Owner Issues Article

Is It Time to Sell the Family Business?

By Carol Hannigan and Omar Romman

Tensions at the annual shareholder meeting were running high, and the Jones family business owners were divided. Their 60-year-old family-owned manufacturing business had fallen on hard times. The company had been a leader in its field for decades, but in recent years, with lingering effects from the pandemic and more competitors emerging, the prospects for the business were not what they once were. “Maybe it’s time we talk about selling,” one owner suggested.

That swiftly triggered a heated debate. Some owners jumped on the idea, excited to explore options to sell the business and plan for new ventures. Others were attached to the legacy built by their parents and grandparents over 60 years of hard work and innovation. The business was part of the fabric of the community, and the family had always valued its relationship with employees. How could they work through this decision in a way that would make the right choice not only for the business but also for the family? (This is a real family business story; identifying details have been disguised.)

The decision to sell any business can be difficult, and it is even more complicated when the business is owned by a family. In addition to a financial decision, selling a family business is an emotional and social one. So, how do you know when it’s time to sell your family business, and what can you do to position yourself for a successful outcome? The process by which you consider that decision can be as important as the eventual choice. Here’s how to work through the decision.

How do you know it’s time to sell?

In simple terms, the time to sell any asset comes when the cost of owning it outweighs the benefit of selling it. However, for family businesses, this cost-benefit analysis is just the beginning. There are significant non-business considerations beyond the valuation of the potential sale. For example, we have worked with families who have decided to sell their businesses because of:

By contrast, there are also good non-financial reasons to decide to keep the business in the family, such as:

How does an owner group reconcile these competing priorities to come to a decision, particularly when there are multiple family owners?

Normalize the conversation

The idea of selling the business is often a non-starter for many family owners. For some, it is akin to leaving the family. However, as the family grows and the business moves from one generation to the next, the attachment and engagement to a business can also change. Family members who are contemplating their options need a safe place to raise their questions about ownership without fear that they are betraying their fellow owners. Otherwise, the ownership group can grow disconnected or frustrated, which can lead to conflict among them.

These conversations can take place in owners’ meetings or in board meetings. Boards are obligated to bring offers to the ownership group, so that is one way the conversation can be initiated. Owners may request an assessment of the marketability of their business from the board or directly from independent advisers. Significant events can also trigger these discussions, such as the death of a founder or a material shift in the business. It can also help to bring in case studies of competitors that have sold their businesses to keep the family owners informed about their options.

Once the Jones family owners began the conversation, they moved the topic from the broader annual shareholder meeting to their owner council, which met quarterly to discuss a potential sale and make recommendations to the broader ownership group. The owner council then served as a working group on this topic, exploring and researching options to bring back to the full owner group for consideration. In this way, the owner group could consider multiple alternatives and work toward building consensus for the ultimate decision.

Understand who decides

Before a process to explore a sale is initiated, it is important to understand who has the actual authority to make such a decision. Is it the board? The owners directly? If ownership interests are held in trusts, is it the trustees or beneficiaries? Are there voting and non-voting shareholders? Understanding the roles of various constituents in such a decision will help ensure that the right people are heard and involved in the conversation. This can head off the confusion and conflict that come from multiple voices on such a sensitive topic.

For the Jones family business, the owner group included direct owners and several trusts. Given the family’s significant attachment to the business, the owners agreed that all adult beneficiaries should provide input, even though the trustees had the legal power to decide. They also sought input from the broader family, since several NextGen family members had expressed interest in being a part of the business in the future. Clarifying who had a “vote” and who had a “voice” in the decision headed off unnecessary conflict.

Align on a clear decision-making process involving key stakeholders

To navigate such an important and complex decision, a family business needs a clear process. The owners, board and senior leadership may each have different roles in the process. Being clear about each group’s roles and responsibilities is essential. For example, the Jones family owner council decided to rely heavily on two independent board members (one with family business experience and one with M&A experience) to help generate and evaluate options for the owner group.

Beyond knowing who has what role, you should discuss communication protocols for the process. For example, decide how and when the full owner group, board, senior management and broader family will be updated on the process along the way and informed of the final decision. The Jones owner group (direct owners, trustees and beneficiaries) committed to meet regularly with the owner council and two independent board members during this process to share information and perspectives, with the goal of building consensus toward a final decision. The broader family and board were updated at key milestones during the process, and all stakeholders were advised promptly of the final decision. A well-run process creates transparency and more buy-in for the final decision.

Consider the alternatives

Often the choice to sell a business is a result of dissatisfaction with some aspect of the ownership that could be addressed in ways other than selling the company. For example, dissatisfaction with the liquidity provided may be resolved by raising the level of dividends. Owners who feel too involved (or not involved enough) can choose to update their governance model to fit their preferences. Also, owners can consider a partial sale or buying out specific shareholders as an alternative to a total sale.

The Jones family’s owner council and two independent directors thought through these alternatives as part of the process, bringing various options to the full owner group to consider. They discussed three possible alternatives: selling the business to employees through an ESOP, retaining the core product line but selling the distribution channels, or having one branch (which had been far more engaged owners) buy out the other two. Their work on creating these competing options gave them more confidence that they had considered all possibilities before making their final decision.

Enlist the right professional support

With a decision this complex, owners must gather the information they need to make a decision carefully and confidentially. The Jones family convened the company’s corporate attorney (who had M&A experience), the family’s trust and estate planning attorney, and the accounting and tax planning firm (which handled the tax returns for both the company and the owners). The accounting firm recommended an appraisal company to value the business. Coordinating a “dream team” of the right strategic advisers helped the owners consider and plan for all consequences of a sale, including structuring any sale transaction to minimize income and capital gains taxes for the company, the trusts and the individual owners. The owners could also plan for any updates to their trust and estate plans to account for managing more liquid assets after the sale. While many family business owners can run a successful process on their own, some owner groups value the assistance of a family business adviser to co-create and support the process, including facilitating difficult conversations.

With such a thoughtful process in place, the Jones family owner group was able to make a decision they all agreed on. It was time to sell. They considered both financial and non-financial factors in the ultimate decision:

Financial: The family business had long dominated the market, but new entrants were competing effectively, and profit margins were shrinking, even after the company had cut costs and increased its online marketing. To compete and grow, a major investment in new technology and equipment would be needed. This would mean lower dividends, taking on debt and perhaps bringing in a third-party private investor.

Non-financial: The third-generation family CEO was ready to retire, and none of the fourth generation were working in the business or on the board. For many G3s, working long hours in the business had taken a toll on their relationships and health. When asked, most G4s indicated that they did not want to work in the business. They also did not not want to spend the time necessary to play governing roles, nor did they want to oversee a non-family CEO or independent board. Many of the G4 were pursuing careers unrelated to the business and were interested in having more access to liquidity.

The owner group decided to work with an investment bank to find a suitable buyer who would respect the legacy of the business and continue to care for their employees and customers. A committee of G3s and G4s was appointed to begin to explore a new family mission, vision and values, as well as wealth management options for diversifying the family’s wealth. Having run an effective decision-making process, the family maintained positive family relationships in the process, the outcome some valued most of all. Two of the three family branches were exploring starting a family office together. And as part of the decision-making process, the family agreed to continue its annual family retreat for all branches, asking G4 to take over the planning so they’d continue to build their bond.

“When we first asked the question whether it was time to sell, I was overwhelmed by the prospect,” one family owner confided to us. “But I feel great about how we worked together to get to the right decision in the end.”

First Published : 27 November 2023. Family Business Magazine