To Sell or Not to Sell: Considerations of Family Business
GenSpring was founded twenty-five years ago by a business owning family. Like many of the families we have advised over the years, our founding family faced the decision of whether to continue to own and operate a business or diversify.
Years of experience working in this area has shown us that the decision to “diversify” is not often an easy one. And, it is certainly not straightforward for many. In fact, the considerations impacting the decision whether to retain or sell a business are multi-faceted, containing financial and non-financial aspects.
The decision of whether to continue ownership or to sell has been getting quite a bit of attention lately. Over the past few years, the U.S. economy has begun to see an increase in merger and acquisitions. Many industry participants have cut expenses and now are using strong cash reserves to grow revenues through acquisitions. At the same time, private equity investors have been actively seeking ownership in companies that have the potential to provide highly sought after income streams.
Given this current landscape, it is helpful to highlight a few key thoughts when evaluating the possibility of selling a business.
Successful owners are financially minded people who want to maximize economic value.
The first questions often center on value such as:
- What is my company worth?
- How do I really know what my company is worth?
- How can I maximize its value?
As owners begin to think through these questions, they should understand that independent resources are available to not only provide well informed indications of potential value, but also help position the business to achieve highest value upon sale.
How do I really know what my company is worth?
Many owners benefit from consultation with investment bankers who routinely represent and advise companies involved in transactions. Investment bankers can provide in depth information about similar recent market transactions and are able to compare and contrast a family’s business with others that have been acquired.
When determining potential value, factors such as current and projected financial performance, earnings growth, market share, diversity of customer base, technologies owned or utilized, and company infrastructure are important. Good investment bankers understand how to evaluate a company’s current standing in these areas and help position it best for a potential sale. They are able to help identify potential buyers and effectively manage the sale process.
Should I sell all or a portion of my business?
As business owners think about a sale, they will want to be aware of the different types of buyers and their goals. Generally, there are strategic buyers and financial buyers. A strategic buyer will often pay beyond the normal range of value in order to recognize increased market share, access to technology or other synergies. In today’s market, many potential acquirers will be financial buyers or investors. Financial buyers often do not operate in the industry and are simply seeking return on capital based upon the expected financial performance of the business.
Financial buyers, such as private equity firms, will not likely want to be involved in the day to day business operations so an expectation may exist for current management, including family owners, to continue in the business. Consequently, many financial investors do not acquire full ownership in the business, often limiting their ownership to just at or below a controlling interest.
An important consideration in these situations is any future monetization or exit strategy for the financial investor as they often establish a timeline for achieving full return of their investment. Not only “how” this exit will happen, but “when” it will happen must be carefully considered. It is not uncommon for a family to sell an interest in their business to a private equity firm to find that six years later they need to borrow to finance the purchase of the private equity firm’s exit.
Is there a way to know how much I need to accomplish my goals?
Once business owners become better informed regarding valuation, they should think about what they will likely do with the proceeds and whether it would be enough to fund their lifestyle and philanthropic and legacy goals. For some families, the thought of selling the business and placing the after-tax proceeds into an investment portfolio to generate cash flow once provided by a business is unsettling. They may have limited experience investing in the public markets and feel a better sense of control with their own business.
In these cases, a goals-based process should be utilized to craft a customized plan solving for the family’s objectives. Establishing a financial framework or model for projecting whether the resources will meet the family’s goals is a valuable decision making tool. Investment and planning solutions can then be combined to build a customized portfolio that meets each of the family’s unique needs, whether it is:
- wealth preservation,
- philanthropic giving,
- legacy accumulation or
- lifestyle maintenance
This goals-based analysis also has implications for planning before a sale. Often owners can achieve the most tax efficient results by putting a plan in place pre-sale.
How do I minimize the taxes when selling?
Significant income tax and gift and estate tax savings are possible for owners who work closely with their advisors to implement strategies before a deal is reached. Once a deal is reached, the opportunities for tax savings may be forfeited even if proceeds have not yet been received.
Even though the financial considerations of a possible sale can seem complex, the non-financial considerations for many families are more challenging. After many years of hard work and sacrifice, a business represents much more than a financial asset. The business itself may be part of the family’s identity.
The family often sees its role in the community in terms of its business. They harbor a sense of duty to employees and their families. They use the business to express their community involvement through economic development and work with charities and other groups. Consequently, their role in the community is linked with their business activities.
Is my legacy tied to the business?
The senior generation may also see the business as their legacy for children and grandchildren. They desire for their heirs to work in the business just as they have. Families who are most successful integrating the next generation into the business start early by communicating expectations to them while providing needed support, education and experience. However, many families face the challenge of finding a path forward for the business when the adult children are not interested in working in the business or do not have the skills and ability to be successful owner/operators of the business. In some cases, the opportunity for next generation involvement in the business has passed and the senior generation may struggle with how their legacy is expressed absent the family’s business.
When considerations such as legacy influence thinking, it may make it more challenging for the senior generation to assess the competitive strength of the company going forward. Without outside board members and strong management, families may not benefit from much needed independent perspective.
Good outside perspective along with work and communication within the family around its values and mission can be invaluable when legacy is intertwined with the business. When a family is able to envision its goals and legacy separate from ownership of a particular business, the family often finds the freedom to make the best decision regarding the sale of the business. For some families, they may have the realization that the family will own and operate a business, but they begin to see that a particular industry or business is not essential. They are then able to evolve as needed to maximize enterprise value while ensuring long-term sustainability for the family.
Another concern surfaces for family members working in the business; they may be unsure of how they will spend their time without the business to work in each day. In a sense, they may find a need to re-invent themselves. This can be exciting or stressful.
How will I spend my time if I no longer own a business?
For many owners, stepping away from the busy lifestyle of running a business affords time for reflection. They are excited to have a fresh look at their interests and priorities post-sale. They may choose to dedicate their time to new business ventures, or allocate more time to family and philanthropic activities than they did in the past.
Another concern for some families is their reliance upon the operating business for more than just income and identity. Often business owning families use the operating business to provide personal support for financial and non-financial activities. For example, owners may rely upon the company’s CFO to help oversee investments the family owns outside the business. They may also tap the accounting department to help pay personal bills or process payroll for household help. They may manage their travel and philanthropic interests with the help of business employees. In these cases, the family may see their own personal affairs and finances so connected with the company that they would feel at a loss without the continued personal support of the company’s trusted employees.
A good solution for this dilemma is utilizing a family office. A family office can step into the place of the operating business to serve the family members’ needs and help with a potential ownership transition. The family office can provide not only financial, administrative and planning functions that company employees may have been fulfilling, but it can also act as a focal point for the family across generations. By aligning itself with the family’s interests, the family office can be an invaluable resource to the family. The family can tap into objective expertise needed to ensure financial well-being, support family member productivity, and promote the family’s unique legacy.
The decision to sell or continue ownership of a business is complex. Business owning families who recognize early the importance of both the financial and non-financial considerations of a potential sale are more likely to make good transition decisions.
Engaging experienced advisors who understand the multi-faceted nature of this planning can help bring a pro-active and process driven approach to resolving the family’s needs and concerns. Whether a family continues to own a business or does indeed “diversify”, sustaining wealth is an evolutionary process that requires ongoing attention and thoughtful intentionality.
Authored by GenSpring Family Offices with direct contribution from David Neubert, Senior Family Wealth Advisor.