A guide for family businesses to managing an exit strategy

28 May 2018 Consultancy.uk

Being part of a family business does not come without its challenges, however, family businesses also provide a wealth of benefits for individuals and the wider economy. Despite this, working with family members is not for everyone, therefore, it’s important to have an efficient exit strategy in place for when it’s time to part ways.

Alexander and Co, a family business professional services firm with offices in Manchester and Salford, has put together a guide on how to create and manage an exit strategy for a family business, so that the transition into a new role is as smooth as possible.

Family Business - Is the decision to leave the business the right one?

Before making any significant changes, it’s important to assess whether leaving the business is the right decision. Firstly, consider and review the reasons for wanting to leave. Is it for a completely different career path or unhappiness within the current role. Have any family conflicts or politics contributed to the decision?

Depending upon the answers to these questions, there could be other solutions other than leaving the business such as: moving on to a better suited role within the business or introducing different processes to help avoid conflict within the business. One of the key advantages to being a part of a family business is flexibility. Therefore, make the most of this advantage and explore the other options available to reach a solution, rather than leaving the business.

Exiting the business - what will happen afterwards?

If all options have been explored and considered, it may be that leaving the business or exiting is the right decision to make. At this point, it’s worth considering all of the different exit strategies that are available.

A guide for family businesses to managing an exit strategy

The chosen exit strategy will largely depend on what the medium to long term business plans and goals are. Passing on responsibility to another family member is one option to consider, or even selling the organisation altogether. The selected option will dictate the course of action that follows. Below, we explore these options in more detail.

Passing the business onto someone else

There are several options to consider if the business or organisation is to be passed onto someone else. This could involve passing ownership onto another family member or hiring someone to fill the role. In all of these scenarios, the person filling the position will require proper training and sufficient qualifications to ensure a seamless transition, helping the business to keep running as usual.

In many cases, family business owners choose another family member who already knows the ins and outs of the organisation, to take over the soon-to-be vacant position. However, this isn’t always a viable option. In this case, someone outside the company will need to be trained in the role instead.

Selling the organisation

Making the decision to sell the family business is not one that should be taken lightly, but sometimes this course of action is needed. In this case, ownership, timing, risks and pensions will all need to be considered.

The typical sales process for a private company involves seven key stages. These are:
1. Finding buyers
2. Contacting potential buyers and gaining interest
3. Pricing or valuing the business
4. Assessing the potential returns of the transaction
5. Drafting the necessary documents
6. Tax management
7. Completing the deal

Selling a business can be a risky and lengthy process, which is why it’s always best to enlist the help of professionals during the process. This can also provide peace of mind that the transition to new ownership will be as smooth and as cost-effective as possible.

Informing family members of the plans

In order to avoid conflicts or disagreements, it’s a good idea to establish an open dialogue with all family members and business partners to provide as much detail and clarity as possible on what will happen after any exit has taken place. Emotions often run high in family businesses and it’s easy for messages to get misconstrued. As a result, communicating clearly about the decision can help avoid any heated discussions and make the transition as painless as possible.

Whilst not everyone within the organisation may agree with a family owner’s decision to leave, it’s likely that family members will still offer their support in whatever role owners choose to pursue upon leaving the family business.

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8 tips for successfully buying or selling a distressed business

18 April 2019 Consultancy.uk

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.