How and when to exit a family business
How and when to exit a family business
As the number of high net worth families continues to increase across the world and with many of them presiding over their own entrepreneurial businesses, Ocorian's Family Office Executive Director, Richard Joynt draws on his experience to analyse the challenges high net worth families often face when operating a family business.
As professionals who work with entrepreneurial families for a living, we regularly come across the issue of how and when to exit a family business.
The family business is both a massive asset and a massive exposure. On the one hand, it is often the source of the wealth of the family and is therefore to be treasured and nurtured. On the other, it is the source of much anxiety – what if things go wrong and the main family asset devalues? To examine this issue, we will use a fictitious example and explore how this issue might be positively addressed.
Setting the scene
You are a family of twelve whose wealth has largely derived from a business. This business currently provides all of the family members with income, sometimes at predictable levels, sometimes at unpredictable levels. The business provides employment opportunities for some family members, and the non-family staff who work in the business have become used to working in a family-owned working environment and they enjoy it.
Selling the business has always been in the background as something to be discussed “one day”. That one day comes, and two members of the family propose that the business be sold as trading conditions are good and markets are active – “there has never been a better time to sell”.
The four family members who work in the business are unanimous in not wanting to sell – they say they believe growth prospects are high and therefore the business will become more valuable in the future. The remaining six people are confused and undecided. How should they proceed?
In this article, we will look at this regularly-experienced dilemma and suggest some ways that families can manage the apparent conflict.
Private businesses vs. family businesses
Some would argue that this dilemma is applicable to all privately-held companies, as the prospect of a sale of the business is always in the offing. However, there are specific circumstances that make the sale of a family business unique:
- If the business employs family members then a sale of the business leaves their futures uncertain – where will they work? Will the new owners want them? Will their position be untenable given their shift from owners to salaried employees? Will they be barred from working in a similar industry for a time at the request of the new owners, thereby leaving their earning potential impaired? The decision to sell impacts the owners in different ways depending on their status within the business.
- Often the business is core to the family’s vision and ideals. If the business is sold then the "raison d’être" of the family can be called into question. A recently observed example is one Indian family who realised substantial sums on the sale of their family business, only to then acquire other businesses as they felt that having common business interests held the family together and gave it a common purpose.
- Selling the family business can be seen as a failure by the descendants of the founder. Where something has taken years to build and is seen as part of the family’s history, an exit, albeit a profitable one, is seen by some as “selling out”.
- What will the family do with their money in the future? Although financial investors are quite used to recycling gains from one investment to another, some family members may either be financially unsophisticated or not particularly driven to increase their wealth.
Mechanisms for dealing with conflict
The question of selling the business can often create tensions within the family. However, there are a number of steps a family can take in order to reduce that expected tension. Many of these can be considered in advance so that when the question arises it does not come as a shock.
Mechanism one: Communicate an agreed company exit value in the years before it becomes an issue
One method we have seen for bridging this problem is for the family members to agree, in advance, what value figure they are aiming for at which the “price will be right”. This may even be combined with mechanisms for how family members achieve value at that point – be it a partial sale, an internal sale amongst family members, a full sale or even an exit funded by bank debt (less available now than a decade ago but still an option).
This is not to say that this will all go smoothly. Once the moment arrives, some family members will want to hold out for more, some will want to stay in the business for job opportunities and some will still feel conflicted. However, it does provide those who really want to achieve liquidity with the “right time” to ask the question, a moral certainty that this is not “going against the grain” of the family’s ethos (very important, as highlighted above) and sets the basis for negotiation where conflict might otherwise reign.
Mechanism two: Get some insurance money off the table
This is something which we have seen on many occasions. The family, paranoid about the possibility of having their life’s work and invested finances falter under market conditions outside their control, have a desire to realise some of their investment so that they know they will be financially comfortable and it will not all have been in vain if it goes wrong.
This is a good halfway house – any family members can participate in this partial exit and those who wish to stay in are permitted to do so. The new investor typically comes in as a minority, meaning that most day-to-day decision making remains within the family and therefore there is not an overnight, wholescale change. This will also appeal to non-family staff in the business who will see that, from their perspective, nothing much will change.
However, the impact of bringing in new investors to sit alongside the family should not be underestimated. The family used to making all the decisions up until now, being accountable only to themselves, suddenly finds themselves with new responsibilities. The cash they have received can soon be forgotten, replaced with irritation about perceived shareholder “interference”. The choice of investment partner can therefore be critical and perhaps the family should build in methods of unwinding it, should it not work in practice.
Mechanism three: Bring in an independent professional to create consensus
Sometimes the appointment of an independent advisor can be the most effective way of creating consensus. This is because communication is most often the cause of the tension and if the communication channels can be opened up within the family, then it starts to become apparent why each individual feels as they do.
In his excellent book Family Business – the Essentials, Peter Leach, an experienced family advisor, highlights that this can be achieved most effectively when the entire family agree to appoint the independent professional. If the head of the family, or the CEO of the family business, appoints the individual then often they are seen as executing the orders of that individual rather than trying to achieve consensus.
As highlighted above, family businesses are different to those other private businesses where there is no familial connection and this can be especially true in the context of decision making. The head of the family is often used to making the decisions and acting in their perception of everyone’s best interests. The younger members of the family, having grown up within the family business and having been wealthy because of it throughout their lives, may find it difficult to articulate their wants and feel intimidated by the superior knowledge of their elders.
The outcome of this process is not pre-determined, as the advisor is truly independent and is not seeking any other objective than to create consensus. It may be that the family decides to stay in the business together but create a charter for future generations, setting out their mechanisms for selling or splitting the business interests of the family.
Preparation, preparation, preparation!
This issue of when to sell the family business, in whole or in part, is undoubtedly a complex one and we have seen various families grapple with it to differing degrees of success. The key to creating an optimal position for as many family members as possible is creating mechanisms for this to be discussed and agreed upon, preferably a number of years in advance of it becoming an issue!
Ocorian's Family Office team are a professional multi-family office and client families include those of first, second and third generation wealth. Each family has the need for bespoke and highly personalised services due to their complex individual needs. If you would like to learn more about Ocorian's Family Office services, click here or contact one of our representatives below.