How can a family business owner take care of their future?

Sebastian GOSCHORSKI
Business Development Partner at RSM Poland

More and more family businesses are facing a dilemma - whether to pass on the legacy to the next generation or rather to financially secure the existing owners?

There is a business, but there is no future

The saying "shirtsleeves to shirtsleeves in three generations" is popular in English, which means that the oldest generation started a business with nothing and built a fortune through their hard work, but when their grandchildren come to power, not much of the fortune is left and business has to be built again.

Many successful international companies are run by multi-generational families. Examples of such businesses are well-known brands - Nike, LG, or L’Oréal or Wal-Mart. Depending on how we define the notion of "influencing the company", in the US, families have an impact on about 40% of the 500 largest companies. These companies are often shown in the media as examples of family businesses that skilfully transfer power from generation to generation. Unfortunately, globally, only about 30% of family-run businesses are able to survive the transfer from the first to the second generation, and only 10-12% from the second to the third generation (according to a study by the Harvard Business School). Why? There are many reasons for this particular situation.

Selling parts of the company as an alternative to succession

The development of family businesses is strongly complicated by globalization, new technologies that quickly change the traditional rules of functioning on the market, or new fashions that strongly influence purchasing trends. There are so many changes that not all of them can be caught in time, let alone skilfully leading the company through them.

Therefore, from the point of view of the owner of a family business, often the only correct decision concerning the future of the developed assets is to sell the company.

However, the decision to sell the family business is one of the most difficult and emotional decisions an owner has to make. Among many aspects that need to be considered are relationships with other family members, the complexity of financial issues or tax issues. The situation is all the more complicated because most family businesses do not have a succession plan and discussions about it are often the reason for arguments within families.

A financial pillow not only for a rainy day

An interesting way out of this situation may be to sell part of the family business. Of course, this requires proper preparation of the company and the hiring of a person who will support the owner in this process. Nevertheless, the advantage of this type of transaction is the possibility to sell a 10-30% stake and thus retain control over the company. The partial sale of shares allows for funds which can be a security for the owner of the company to secure a peaceful pension or a way to finance investment needs to be acquired. Together with the sale of a part of the company, a partner may appear in the company in the form of a fund, which will support the company in its further development. This support may consist in preparing the company for takeover by a family successor, or exiting through the stock market or a professional investor. However, it is also possible to find an investor who will not have to participate in the current life of the organization.

Considering the impact of the coronavirus pandemic on business is not without significance for the future fate of the family's achievements. The current situation has clearly shown how often companies, including family businesses, are not prepared for events that may disrupt their operations for more than 3 months. The economic turmoil, putting a business to the test, often shows that a business that has been laboriously built over the last 30 years may cease to exist in just a few months and leave the owners without means to sustain themselves.

Plan, but prepare for the unexpected

Planning the succession or sale of a company is one of the biggest challenges facing family businesses. Many owners of such businesses have dreams of passing on their achievements to the next generation, although this is not always possible or the best option. Family business owners often live with the conviction that they will find it easy to find someone interested in working in their company in the family, which, unfortunately, is increasingly rare in the current reality. According to the research published in the report "Succession Barometer of the Next Generation Career Path in Polish Family Businesses", 8.1% of the successors want to take over the business from their parents in Poland. This result is far below the European average, which is about 10-12%. Most of the respondents rather see themselves in a corporation or building their own startup (47.3% of respondents).

The lack of a properly prepared successor or the lack of interest in succession therefore requires a different approach to business. And in the case, the partial sale of a company may be an interesting solution for business owners. Firstly, it will bring the funds needed for financial security, which can wait patiently in a bank (or can work intensively, located in appropriate investment products), or which will allow long postponed dreams, e.g. about a cruise on Cape Verde's archipelago on one's own yacht to be achieved. Secondly, it can give an impulse to potential successors to take more decisive actions to get involved in the business life of the company.

Of course, the decision to sell part of the assets must be considered in many ways; it is therefore worth knowing what to pay attention to when planning to sell the company in the near or distant future.

Do not wait too long with the decision to sell

Excessively long delays in reaching a decision or the absence of an appropriate action plan are the most common reasons for the failure to sell a business. Preparing for the sales process and then closing the transaction with a contract is a process that can take at least 6-12 months. Taking this into account, you should start preparing and planning the process as soon as possible. It is good to bear in mind that the possibility of a beneficial sale of the company appears only sometimes and missed opportunities can be very expensive. Often an offer to buy a part or all of the company appears at a completely unexpected moment, so it is better to be prepared for it in advance.

Find the right person to represent your interests

Finding the right advisor in the business sales process is very important, if not the most important element of this sentence. This has to be a well-thought-out choice, especially considering the fact that you will be working with this person for at least a dozen or so months, and that finding a suitable investor will depend on their professionalism and negotiation skills. The transaction advisor will indicate how best to conduct the process of preparing and selling the company. They will also bring in potential buyers and will strive for the highest possible transaction value.

Actively participate in the sales process

Hiring an advisor to support the sales process does not release the owner from the obligation to actively cooperate in this transaction. The owner must attend meetings with potential buyers during the sale because they know the business best. They are also best able to answer questions and explain possible problems the new business owner may encounter.

Value your business properly

Business owners tend to overstate the value of their business. Unfortunately, this does not make it any easier to acquire a buyer. Expecting payment in the amount much higher than the value of the business may lead the business owner into a blind spot. Of course, this is not always the case, especially if we are dealing with companies from the technology or innovation sector. Then the valuations can be significant, even with no profit.  Nevertheless, also in this situation, a good strategy may turn out to be selling part of the business (e.g. 20-30%) and then working together with the investor to prepare the entire company for sale. An example is Home.pl, which first gained an investor in the form of Valu4Capital, which helped the company to improve its operating results, and then made the sale for a price over twice as high as the original assumed valuation.

The valuation of the company below its real value is also a mistake.

It happens that burnout or illness of the owners affect the emotional rather than rational assessment of the state of affairs and become a bad advisor. It is better to simply employ an experienced specialist who will conduct the valuation of the company, using reliable, commonly used and accepted methods.

Choose the right buyer

When the first offers come up, it's better to wait patiently than to fall into premature euphoria and "take what they give". Most likely, the first offer will not be the best one. Special attention should also be paid to such offers, where the buyer will demand exclusivity in purchase negotiations, without paying any money in the form of a deposit. In the sales process, it is also worth remembering about the team that made the company successful.  A new owner very often needs the support of such people.

Is 2020 a good time to sell the company?

Firstly, a good time to sell a family business is the time when the owner is mentally prepared to sell shares in their company.

It can be said that the market is now at the end of the growth cycle, so it is one of the best possible moments to sell the company in whole or in part. Valuations are high, especially due to the low cost of capital, which will be used to finalize the transaction and the high appetite of investment companies. If a company has good historical results, is recognizable on its market, boasts an extensive customer base and its growth prospects are optimistic, this is the right time to look at what the market can offer.

An appropriately selected investor will not only provide financial security for the owners of the family business, but will also effectively help the company in case of another wave of the pandemic. The sale of a part of the company, the money from which can be used to secure the future in case of further market turbulence, including the return of the pandemic, may turn out to be especially interesting.