Owners' Discussion on Selling the Business
By Jennifer M. Pendergast
In this article, we address the difficult subject of how to discuss selling with the ownership group. We identify several topics to include in an ongoing dialogue concerning the possibility of a business sale.
Few family business discussions can be more contentious or fraught with emotion than the discussion about selling the business. There are instances when the ownership group agrees that sale of the business is the only answer. More often, it is not clear that selling the business is in the owners’ best interests, or it may be that selling is in the best interests of some owners but not others. It is under these circumstances that a thorough dialogue on the sale option will help owners make the appropriate decision and execute it successfully.
An interest in selling can be generated from a number of sources. A few examples include an offer for the business by an outside party, financial distress within the business, dissent among family members leading to a desire for some family members to exit, and lack of commitment of current or future owners to provide the support necessary to move the business forward. How do you begin the dialogue on considering a sale? You might think that the conversation would depend upon the reason for considering the sale—after all dissent among family members is a very different reason for a sale than receiving a great offer for the business.
The truth is that regardless of the reason for considering a sale, the right place to start the dialogue is with a discussion of the long-term vision for the business. For owners to make an educated choice between keeping and selling a business, they need to understand what the future of the business might look like (and understand what the future looks like without the business – more on that later). Questions that need to be raised in this dialogue include:
What is the long-term business vision and is it inspiring to owners?
Are owners capable of executing this vision, as either managers or overseers of strong outside management?
Does the vision create a financially attractive result for owners?
A decision is a trade-off between two or more alternatives. In the case of a business sale, the most simplistic alternatives are to sell or not to sell. To make an informed and wise decision, owners must understand what they are giving up if they sell. This requires an understanding of future strategy and a financial outlook for the business as well as an appreciation of the legacy and values that the business represents.
Once the owners have a clear picture of the business vision and opportunities, those who advocate selling must articulate what they hope to achieve through a sale. The goals for the sale can be diverse, including a desire for liquidity by some owners, a wish to reduce risk associated with problems in the business, or an effort to remove circumstances leading to family discord. Or perhaps an offer was made that’s too good to pass up. Understanding the objective(s) and motivation(s) is important because, as the old saying goes, there is more than one way to skin a cat.
The objective of the sale will define the range of possible solutions, of which selling will be only one. For example, if the objective is to provide liquidity for owners, there are other options besides selling the business, including taking on additional debt or selling part of the business to an equity partner. If the objective is to address unhappy owners who want to exit, it might be possible to finance a buyout of those owners while retaining control in the hands of a consolidated ownership group. If industry consolidation prompts consideration of a sale, the owners could think about being buyers instead of sellers.
Another important part of making a good decision is understanding the implications of making the decision versus not making the decision. In the case of keeping the business, owners must understand not just the financial implications, but also the implications for the owners’ and managers’ roles and the long-term opportunities and challenges the business may face. In the case of a sale, owners must understand the implications as well.
Financial implications of a sale can be obvious: keeping the money in the business or earning an immediate return. However, even this scenario must be considered carefully. What is the outlook for long-term return from the business versus the outlook if the money is invested elsewhere (or spent)? Understanding the financial trade-offs will require a conversation about what happens to the money after a sale. Does the family intend to retain the proceeds in an investment vehicle, or do members want to take their individual pieces and make their own investment decisions?
Non-financial implications are more difficult to quantify. For instance, what happens to family members currently employed in the business? And what are the implications for next-generation members who were considering employment? If the business is the glue that holds the family together, is there a desire to recreate that glue by developing a joint investment vehicle or a philanthropic entity? The family also will need to consider the impact of the inflow of liquid wealth on current and future generations.
Beyond the impact on the family, a sale will have an impact on non-family employees, many of whom may have dedicated years of service to the business. A sale also will have an impact on the communities where the business operates.
Given the breadth of topics that need to be considered, it is very unlikely that the decision to sell the business could ever be accomplished in one meeting. For this reason, we choose to use the word “dialogue” in framing the sale discussion. How does this dialogue start? Typically, an owner or group of owners will need to decide that the topic is worth broaching. This dialogue could start as an informal conversation among owners or a more formal presentation, depending upon the reason for the conversation as well as the size and complexity of the ownership group. Regardless of how the conversation starts, we strongly encourage owners to fully consider all the elements of the dialogue we have outlined – business vision and strategy, objectives of the sale, alternatives to a sale, and implications of a sale – before reaching a decision. The objective is not just “to sell or not to sell,” but a genuine analysis of strategic alternatives for achieving the owners’ goals.
Even if a sale is a foregone conclusion, a full and informed discussion of these topics will ensure that the impact of the sale is well understood and managed and the outcome is as positive as it can be.
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