In recent posts focusing on Business Succession Planning, I’ve recognized that often the best solution for the family is to bite the bullet and sell the business. As Denise Logan describes in The Seller’s Journey, that’s a bitter pill for most business founders to swallow. She likens it to the pit in your stomach the day you drop your oldest child off at college. Accordingly, Logan asserts that 70% of business owners fail to follow through to closing. To improve the odds, Logan urges advisors to focus not only on the transaction, but also on the owner’s transition. There are both head and heart issues at play in selling a business.
An example of a business sale success story that did make it to the finish line is Pac Paper, Inc. of Vancouver, Washington, manufacturer of paper sleeves for coffee cups and other paper products. The business had been in the family over 40 years, passed down by father to son David Morgan. Like most business owners, Morgan had no intention of selling the company, assuming it would stay in the family for generations to come. Out-of-the-blue, Morgan began receiving unsolicited call from competitors wanting to buy the company. It got Morgan thinking: who in the family was suited to run the business after him? Hard though it was to admit, Morgan came to the conclusion that the next generation wasn’t in a position to take over leading the business. He also realized that good offers wouldn’t stay on the table forever. Morgan and other co-owners accepted reality and sold the family business to a rival company. They knew that a sale was the best way to preserve family unity going forward.
For those in similar shoes to the Pac Paper Morgan family, there are steps to take prior to going to market that can help the family get the best price. My thanks to Kasper & Associates, a Fort Worth professional merger and acquisition firm, for providing me the following list entitled Business Exit: Tips to Maximize Value:
- If possible, begin preparing to sell your business 1-2 years before the expected listing date.
- Get all major shareholders and your spouse to agree with the plan to sell. Don’t assume your spouse or major shareholders will sign whatever is put in front of them to effect the sale. Seek professional help on this matter as needed.
- Try to keep an open mind about the potential value and be flexible about the terms of a proposed transaction.
- Explore tax savings strategies with your CPA or other tax advisor.
- Replace family member employees unless they plan to remain with the business after it is sold.
- In order to boost your company’s profitability, reduce or eliminate unnecessary perquisites you receive from the business.
- Replace non-productive employees with productive ones.
- Develop key employee job descriptions/resumes and an organization chart which includes all employees.
- Execute employment contracts for key employees.
- Reduce receivables; clean up your company’s financial reports; update inventory records.
- Settle liabilities and pending litigation.
- Spruce up the facility inside and out.
- Upgrade your company’s technology and fine-tune customer records using up-to-date software.
- Do post-retirement financial planning with your financial advisor.
- Develop a relationship with a professional Merger & Acquisition Specialist 1-2 years in advance of anticipated listing date and request an opinion of current market value of your company.
I’ll add another point to this list:
- Plan ahead to fill the void in your life created by selling the business. I’ll dive deeper into this point in upcoming posts and offer guidance from real-life experiences.
For those of you who are still struggling with the idea of ever selling your family business baby, I’ll close with wisdom from a family matriarch. Dennis Jaffe tells the story of a letter written by the wife of a business founder, read annually to future generations of the family. As precious to the family as the business that “Papa” built is, the matriarch acknowledges in the following Legacy Letter that circumstances could arise where they may have to sell the business in order to save the family:
“Greetings to all of you as you gather for the annual family meeting. I want you to think about a paradox—Money is important./Money is not important. There’s a lot of truth in both statements. You’ve come a long way, babies, but remember where you came from—know your roots. T. S. Eliot said, “Where is the life we have lost in living? Where is the wisdom we have lost in knowledge? Where is the knowledge we have lost in information?”
You need knowledge, wisdom, and vision. It’s our job to be good stewards of the gifts Papa left us. There are pitfalls inherent in having a family business. Be vigilant for the warning signs. I would rather you dismantle the family business than squabble over it.”
I urge all to conduct an honest assessment of your family and determine if the best course is to keep the business or sell it. No matter how precious it may feel to preserve the business, preserving the family is even more precious.
Marvin E. Blum
Selling a family business is a heavy psychological lift but is often the best solution for the family. Marvin Blum offers tips to help business sellers achieve the best outcome.