15 June, 2011

Private business exit: Q10. Should you sell to family and/or staff?

In this continuing series of questions on selling a mid-size business, last week we asked “Should you sell gradually or all at once? Now we turn to the question of whether or not you should sell to family and/or staff.

I’ll repeat a postscript from an earlier question. I’ve made an assumption here that you are selling. Some people want to gift their business (or a large part of it) to staff, family or charity. Angus Tait in New Zealand, and John Lewis in Britain are classic examples. I would be foolish to try to come up with a general approach for those situations. Each is unique and requires a unique solution.  Likewise, it isn’t my intention to explore staff ownership schemes as part of a reward and retention programme. If you do have such a scheme, then, as with any shared ownership, you should arrange things such that any future sale is not hostage to minor shareholders (through compulsory purchase clauses, drag-along rights and similar mechanisms).

Returning to our theme of selling to family and staff as your business exit, there are some subsidiary questions:
  • Do they want to own the business?
  • Do they have the confidence and ability to run the business?
  • Do they have the financial means to buy the business?
  • Are you prepared to wait to enable them to buy the business?
  • Are you prepared to give away some value in order to enable them to buy the business?
Apart from the first one, where they must want to own the business, there are no right answers here, just different ones leading to different approaches. If they haven’t got the confidence and ability to run the business, maybe you can look at developing their abilities, or bringing in skilled management to meld with the existing team. If they haven’t got the financial means to buy the business, it may be possible to arrange external co-investment - private equity firms and investment firms specialise in co-investing with family and staff - or you might provide them with a loan to be paid off out of earnings (you don’t need any cash for this, it’s just converting part of the purchase price into an interest bearing debt, often secured against staff personal assets and/or business assets). You might chose to transfer ownership a piece at a time over several years (family firms often take this route) with payment out of earnings and bonuses - just make sure there are mechanisms to handle things going wrong part way through the process. There may be no need (other than altruism) to give away value in a sale to family and staff. On the contrary, they are often the ones who see the greatest value - joint staff/private equity deals are often more lucrative versus financial investors. Staff deals however can sometimes struggle to match acquisitive trade buyers with synergistic value in mind.

When planning to go to market to sell the business (for the best price), a staff group might express interest in putting in a bid (assuming they know it’s for sale). That’s OK, but you need to be aware of some risks, such as deliberate under-performance in the run-up to the sale (to deter other bidders) or inadvertent under-performance (because they are distracted from doing their jobs). Not least is the risk of them underselling the business when potential buyers meet key staff. A normal route would be to establish through indicative bids whether the staff buyers are the top contenders and then negotiate on an exclusive non-binding basis with them. If they aren’t in the hunt, then you need to get them focused back on their roles. Frankly, if they are never likely to be serious contenders, it would be better not to admit them to the bidding process.

Many private business owners would take great pleasure from seeing their family and/or staff take over the business, and there are mechanisms available to enable that. Just be clear about your own objectives and the realities of their ability to be viable buyers.

First posted September 2nd, 2008

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