individually with family members, who are invited to rephrase their responses before we present them to the family as a whole. What emerges is the family-wide position on the economic justification for keeping or selling the family business.
The importance of these raw survey data goes far beyond their organization into neat tables. The real value comes from the in-depth discussion of the responses with individuals and with the group. In the process, the surveys can turn up surprising information, both emotional and economic, which leads client families to make important, sometimes counterintuitive, decisions. Here are a few disguised examples:
- In Argentina, two brothers and a sister owned a retail business. One sibling lived in Argentina, while another lived in North America, and a third in the Middle East. The surveys showed that they all agreed the business was at best a marginal performer. Despite this, an opportunity existed to sell the business at an attractive price. But the three siblings decided not to sell because it gave them valuable face time together. They felt it was an important link for holding the family together.
- In Mexico, two brothers ran a very profitable industrial company. The brothers believed that their wives and children expected them to run the company so long as additional wealth could be created. Afraid of coming across as weak or irresponsible, neither brother ever suggested selling. The surveys, however, showed that the brothers were burned out; their wives reported that they felt more than enough wealth had been created and that they now wanted more time with their husbands – not more money. Since the children had no interest in the business, the family quickly reached a consensus to sell the business.
- In North America, a large multigenerational family owned a construction management company that consistently delivered high double-digit returns on equity. Family members have been approached several times to sell the business. The surveys, however, revealed that family members, even those relatively distant from the company, felt strongly that there was no better place to invest their money than back in the business. They did not sell.
- In Southeast Asia, a family of four sisters and three brothers in a food processing business had growing differences of opinion with regards to the future direction of their business. Despite difficulties in working together, after taking the survey the siblings realized that they needed to stay together and grow the business to provide the necessary financing for their own retirement and to deliver substantive wealth to their offspring.
The answer to the question of whether or not to sell the family business is seldom black and white. That’s why the emotional and economic reasons for keeping versus selling must be carefully weighed and balanced. As we have seen, the decision to sell is not inevitable – even when the economic argument for doing so seems strong.
Given the complexity of the selling decision, this is a time when experienced professionals can help families think through their options. We collate data from the surveys, the sundry opinions, conflicts, and discussions with objective strategic, financial and emotional analyses to bring everyone together.
Such careful analysis is particularly important given the counterintuitive findings of many of the surveys. And timing is critical. Our experience shows that getting to a reasonable and fairly enduring consensus is more readily done before a buyer “darkens” the doorway or before performance deteriorates to a point where wealth is severely diminished.
If it does come to selling the business, this need not be the winter of a family’s discontent. Selling the family business can be the most difficult decision that a business family ever faces, but it can also be the beginning of a new adventure, a journey that can lead to philanthropy and other investments of family wealth, including a new family-owned business.