Family Businesses
How to Successfully Sell a Family Business
Introduction
Selling a family business can be a complex and emotional process. Whether you’re planning to retire, pursue other ventures, or simply feel it’s time to move on, understanding the steps involved is crucial for a successful sale. This guide will walk you through the essential aspects of selling a family business, ensuring you get the best value and transition smoothly.
Why Sell a Family Business?
Personal Reasons
- Retirement
- Pursuing new opportunities
- Health issues
Business Reasons
- Market conditions
- Financial struggles
- Lack of succession planning
Preparing Your Family Business for Sale
Financial Preparation
- Audit Financial Statements: Ensure your financial records are accurate and up-to-date.
- Valuation: Obtain a professional business valuation to understand your business’s worth.
Operational Preparation
- Streamline Operations: Make your business as efficient as possible.
- Document Processes: Ensure all business processes are well-documented.
Emotional Preparation
- Family Consensus: Ensure all family members are on the same page.
- Professional Counseling: Consider seeking advice from a business counselor.
Finding the Right Buyer
Types of Buyers
- Strategic Buyers: Companies looking to expand their market share.
- Financial Buyers: Investors looking for profitable businesses.
- Individual Buyers: Entrepreneurs looking for new opportunities.
Marketing Your Business
- Confidentiality Agreements: Protect sensitive information.
- Professional Brokers: Utilize business brokers to find potential buyers.
Negotiating the Sale
Key Considerations
- Price: Ensure the price reflects the business’s true value.
- Terms: Understand the terms of the sale, including payment structure and transition period.
Legal Aspects
- Contracts: Have a lawyer review all contracts.
- Compliance: Ensure the sale complies with all legal requirements.
Closing the Deal
Final Steps
- Due Diligence: Allow the buyer to conduct due diligence.
- Transition Plan: Develop a plan for transitioning the business to the new owner.
Celebrating the Sale
- Family Celebration: Mark the occasion with a family celebration.
- Future Plans: Discuss future plans and opportunities.
Common Mistakes to Avoid
Lack of Preparation
- Financial Discrepancies: Ensure all financial records are accurate.
- Operational Inefficiencies: Streamline operations before the sale.
Emotional Decisions
- Family Disagreements: Resolve any family disputes before the sale.
- Unrealistic Expectations: Have realistic expectations about the sale price and process.
Conclusion
Selling a family business is a significant decision that requires careful planning and execution. By following these steps, you can ensure a smooth and successful sale, securing the best possible outcome for your family and your business.
Call to Action
Ready to sell your family business? Contact our experienced brokers today for a free consultation and take the first step towards a successful sale!
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Two Similar Companies ~ Big Difference in Value
Consider two different companies in virtually the same industry. Both companies have an EBITDA of $6 million – but, they have very different valuations. One is valued at five times EBITDA, pricing it at $30 million. The other is valued at seven times EBITDA, making it $42 million. What’s the difference?
One can look at the usual checklist for the answer, such as:
- The Market
- Management/Employees
- Uniqueness/Proprietary
- Systems/Controls
- Revenue Size
- Profitability
- Regional/Global Distribution
- Capital Equipment Requirements
- Intangibles (brand/patents/etc.)
- Growth Rate
There is the key, at the very end of the checklist – the growth rate. This value driver is a major consideration when buyers are considering value. For example, the seven times EBITDA company has a growth rate of 50 percent, while the five times EBITDA company has a growth rate of only 12 percent. In order to arrive at the real growth story, some important questions need to be answered. For example:
- Are the company’s projections believable?
- Where is the growth coming from?
- What services/products are creating the growth?
- Where are the customers coming from to support the projected growth – and why?
- Are there long-term contracts in place?
- How reliable are the contracts/orders?
The difference in value usually lies somewhere in the company’s growth rate!
© Copyright 2015 Business Brokerage Press, Inc.
Photo Credit: jeltovski via morgueFile
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What Are Buyers Looking for in a Company?
It has often been said that valuing companies is an art, not a science. When a buyer considers the purchase of a company, three main things are almost always considered when arriving at an offering price.
Quality of the Earnings
Some accountants and intermediaries are very aggressive when adding back, for example, what might be considered one-time or non-recurring expenses. A non-recurring expense could be:
- meeting some new governmental guidelines,
- paying for a major lawsuit, or
- adding a new roof on the factory.
The argument is made that a non-recurring expense is a one-time drain on the “real” earnings of the company. Unfortunately, a non-recurring expense is almost an oxymoron. Almost every business has a non-recurring expense every year. By adding back these one-time expenses, the accountant or business appraiser is not allowing for the extraordinary expense (or expenses) that come up almost every year. These add-backs can inflate the earnings, resulting in a failure to reflect the real earning power of the business.
Sustainability of Earnings
The new owner is concerned that the business will sustain the earnings after the acquisition. In other words, the acquirer doesn’t want to buy the business if it is at the height of its earning power; or if the last few years of earnings have reflected a one-time contract, etc. Will the business continue to grow at the same rate it has in the past?
Verification of Information
Is the information provided by the selling company accurate, timely, and is all of it being made available? A buyer wants to make sure that there are no skeletons in the closet. How about potential litigation, environmental issues, product returns or uncollectible receivables? The above areas, if handled professionally and communicated accurately, can greatly assist in creating a favorable impression. In addition, they may also lead to a higher price and a quicker closing.
© Copyright 2015 Business Brokerage Press, Inc.
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A Reasonable Price for Private Companies
Putting a price on privately-held companies is more complicated than placing a value or price on a publicly-held one. For one thing, many privately-held businesses do not have audited financial statements; these statements are very expensive and not required. Public companies also have to reveal a lot more about their financial issues and other information than the privately-held ones. This makes digging out information for a privately-held company difficult for a prospective purchaser. So, a seller should gather as much information as possible, and have their accountant put the numbers in a usable format if they are not already.
Another expert has said that when the seller of a privately-held company decides to sell, there are four estimates of price or value:
- A value placed on the company by an outside appraiser or expert. This can be either formal or informal.
- The seller’s “wish price.” This is the price the seller would really like to receive – best case scenario.
- The “go-to-market price” or the actual asking price.
- And, last but not least, the “won’t accept less than this price” set by the seller.
The selling price is usually somewhere between the asking price and the bottom-dollar price set by the seller. However, sometimes it is less than all four estimates mentioned above. The ultimate selling price is set by the marketplace, which is usually governed by how badly the seller wants to sell and how badly the buyer wants to buy.
What can a buyer review in assessing the price he or she is willing to pay? The seller should have answers available for all of the pertinent items on the following checklist. The more favorable each item is, the higher the price.
- Stability of Market
- Stability of Historical Earnings
- Cost Savings Post-Purchase
- Minimal Capital Expenditures Required
- Minimal Competitive Threats
- Minimal Alternative Technologies
- Reasonable Market
- Large Market Potential
- Reasonable Existing Market Position
- Solid Distribution Network
- Buyer/Seller Synergy
- Owner or Top Management Willing to Remain
- Product Diversity
- Broad Customer Base
- Non-dependency on Few Suppliers
There may be some additional factors to consider, but this is the type of analysis a buyer should perform. The better the answers to the above benchmarks, the more likely it is that a seller will receive a price between the market value and the “wish” price.
© Copyright 2015 Business Brokerage Press, Inc.
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Top Ten Mistakes Made By Sellers
- Neglecting the day-to-day running of their business with the reasoning that it will sell tomorrow.
- Starting off with too high a price with the assumption the price can always be reduced.
- Assuming that confidentiality is a given.
- Failing to plan ahead to sell / deciding to sell impulsively.
- Expecting that the buyers will only want to see last year’s P&L.
- Negotiating with only one buyer at a time and letting any other potential buyers wait their turn.
- Having to reduce the price because the sellers want to retire and are not willing to stay with the acquirer for any length of time.
- Not accepting that the structure of the deal is as important as the price.
- Trying to win every point of contention.
- Dragging out the deal and not accepting that time is of the essence.
© Copyright 2015 Business Brokerage Press, Inc.
Photo Credit: jppi via morgueFile
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