Make the right strategic moves
to ease the sale process
 
The choices you make will affect not only the sale price, but also your family legacy and relationships.

Selling a midsized family business can be more complex and challenging than even the most sizable public company transaction. Naturally, price is a critical component of the outcome. However, issues such as employee and community impact, family legacy and harmony are often critical aspects as well. Selling a family business is often about much more than just the money.

The decision to sell a family business is often a bittersweet one, filled with emotions ranging from angst to relief. Often different members of the family will have very different ideas about whether, when, how and to whom the business should be sold. Selling in the middle of a period of relative strength in financial performance such that buyers envision continuation of that trend is ideal, but these periods are difficult to identify and factors such as pride and overconfidence can interfere with objective analysis. Sometimes a direct competitor is in fact the best buyer for a business, but years (or generations) of intense rivalry can make this distasteful.

One of the most difficult things for us to see is different branches of a family driven apart by these decisions. Bringing in a highly qualified professional—one who will be viewed as a credible analyst without a vested interest in the outcome—can help shareholders work through these complex issues. This is why I recommend families get to know and work with advisers years before they entertain the thought of selling. Shareholders benefit from various points of view and can use the intervening time to get to know the adviser and judge his or her credibility and integrity. Depending on the degree of analysis required, most reputable investment banking firms will not charge for this type of work.

Preliminary measures

Once it appears shareholders are nearing the decision to transact, some management teams may start to change the way the business is run in the hopes of maximizing the transaction value. Price cuts to drive volume, delays in capital expenditures and avoidance of needed personnel expenditures are common approaches. A trusted, experienced adviser can help families think through these decisions. However, if the business is of a size (say, transaction value greater than $20 million) at which the buyer is likely to be a sophisticated party with significant resources to devote to due diligence, these strategies are likely to be uncovered in diligence and adjusted for in the transaction (i.e., the business needs $10 million in capital expenditures; therefore the price comes down by a like amount). The best approach, within bounds, is often to run the business as if you have no intention of selling it.

In the months or years leading up to a sale, improving the financial reporting and operating metric tracking system will avoid timing slips that can harm the business and the transaction once it is under way. Clean, GAAP-style audits and good operating systems that can gather data quickly from operations around the world are investments that will pay off several times over in terms of both the length of the transaction and its ultimate outcome.

While you may not view it as important to know exactly how many widgets were sold in the Fairbanks market last month because it is such a small part of your operation, a buyer may regard that approach as a lack of internal controls and lose confidence in his ability to properly monitor or run the business in the future. At a minimum, it slows the due diligence process down considerably compared with situations in which sellers have “overinvested” in information systems, thereby lengthening the whole process and reducing the element of competition necessary to drive a buyer to the right result.

Testing the market

Once the business is prepared and the timing is right, there are various strategies shareholders can select for executing a transaction. I have been involved in a spectrum ranging from approaching only one buyer and completing a deal in several weeks to full-blown auctions.

Most often private family businesses do not lend themselves well to the latter approach. In many cases a targeted solicitation can be implemented; this generates enough of a market test to give shareholders some certainty that they have in fact received the best deal, without compromising the confidentiality of the process. Very tight confidentiality agreements, staged release of information and aggressive timelines can help avoid impairing a business during the process of its possible sale. An adviser who is an important source of transaction volume for buyers and maintains high-quality data on buyer behavior over years of similar transactions is a valuable asset.

In the case of a family business with multiple shareholders, it is often a good idea to appoint one person to work with the advisers to orchestrate the process and provide, together with the professionals, regular updates to the shareholders (or board of directors, as the case may be). Someone with a good working knowledge of the business and its markets, such as the highest-ranking family executive, is usually the best choice.

Typically we write a confidential memorandum containing enough information to enable a preliminary review and valuation to take place, without sharing anything that could pose a substantial risk to the business should the memorandum find its way into the wrong hands. We take clients through a full review of all potential buyers we could possibly approach and look at strategic rationale, financial wherewithal and how they have behaved in our past transactions. The client then decides which prospective buyers, and how many of them, we will approach.

Confidentiality agreements, which prohibit solicitation of employees and any sharing of information, are negotiated, typically without ever telling the buyer the name of the company for sale. Based on a review of the memorandum, the buyers are required to submit a non-binding indication of interest containing expected value ranges, financing capabilities, etc. The seller then decides which of these preliminary offers appear interesting enough to pursue. Those parties are invited to meet with the management team and learn more about the business.

Due diligence and negotiations

If at this point there appears to be enough interest to convince shareholders to continue the process, it will be important to ensure that everyone’s incentives are aligned appropriately. For example, if the management team includes non-family members without significant shareholdings—especially the CEO or CFO—bonus payments based on transaction value can be a very good idea. Splitting the bonus into two parts and paying one part six months after a deal (unless the executive has quit working for the buyer of his own accord) can create the right incentives and assure the buyer some degree of continuity.

After sharing another level of information with this subgroup of buyers, it may be best to select one party for a more detailed due diligence process. Sometimes, if a situation is particularly competitive, multiple parties are taken through diligence. Note, however, that some buyers simply will not devote the money and executive resources to spend several weeks performing a “deep dive” unless they think they have a high chance of -success.

The time to negotiate for the continuation of philanthropic efforts and some assurance of continued community involvement is early in the discussions—ideally, while several buyers are engaged. We were involved with a transaction for a family-held printing concern that wanted contractual assurances that the buyer would not print pornography. Remember that once the transaction is closed you will likely lose your ability to achieve these aims.

Conversely, if there are expenses that will not continue into the next phase of ownership, such as salaries for family members who are not directly involved in the business, personal airplanes or travel, be sure to highlight them in order to negotiate based on the higher cash flows that will be realized by the buyer.

These transactions are typically the most important event in the history of a family-held business. The outcome can make a significant difference in generational wealth and family legacy. Upfront planning and investment can—and does—drive materially better outcomes for shareholders and the communities they live in.

Mark Brady is the head of mergers and acquisitions at William Blair & Company in Chicago (mbrady@williamblair.com). He has been advising entrepreneurs and -family-held businesses for 21 years.