Here are ideas from our current issue that may be helpful in running your family business. Subscribers can access the full text of these articles in the Autumn 2008 issue of Family Business Agenda or in our online archives. Visit our online circulation office to order a subscription.

 
• Preparing the family for a business transition    • Be prepared to capitalize on a chance to sell your business    • Mistakes to avoid when selling your family business    • Tips for a successful merger   

Preparing the family for a business transition

• Engage the next generation in discussions about the future direction of the business and gain an understanding of their interests.

• Discuss the risks to family unity associated with any sale or acquisition.

• Clarify the family’s mission and use it to define what the family expects from the business.

• Assess the external forces for change that can affect the future of the family enterprise and develop strategies for managing the impact of such changes.

• Be attentive to the emotional risks and benefits of any transaction and prepared to respond to any opportunities and threats presented.

• Recognize when transitions can be effected without transactions and engage the family in planning for the transitions that are part of each transaction.

—From “Family transitions and M&A transactions,” by Fredda Herz Brown and Sam Davis III, Family Business Agenda, Autumn 2008.

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Be prepared to capitalize on a chance to sell your business

1. Think like a buyer. Most sellers do not consider buyer needs until a sale is imminent. Buyers should see that you have cared for the business enough to ensure it can compete with the best and be a profitable investment for them. The better you care for your business from the start, the easier it will be to attract the attention of a quality buyer when it becomes necessary to sell the business.

2. Make your company attractive to brokers. While selling a business might be a once-in-a-lifetime experience for a business owner, brokers do it all the time and have the skills to review your business to determine if they can find qualified buyers. The good brokers will not waste their time on impaired businesses that they know will be a headache to try to sell. Businesses that are fully prepared will easily stand out in the eyes of the best brokers and the highest bidders.

3. Develop a simple strategic plan that is known throughout your company. Draft a clearly written strategic plan that tells a believable and easily sharable story about the future you your business. It is also a good idea to attach financial projections to the plan. This signals that you are confident about what’s in store for the operation and have nothing to hide.

4. Keep your financials in check. Poor internal bookkeeping has hindered many potential sales and cost owners millions of dollars in proceeds. Remember that if you can’t measure the financial strengths of your business, the buyer can’t value it.

5. Ensure that your business can run without you. Attract and train highly qualified managers who can properly run the business in your absence.

—From “Always be prepared to capitalize on a chance to sell your business,” by Mark Rittmanic, Family Business Agenda, Autumn 2008.

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Mistakes to avoid when selling your family business

1. Failure to integrate estate and business planning. Without appropriate planning, effective control of the business can be dispersed among a disparate group of beneficiaries with very different levels of business acumen and varied objectives. Such arrangements often result in stalemate and disaster.

2. Failure to line up the family members. If the selling group appears to be in disarray, some potential buyers will not even spend the time to investigate the opportunity. One approach is to desingate a single person as the selling group’s representative. If that is not possible, there should be a clear understanding as to how the selling group will make decisions.

3. Failure to assemble an experienced team. Family business leaders are often out of their depth when it comes to an M&A transaction. Moreover, they often avoid or delay engaging a team to help them maximize value.

4. Failure to prepare for due diligence. A truly interested buyer will deliver to the seller a lengthy and detailed due diligence questionnaire. All too often, inexperienced sellers are unprepared to complete these forms. Well-advised sellers anticipate the suitor’s questions by setting up data rooms, often electronic in nature, where all the information is waiting.

5. Failure to properly structure the deal. If planning is undertaken early enough, the sellers can structure the operating entity as an S corporation or an LLC and avoid corporate-level tax.

6. Ignoring the ‘money provisions.’ In reviewing an acquisition agreement, sellers typically focus only on the stated purchase price. They fail to realize there are often sections in the agreement that can directly affect the cash they will receive.

7. Ignoring seller representations and warranties. If the sellers’ representations as to the state of the company prove to be incorrect, the buyer can bring a claim for indemnification.

8. Failure to prepare for post-closing disputes. If there is a large group of selling stockholders, they should first decide who will bear the legal costs associated with any such dispute. If litigation ensues and the sellers are ultimately found liable, how are damages to be allocated? The issue should be considered and addressed.

9. Allowing a viable buyer to walk away. Transactional lawyers advise their clients that the deal is never really closed until the wire transfer of the purchase price hits their client’s account. In negotiating the acquisition agreement, every effort should be made to eliminate as soon as possible any closing conditions over which the buyer maintains control. The sellers can also provide for a break-up fee if the buyer exits the deal.

10. Failure to anticipate second thoughts. The fact that sellers are experiencing these feelings does not automatically mean that selling the business is a mistake. Rather, the sellers should take the occasion to confer with their team members and satisfy themselves that they have covered all the bases.

—From “The top ten mistakes to avoid when selling your family firm,” by Dennis J. White, Family Business Agenda, Autumn 2008.

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Tips for a successful merger

There are some measures that can be taken to increase the likelihood that the families will peacefully and wisely divide up power, money and responsibility (and that incentivize rational behavior).

1. Provide the minority with an exit strategy. Many minority owners have a rational desire to diversify or to be more liquid. If these desires cannot be addressed at fair prices, the frustration becomes corrosive.

2. Address balance-of-power issues. Provisions can be made that:

• Give each family the same number of directors regardless of small changes in ownership.

• Require a super majority to choose leadership.

• Require that each family have a veto over the employment of the other family’s members.

• Give the minority veto power over the budget and any material changes to it.

• Provide for minority input in the selection of the board chairman.

• Provide the majority with an exit strategy.

3. Provide multi-layered oversight. Having a board oversee the officers is good. Having a committee of owners review the board’s decisions is often even better.

4. Document plans and policies, and communicate them to shareholders. being kept in the dark about company plans and policies is not just insulting; it’s suspicious.

5. Establish an outside board. Protection of the minority can often be afforded by requiring key decisions to be approved by an outside board of advisers or directors.

—From “Corporate governance in a merged company,” by Henry C. Krasnow, Family Business Agenda, Autumn 2008.

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