Gibraltar is one of those unique places where the economy is dominated by family-owned businesses rather than multi-national conglomerates. Indeed, perhaps in every sector of the economy we can identify dominant family businesses, some of which have been around for over 200 years, passing from one generation to another.
Most businesses start out under family control – the exceptions are those started by, or spun out of, established public companies. Most of them also remain within private and family control; they never reach the size where they are confronted with the prospect of dealing with other shareholders.
Yet, there comes a time in the family business when selling the family business is the best answer. In some cases, it may be the only answer. That said, many families consider selling their businesses at some point in their careers. For those who have invested years of work, financial capital and often their identities in the legacy of the business, letting go is very difficult.
Reasons to sell the business tend to fall into three categories:
- Destructive family dynamics
- Inability to support a viable business under current ownership
- Lost passion for business
Destructive family dynamics may be self-explanatory. The first step is to identify the problem and discuss it as an ownership group. At that point, it may be appropriate to bring in outside help. If you have already used a family business consultant and have not been able to resolve the dissension or come to compromises the family can live with, sale may be the best option.
Even if the family owners get along, it may be that preservation of the business is impossible under current ownership. The inability to support a viable business can come from a number of sources:
- If you believe that the next-generation owners are not capable of maintaining the culture and values of the organisation, it may be best to sell to other owners who are. This notion seems counterintuitive, since one of the reasons families stay in business together is to perpetuate their business culture. However, in certain cases the next generation may not be good stewards of the asset, particularly if they have been unable to internalize the values and sense of stewardship.
- The business may not be able to compete in the current environment. If you have concerns that the problems your business faces are beyond the abilities of the current ownership group to manage, you may want to consider selling to someone who has the skills or resources to improve the business.
- If the family would like to maintain ownership, you can and should consider bringing in outside management. But, if the shareholder group is not up to the challenge of changing the business to meet the current competitive environment, it may be time to sell.
- The business may require a capital infusion to remain viable. If current owners do not have access to the capital necessary to maintain the business, either through additional equity from family or through debt or equity from other sources, then selling to someone with access to those resources may be best.
- Current owners require capital to retire and the business cannot provide the funds. In this case, the next generation can step up to the plate to buy the business from the current generation. But if next-generation members do not have the ability to secure funding, then the business may need to be sold.
The last but probably the most important reason to sell is if owners no longer have a strong passion for the business. Particularly for businesses that require a great deal of owners’ attention, it is crucial that owners maintain enthusiasm for the business. If owners’ commitment wanes, it is time to consider whether holding the business makes sense. At this point, the decision to sell becomes a purely economic one. If keeping the business is more financially lucrative than selling, absent other issues, maintaining the business with non-family management makes sense. But, even in this situation, if owners have other interests and the desire to unlock capital to invest in those interests, selling the business can make sense. One test of passion is to have owners identify the benefits they perceive from the business. If they cannot identify benefits beyond money that make the business worth keeping, it is time to decide if selling would be more lucrative than keeping the business.
According to the Financial Times (Dec. 13th 2017), despite their image of being cautious and inward-looking, family-owned businesses on average perform well. Credit Suisse research found that the returns of 1,000 family owned companies outperformed public markets by 55% between 2006 and 2017. This was despite having slacker governance standards and a conservative attitude to risk-taking. Consequently, there are plenty of strategic buyers, large corporate companies, and investment houses who would love to buy family businesses of scale and size. Don’t underestimate your company’s value to these buyers who struggle to develop cutting edge entrepreneurial businesses on their own. It is easier and quicker for them to buy the business you have spent your life building.
Having advised on selling numerous family businesses, we can say this is multi phased process involving tax planning, valuing and marketing the business, price negotiation, due diligence and documenting the sale. Don’t wait until you are near retirement, under extreme competitive pressure or in financial difficulties. Try to time the sale so you exit in a benign economic environment when there is generally more appetite from purchasers.