Thinking of selling your family business?

| August 10, 2018

Family businesses form the backbone of economies the world over.

Examples include Amy’s Kitchen, started by a US couple who turned their kitchen-based organic food business into a $500 million turnover company, and a fifth-generation Finnish paper firm, founded in 1851, that today is one of the world’s largest and most successful fibre-based businesses.

Highly profitable family firms such as these can also be found here in Australia. They include the Fairfax, Myer and Linfox companies, all of which were once small family businesses. Though most family businesses don’t achieve such fame and fortune, they most certainly contribute significantly to our economy, accounting for 70-percent of all businesses in Australia while turning over an average of $12m each per year.

However, with the average age of family business owners currently standing at 55 – and 89% of them male – never has there been a greater number of family firms changing hands. These new owners might be the next generation of family members, they might be current employees or perhaps outside buyers with no previous relationship to the firm.

Likewise, never have there been so many challenges facing family business owners or so many options for business owners to consider when planning to exit. It has never been more important to plan for the long-term future of a family-owned business.

The traditional handing down of a firm from father to son (or today, any member of the family) is occurring far less frequently as children pursue perhaps more exciting options. In fact, just 41% of business owners intend to pass their firm onto family members.

Challenges facing family firms

Modern family businesses face a number of pressing issues that affect their current and future success. Chief among these are:

Communication – previous generations took over the family company often after working in the business for many years, learning from the ground up. Today, younger family members are likely to go to university and return to the business with a different perspective on the world, new ideas and an entirely new vocabulary. This can cause significant tensions between the generations. Add family dynamics into the equation and communication can become a minefield.

Governance – only a third of family business have a formal board structure, even fewer have a family council or a family constitution. Decisions are traditionally made by the head of the family and the business, who are usually one and the same. To survive in the modern business world, modern business methods are required and often that means a formal board of directors with less centralised decision-making. This is not always popular with the business owner who may have been in sole charge for decades.

Strategic planning – it is not uncommon for family businesses to have no formal plan for the future. They concentrate on the here and now, leaving the future to look after itself. This lack of strategic planning affects all parts of the business, including how the owners will successfully exit. And whether they are able to achieve as high a price as they think their business is worth.

As well, founding business owners often become risk-averse and tend to quash any development or growth plans suggested by the next generation. This stifles growth and negatively impacts long-term performance.

Technology and change – older business owners are often less able or willing to adopt new technologies that may be needed to adapt to changing market conditions. They grew up in a time before computers whereas the new generation readily adopts new platforms, software and methods. This can leave family businesses struggling in competitive environments.

To sell or not to sell

Deciding when and how best to exit a family business can be fraught with difficulty. The next generation may not yet be sufficiently skilled or even willing to take up the reins. Perhaps the owner may not want to sell it outside the family, or they may have no choice because of ill health.

You don’t want to find yourself in the position of a business owner we know. He has been taken ill with a permanent heart condition for which there is no cure except a transplant. Because he has always been a hands-on manager – who even while desperately sick still controls the finances – the company is struggling without him.

He cares deeply about the welfare of his 16 employees and does not want to sell the business because of his concern for them. However, his entire lifetime’s work could be at stake if he does not take action soon. He faces this predicament because he had no strategic plan, no succession plan and no obvious successor waiting in the wings.

There is a common misconception amongst business owners that it’s too early to consider an exit strategy. Many don’t expect to be exiting their business for another 5, 10 or 20 years.

But it’s never too early to get professional advice!

Getting advice early pays dividends. An objective assessment of the business and discussion about the options available are the first step in readying a business for sale or preparing for transition to the next generation.

By far the best course of action is to develop an exit plan so that no matter what life throws your way, you can sell or transition the business on your terms, rather than be forced into it by circumstance.

What are your business exit plans?  How do you want to exit your business when the time comes?

The first step is to discover what your business is worth today. Using the Value Builder Score will help you develop a clear plan to increase the value of your business, so when you are ready, you’ll be in the best position to transfer your business and get a premium price.

This powerful benchmarking tool rates your business against the key factors that acquirers will pay a premium for. Over 30,000 business owners have now taken this assessment to measure their business, and companies with a score over 80 are getting valuations 71% higher than the average.

There’s no cost to take your score and it only takes about 10 minutes to complete.

Find out what your business looks like through the eyes of an acquirer. Discover what could be silently dragging down the value of your business, or whether you have untapped hidden assets with the potential to increase value.

 

SHARE WITH:
Simon Bedard

Simon Bedard is Managing Director of Exit Advisory Group, an Australian business broking and advisory firm that helps entrepreneurs develop growth strategies, build company value and create successful exit options for maximum value.

Leave a Comment

Your email address will not be published. Required fields are marked *