While conditions differ from sector to sector, now could be a good time to consider selling a family business.
“The current landscape continues to show strong business valuations, as well as heightened levels of consolidation and M&A activity in certain sectors. This is driven by private equity firms and trade buyers showing interest in acquiring high-potential SMEs, suggesting that the time may be right to realise the business’s value,” says Billy Sweetman, partner at PwC Private.
Selling a family business is a more complex proposition than selling a non-family business, as it often involves emotional as well as practical considerations. The decision to do so can be affected by a range of factors, Sweetman points out. These might include the absence of a designated successor who can assume leadership responsibilities; incompatible timelines for transitioning ownership – especially based on age; and readiness of potential successors – or indeed a lack of interest or commitment or skill set on the part of the next generation – to take over the family business.
“These dynamics can lead owners to determine that selling the business serves the best interest of all stakeholders, allowing the family to de-risk and preserve its legacy while setting up the business for future success under new ownership,” says Sweetman.
One of the most important issues here is to ensure that the business has a well thought out and documented business plan. A core group of key managers should be identified who can confidentially manage the presale process. A business health check should be carried out to identify and try to rectify any deficiencies and allay potential buyer concerns.
Once the business is optimised for sale, the owner should prepare a target list of potential buyers and seek to understand their acquisition strategies and motives.
This could include similar businesses in the same market who are looking to grow in scale or businesses in adjacent fields or different parts of the supply chain who might want to acquire complementary skill sets or customer bases as an alternative to growing these organically.
Feargal McCormack, senior partner and head of family business at accountancy and business advisory firm AAB, says preparation for a sale can take two to three years minimum, if starting from scratch, with the length of time in each case depending on the complexity of the business and issues involved.
It’s important to show a track record of steady growth to give comfort to potential buyers and to demonstrate good future prospects for the business, he says.
“Focus on the future sustainability of profits, which is what potential buyers will be interested in, and consider who the potential buyers might be; they could be competitors or companies looking to enter the sector for the first time,” says McCormack.
In negotiating a sale, he suggests eliminating any noncore assets, such as property or unrelated holdings, such as houses within the business. In some cases, however, these can also be sold separately or leveraged for additional value.
“This separation of noncore assets from the business offers buyers flexibility to either buy the trade alone or both trade and property. This flexibility can be crucial in negotiating value,” he says.
Selling a business is not without its hazards and McCormack suggests engaging an experienced M&A or succession adviser early to optimise the business’s valuation and to handle negotiations professionally.
“The biggest risk is losing focus on running the business while dealing with the transaction. Owners should also optimise working capital to maximise valuation, strengthen recurring revenue streams and reduce customer concentration risk.”
Sweetman agrees, and says it is critical that owners strike a balance between maintaining day-to-day operations and dedicating adequate time to the sale process, as any lapse in short-term performance could impact on both the business’s value and the outcome of the transaction.
It is essential to execute the deal process promptly and once terms are agreed upon, moving forward decisively is important, as delays can lead to unfavourable and costly outcomes. One key issue in the case of family businesses is deciding which, if any, family members will be retained within the business and to have clear expectations on both sides around issues such as control.
Having a good professional adviser engaged throughout the process is vital to a smooth and successful outcome.
“Attempting to manage the disposal process without professional guidance can lead to complications, extended timelines and lost value. Engaging seasoned advisers who understand market norms and deal dynamics is imperative,” says Sweetman.
