The Challenges of Selling a Family Business

In many family owned businesses, the owners reach a time when they are looking to sell the business to outside investors.  Perhaps there is no one in the family to pass the business on to, or it is time to cash out.  Perhaps the business needs a capital injection to take it to the next level.   All businesses can be challenged by the process of selling themselves, but family owned businesses can face a double whammy – as well as selling the business they may also need to normalise it to the expectations of potential new owners of how business should be done.  And if they fall short in this regard, decades of investment in time and money to create the business can be undermined and value lost.

At Food Strategy Associates we advise food companies and also PE investors in many aspects of business strategy and M&A.  Despite the relatively large values at stake when companies are sold, we have found many companies are ill prepared and under-resourced to optimise sale processes and the value they receive.  And whilst classic M&A bankers are well equipped to advise  how to market a business they are less well equipped to advise how to operate it or prepare it for sale.

On the face of it, private equity is a natural home for family owned businesses which are changing their ownership structure.  They are actively engaged in buying medium sized companies and can provide extra finance to drive acquisition led growth for the business whilst preserving the structure and ethos of a lean, entrepreneurial, family owned business.

However for family owned business the challenges of normalising a business whilst preparing it for sale to private equity can be particularly tough. A couple of examples spring to mind; in both cases mid-sized businesses worth in excess of £100m:

The first was a fast growing food company, with a strong but lean management led by two generations of the same family.  The older generation  was retiring and looking to sell their equity.  The business ran successfully with limited management accounts.  After all, the owners had a great feel for where money was being made and were growing profit and cash year on year consistently for 20+ years.  Customer profitability and product profitability was unmeasured at any normal level of detail.  The PE bidder ultimately couldn’t get comfortable with the lack of understanding of the sources of profit, and the business could not readily implement the expected processes to deliver granular costing detail in the middle of an auction process.

In the second example the CEO of the business being sold also performed the role of Finance Director.  The PE bidders loved the low cost of overhead in the business and the rapid decision making process, but were much less comfortable with two key roles being undertaken by one individual.  “What if he fell under a bus?” and “What are the checks and balances in the business” were examples of the questions which sprung to the fore.

In both cases the outcome was the same – a failed process, wasted senior executive time, wasted adviser fees.

And yet, the rewards for selling a business right seem more than sufficient for owners to invest in securing a sale or investment at an attractive price.

In both the above cases, it was the family business approach to finance and reporting that was a challenge.  Owner managers are often so involved in the financial detail of their business that they don’t necessarily feel they need the finance infrastructure around them that would be the norm in public or PE owned businesses.  And owner managers don’t necessarily want a finance function to validate their decisions.

But the challenges go a little deeper than “do you have a Finance Director?” or some “normal” management accounting reports?  Sale processes shine a light on data availability and reporting and PE bidders are generally conservative in their requirements – they like financial controls.  And the typical profile of PE Executives – accountancy or banking backgrounds and invariably strong numeracy skills, and lacking first hand industry experience, means that they rely on data to analyse and understand the business they are buying.   And therein lies another challenge which is particularly tough for lean family owned businesses.  Responding to the probing questions of analysts during a sale process is tough enough for corporates with significant resources.  To keep a sale process on track, the seller needs to anticipate the lines of investigation and prepare in advance of a process.

Alongside financial control and insight, leadership is a second area of difficulty for family owned and managed businesses.  Particularly as the sale event often coincides with a desire of family members to exit the business.  PE investors love the energy and entrepreneurialism of family businesses, but if the owner isn’t planning to stay around, then they will naturally question whether those business attributes can be sustained as new management comes in.  So owners need to bring in new management in advance and step away from the business, or accept they will need to stay on in their role following a sale and learn to work in a more corporate culture.

Neither choice is necessarily palatable.  But it is probably worth working out in advance which option is the most attractive given the aims of the sale process.  A failed process is surely less palatable still!