Implement More Structure Around Business Functions Than You May Have Today
When the time comes to exit the business, it’s important that standardized processes and procedures are in place that will enable the business to replicate success on an ongoing basis and to scale effectively. In order for a potential partner or buyer to look at the business as an enterprise that has substantial value, owners must identify the gaps that exist – they could be in the leadership ranks or how products are sold – and invest in organizational infrastructure, which will support the creation of repeatable processes and procedures that can be transitioned to new ownership.
One important area to highlight here is reliable financial reporting and organizational record-keeping. Having audited or reviewed financial statements prepared by a certified public accountant (CPA) results in increased credibility with lenders, insurance companies and other key stakeholders as well as potential investors and buyers; typically, companies with CPA-reviewed financial statements and well-organized records are better managed and more profitable.
This is also a good time to make sure the right team is in place – both internally and externally. Beyond ensuring management is properly structured and prepared to take over leadership, and potentially going through the process of hiring outside management that may not previously have been necessary, it’s also important to think about which outside advisors can help through the exit process.
Communicate the Decision with the Family, Employees and Other Key Stakeholders
When an owner makes the decision to sell the business upon retirement, it is imperative to communicate the decision with the family. Often, owners have their own assumptions about what the family is going to think – particularly that they will be hurt and upset. Through our work, we have seen that those assumptions can be very wrong. In addition, it’s important to communicate the decision in advance of any public announcement so that the family does not find out about the sale from the news. Instead, the family should be given time to process the information and ask questions, which may relate to everything from future employment to liquidity. Because the influx of questions from family members is so likely, owners should think long and hard about the “why” behind the sale and how to frame the decision before sharing the information.
It’s also imperative that the owners communicate the decision to sell with employees and other key stakeholders, who also often have many questions when they find out that an outsider is coming in. While it’s easy to get wrapped up in the transaction process, it’s important that owners take time to explain to employees the rationale behind the decision – not just that it is happening, but why it is happening and what it means for them. It may be tempting to avoid discussing the transaction until everything is signed and finalized, but employees often know something is happening and may assume the worst unless told otherwise. Sometimes, the hesitance to communicate about the transaction comes from a requirement to keep it close – owners want to make sure the transaction remains confidential and competitive, so only certain individuals who are essential to the process can be informed. In this case, working with advisors to develop messaging that acknowledges change is coming but does not give away too many details can be the best solution.
Think Through the Implications for the Family
Many owners struggle with the impact of a sale on their families. Family businesses provide a lot for families, and the loss of the business can weigh on the owners who are making the decision to sell. The business may provide liquidity and wealth, whether through dividends or salaries. In some cases, a dividend can be replicated through financial assets that also pay a dividend or provide regular liquidity; however, a financial portfolio does not generally employ family members unless they are tasked with responsibilities in a newly formed family office (which is also an option we have explored for families post-sale). Family businesses also provide families with a sense of legacy or community involvement. All of these go away when an owner sells the business.
With this in mind, it’s understandable that a top-of-mind concern among owners is what happens to the family if they don’t have a family business anymore. Families who choose to sell the business often attempt to replicate that family business experience in other ways. For example, they may choose to start a family office to continue to employ family members, or they may establish a family foundation so that they can continue to work together on a common goal. In the case where families are trying to solve for a liquidity issue, they may invest together in a particular way. Thinking through ways to solve for the gaps that may exist when the family business is no longer there can help smooth the transition for the family during and post-sale and ensure family unity continues.
Address the Emotions that Come with Selling, and Think Through Your Post-Sale Plans
The decision to sell is tremendously personal. For many owners, the business is a member of the family. It’s where owners spend their days and get their enjoyment, and it shapes their identity – so it’s no surprise that going through a sale process can be extremely emotional. In order to process these emotions and get to a point where they are fully comfortable with the sale, owners must truly understand why they are going through a sale and what they are going to get as a result. Owners who can reach the point where they are looking at objective data to inform their decision will be able to overcome much of the emotional work that needs to be done.
The emotional side of selling can often be overlooked until too late in the process, and one other area that is often ignored during a sale is the owner’s plans post-sale. It is easy to get swept up in the all-encompassing process of an exit, but it is important that owners reflect on what they will do once this intense period is complete. For more on this topic, see “Thriving After Change: Preparing for Business Transition.”
The decision to sell the family business comes with a host of personal, family and business considerations for owners. At BBH, we have helped countless owners evaluate their options and arrive at the best exit plan for their situation. Please reach out if we can be of assistance in this area.