Julian Lewis is head of the London Corporate Team at Halliwells, a UK law firm. He specialises in the sale of privately-owned businesses.
It is rarely a straightforward process and almost always a stressful one. Julian Lewis offers a few useful tips on how to avoid the pitfalls of selling your family business while, at the same time, negotiating the most profitable sale
There comes a time when most family business owners contemplate selling the business and moving on. Perhaps you are thinking about selling the business which your father started 20 or 30 years ago and which you and your family have worked hard to build up. The business is going well but you recognise there can be ups and downs. Perhaps the time is right to take it a little easier, have the time to enjoy the fruits of your labours, spend more time with your family and take that extended holiday you always promised yourself.
This scenario probably is not exactly the same as your situation but there will be many common elements. As a family business owner, you have both a personal and professional interest in ensuring that the best possible sale price is achieved. You are starting to prepare yourself for the sale process and you know from speaking to friends and business contacts that the process of selling a business can be long-winded and difficult at times. So what are the important lessons to help you through this process?
Protect the business
Your business is your most valuable asset. You are just about to spend six months concentrating on selling that asset rather than managing and developing it. It is possibly the most important thing you have done in your business life.
What would happen if you suddenly went on holiday for six months – taking your chief financial officer with you? On top of this, you and he keep sending emails to other members of the senior management team asking them to meet with people who do not really have any link to the business and to provide them with a huge amount of detailed information very quickly.
I suspect that at the end of the six months your business will be performing less well than when you left and, as a result, would be worth less money. This is the fundamental dilemma. The process of selling will divert your attention from running your business but you must do whatever you can to make sure that the diversion does not allow the business suffers. Any fall-off in the performance of business during the process will inevitably lead to the price being reduced and, if the sale does not go through for any reason, it will result in you having to spend even more time and effort bringing the business back to where it was before.
The golden rule in preparing for a sale is to focus on management of the business and making sure that as few people as possible are diverted from their day-to-day responsibilities.
Understanding the deal
Quite often not all of the professionals involved in selling a business really understand what it is that is being sold. What are the key attributes of the business? Is it the strength of the management team? Is it contracts that the business has in place? Is it a particular technology or is it the assets such as machinery, property or real estate? If the professionals understand what it is that is being sold, they will also understand what it is that the potential buyers are looking to acquire. This will drive how the business is marketed and what areas of the business will come under close scrutiny from a potential buyer as part of its due diligence process. It is thus crucial that you understand your family business's key strengths, and ensure these are clearly understood by the professional team advising you.
As a spin-off from this, you may also be able to identify assets within the business which are not important to current operations and will therefore not attract much value on the sale but which have significant potential. A few years ago, at an early stage of a sales process, we quickly identified that an application of the business's core technology was not being exploited. The owner was able to licence this technology and subsequently build a new business and exploit it for his own benefit later on.
Think of this from a buyer's perspective, using a somewhat over-simplified example. Imagine that you have been in negotiations to buy a company and, throughout discussions, the seller has reported the value of the company's inventory to be about $2,000,000. When your accountants go in and do their due diligence enquiries after you have agreed the terms and the purchase, they report to you that the stocks are actually only worth $600,000 and that no replacement stock has been purchased for at least three months. You would be rightly concerned – even if there is a perfectly innocent explanation. The seller's credibility with you would be severely diminished. There will inevitably be a loss of trust and goodwill that will jeopardise the deal.
In my opinion, you should not be unrealistic about what you are selling and if problems occur during the sales process do not wait for the buyer or his professional team to find them out. Instead, sit down with them, explain what has happened and tell them how the problem can be overcome. Give them a solution not a problem.
Do your own due diligence
As the owner of the family business, you need to make sure that you are aware of any issues that could have a material impact on the deal. Make sure that you and your advisers manage the buyer's expectations through the careful flow of information. The worst way to approach this is to wait for a purchaser to conduct its own enquiries and let them raise a problem you were already aware of.
I would always recommend that before formally marketing a family business the owner should carry out a basic review similar to that which a purchaser will carry out, identify any problems and deal with them before the process begins. Clearly this review will not be as detailed as the one the buyer will carry out but it should focus on the key aspects of the business. For example, if the fundamental asset of the business is its contracts, then it is important to check that they are up to date, have reasonable unexpired periods and cannot be terminated on the change of control of the business. If real estate is a large part of the asset base it is important to check there are no environmental issues. If employees are key, then as a buyer you would want to see that the employees have proper contracts with reasonable notice periods.
I have no doubt that your patience will be severely tried a number of times during the sale process. You will be asked for the same information at least three times by the same or different people. You will have to read long documents and you may be involved in long meetings going through those documents line by line, word by word and sometimes comma by comma. Do not get frustrated by the process, instead, rely on your professional team. They can often shield you from the worst elements but it will take longer and be more frustrating than you imagine. Do not let the process get you down. Remember to focus on the result you want to achieve.
A few years ago, I was acting for the seller of a medium-sized house building company in the UK who was set to earn, depending on the future performance of the business, between £30,000,000 and £60,000,000. After the first hour of the closing meeting which came after four months of negotiations, my client threatened to walk out because he felt that it was taking too long. We quickly drew up a power of attorney and let his right hand man deal with all the details. Quite an extraordinary experience for me, and I could not believe that a lack of patience could nearly undermine a transaction at such a late stage. This was probably an extreme example but be warned of the frustration that lies ahead!
Agree the important issues upfront
Your strongest bargaining position will be in the early stages of the deal. You may think that when a purchaser has spent considerable time and money on lawyers, accountants and due diligence, they will not want to risk losing a deal and will become more flexible as the process continues. In reality this is not the case. As the momentum of the deal increases and you can see yourself within touching distance of that pot of gold. You are likely to be prepared to agree to changes in the terms of the deal you would not have contemplated at the outset. You will want to complete the deal and move on to the next stage of your life. Long before the deal is being completed you will be looking forward to a more relaxed lifestyle. This can, and often is, exploited by the buyers. How many times have you heard of deals being renegotiated at the last minute? Whilst you cannot avoid this possibility, the more detail you can agree up front the better. It does not stop a buyer renegotiating later but it does make it harder for them.
Selling a family business is a long, arduous and potentially frustrating process, made all the harder by the very real emotional connection the owner will in all likelihood have with the business. However, by taking on board these six key lessons, the process can be made that bit smoother and ultimately more profitable.