Selling the Family Business
What happens when a likely buyer offering big money approaches a family business? It's occurring more and more frequently these days because consolidators see great potential in buying up companies in industries where family businesses prevail.
Family businesses are sometimes so tempted by the initial offer, they look only at the traditional financial reasons why the sale makes good sense. The problem is, if you and your relatives share values, an awareness of the legacy of the business and common hopes for the future, then business motivations aren't the only reasons to think twice about selling the company, says Richard L. Narva of Genus Resources Inc., a family business consulting firm in Needham, Massachusetts.
Look at the business's future and examine the foreseeable external and internal conditions that might affect it. Consider whether this is the optimal time to sell the business given its stage of development and the market. And then determine whether the succeeding generation is in place, competent and interested in taking over. But there's more to selling a family business than the obvious. If you're holding on to the following fictions surrounding a possible sale, dispel them before you even think about it.
Fiction 1:We have to make a decision to either hold or sell. It's not an either/or situation. Depending on why you're contemplating a sale, you have any number of options-among them are recapitalizing, considering a leveraged buyout, developing an ESOP (employee stock option plan), going public, bringing in outside management to run the business and selling some of the stock to an unrelated investor.
Fiction 2:We're great negotiators, so we can easily negotiate a sale. You may be great at negotiating good prices with your suppliers, but "people who do nothing else but buy and sell companies have an extraordinary advantage over a family business owner [in negotiating this kind of transaction]," says Narva. It's naive to think you have more expertise in this field than the professionals.
Fiction 3:We have a profitable business, so it should go for top dollar. Maybe . . . maybe not. If the family is divided, it translates into a discount in the value of the business that a buyer can realize, says Narva. A savvy negotiator will use the conflict to the buyer's advantage. Make no mistake about it, buyers can easily find out which companies in an industry are vulnerable and what the points of weakness are.
Fiction 4:Even if we don't go through with the sale, there's no harm in seeing what the business is worth, just in case one day we decide to sell. Sellers rarely have an inkling about how fundamentally unsettling the due diligence process that buyers go through is. "When employees sense the unthinkable might happen-that the family might sell-their morale and productivity drop," says Charles D. Epstein, 43, of Epstein Financial Services in Springfield, Massachusetts. "You risk key people leaving and setting up a competing business next door."
Fiction 5:We'll make certain our employees get a good deal. You might be able to negotiate a good deal for yourself and your employees, but you can't expect it to hold for any length of time. That's what Manhattan Distributing Co. founder Joseph Rothberg discovered when he initially sold a third of the stock in his St. Louis wine and spirits wholesale company to a competitor. He and his son-in-law, company president Nolan Crane, got long-term contracts, and Rothberg felt comfortable with the deal because culturally there weren't that many differences between the two companies, says Margaret Crane, who is Rothberg's daughter and co-author of Arthur Andersen Answers the 101 Toughest Questions About Family Business (Prentice Hall). Still, some employees chose not to stay and for many of those who made the transition to the new owner, there was a period of grieving over what was lost. And now another transition. Recently, the company that bought out Manhattan Distributing sold to an even larger competitor, and still more cultural changes are taking place.
Even if you and your relatives stay in the employ of the original buyer, things change once the contract has been signed. Herman Schlottmann of Mesa, Arizona, can attest to that. He has stayed with Control Logic Inc., a manufacturer of computer controls that he and his wife started 27 years ago, after he sold it to four key employees in June 1999. He's happy about the sale, but he considers himself "a peon" now because he doesn't have the autonomy and freedom he once had.
Fiction 6:It won't change our relationships with each other or the community. It may not . . . but it may. Families experience a certain amount of stress when relatives work together, but where you are in the stress spectrum can determine how a sale will affect your relationships. If you and a relative dislike each other or don't have similar business goals, then a sale, which limits regular contact and takes you out of a partnership role, might enhance that relationship. If you enjoy and get sustenance from each other on a daily basis, you might feel a tremendous emotional loss when you no longer have that.
"Our stature in the community hasn't changed much because people haven't realized the sale's impact yet," says Margaret Crane. "But it might. For example, we used to donate wine to various charity events to help them raise money. Who knows if the new owners will do the same?" If you're considering a sale, look toward the future. Learn about your options by getting top-notch and sophisticated professional advice, and talk to your family. "Discussing the impact a sale would have on the family is an emotionally powerful issue," says Narva, "but it's an essential one to air." When people realize what the family business means to them, they'll know whether selling it is an opportunity they shouldn't miss or an emotional upheaval not worth the financial rewards.
Patricia Schiff Estess writes family business histories and is the author of two books: Managing Alternative Work Arrangements(Crisp Publishing) and Money Advice for Your Successful Remarriage(Betterway Press).