The impact of selling a family business goes far beyond the fiscal implications. There are profound impacts on family dynamics, individual members, non-family stakeholders, and employees. The decision to exit is not easy, but regardless of the reasons, a well-planned exit strategy must address financial and tax aspects and the intricate web of familial relationships and legacies.
So. You‘ve decided to sell the family business…A Whitepaper by David Blom.
Are you ready?
Various factors can prompt the decision to sell a family business, such as high business valuations, realignment of family assets, or changes in lifestyle. While the financial and tax implications are often the focus, we believe that the non-financial aspects of the sale, such as the impact on family relationships and legacies, are equally, if not more, important.
Without purpose, health, and meaningful relationships, wealth can be an unhappy, lonely pursuit.
We advocate for a well-prepared exit strategy that safeguards your financial and family capital. This strategic approach, which should be initiated well before the decision to sell, will help you navigate the complex balance between financial considerations and family dynamics, thereby protecting your financial future and legacy.
This whitepaper discusses the decision-making balance and key considerations for a sales process. We briefly highlight the sales process and address strategies for navigating the sale while maintaining balance.
Decision-Making in Balance
“The most critical issues facing business-owning families are family-based issues more than they are business-based issues” John L. Ward
Achieving family legacy goals requires a decision-making process honouring all key stakeholders' collective goals, objectives, and motivations. How will the change impact the family legacy journey? To be successful, the family needs to plan and understand the complex financial and non-financial interrelationships. It’s not to say that the money itself isn’t important; it is. It may even seem like the driving force based on an opportunity that makes sense or has some influential stakeholder support.
An enterprising family works in three interconnected circles: family, ownership, and business. Protecting a family legacy requires harmony between all three, not sacrificing one at the expense of another.
Not considering all elements can be detrimental when planning for, executing, and transitioning through an exit. A misalignment of the rationale, the discussion, or the final decision can cause long-term and irreversible damage to the family. By understanding and recognizing all three elements, the decision-making process can bring your family together rather than divide it.
The next sections will discuss each circle’s priorities, how each is governed, and common concerns arising through a sales process.
The Family Circle
The family circle includes all family members. This is often a large and diverse group, especially in blended families. Members can be family business employees, owners, both, or neither. Each has different viewpoints and opinions about what is important to them, their immediate family, and the overall family group. Understanding all points of view can add value to the sales process and uncover hidden traps that could damage family cohesion or drive permanent wedges in relationships.
Within a family circle, it is important to address the following topics:
family mission,
vision,
values and goals,
the health of family businesses,
financial support and distributions,
community relationships,
family health and relationships,
the family social, human, spiritual, and intellectual capital, and
ongoing business education.
Families that have undergone formal facilitated sessions often have an alignment of these matters, generally documented in a mission/vision/values/goals statement or a family constitution. This living document outlines the communication and decision-making processes (governance mechanisms) and is referred to at all family meetings.
When considering a sale, many family members will have concerns and questions, including:
Will we have employment after the sale?
What career options are available for me as we advance?
Will we receive any proceeds from the sale? If so, will this be enough for our family?
How will the sale and distributions impact relationships within the family?
Are there health issues to consider that are driving the sale?
How do we navigate from a family with a business to a family with substantial liquid wealth?
How will rising generations deal with the wealth they will steward or inherit?
How does this impact relationships with our community, friends, and social circles?
How does this impact on our family values, mission, or principles?
How do we protect the next generation against entitlement?
How do we protect ourselves from others trying to access our wealth?
Ensuring all concerns are addressed before proceeding with a sale is important. Acknowledging and alleviating the stress that future uncertainty causes will help create alignment through the sales process.
The Ownership Circle
This circle may have family and non-family members with differing agendas.
In this circle, the ownership of the business assets and deployment of capital are critical issues. In this circle, the owners are responsible for key decision-making such as:
Where, how, and when do we employ our capital?
Is the business meeting our expectations on return?
Does the business reflect the same family values it was built on?
Are the current investments meeting expectations?
Are the managers of the capital/businesses meeting expectations?
How and when do we bring in new owners?
How/when/how much do we distribute from the earnings and wealth of the business?
How do we determine when to sell?
Within the ownership circle, governing documents typically include a shareholders’ agreement and documented decision-making processes. An ownership council consisting of owners, outside advisors, and consultants could also exist, with regularly scheduled meetings and comprehensive agendas.
Concerns and questions that owners have on a sale may include:
Does the sale fit with our overall family objectives?
How are the sales proceeds used: reinvestment, distribution, philanthropic?
What impact will this have on management and employees?
How do we maximize sales proceeds while meeting our non-financial goals?
What impact does this have on existing succession planning?
Are there tax implications we need to consider?
The ownership circle is tasked with the logistics of a sales process.
The Business Circle
This circle can be family and non-family members and includes the board of directors, leadership team, employees, contractors, and valued strategic partners.
This circle is concerned with the day-to-day operations of family businesses. Here, we see issues that are more granular to the businesses themselves. These may include:
governance structures (formal Board of Directors, Advisory Council),
strategy setting and implementation,
key performance design and measurement,
management evaluation,
operational efficiencies,
staffing,
adherence to social and legal constructs, and
succession planning and leadership development.
Governing documents within the business circle may include a formal board governance structure, mission/values/guarantee statements, strategic planning guidelines, key performance indicators, and human resource and operational policies.
Concerns and questions that members of the business circle may have on exit include:
What assets are sold, and what is retained?
Are we maximizing the exit proceeds?
What will be the impact on management and employees? Will they still have employment?
Is there retention, severance, or future job opportunities?
How do we ensure continuity with customers, suppliers, and other key business relationships?
Do we need to consider post-sale governance?
The Sales Process, in Brief
Selling a business is complex. The process can take months, if not years, to complete. The demands and responsibilities of the ownership and business groups can be exhausting. On the family side, the process can be emotionally exhausting.
This article will not cover the in-depth details of the sales process. At a high level, it generally includes preparing the business for sale, engaging qualified mergers and acquisition specialists, marketing the business, managing and delivering the due diligence material, and negotiating the sale proceeds and terms and conditions. Once the sale is completed, there are often transition and post-close responsibilities. Within these time-bound demands, it is not unusual for the focus of the family leadership group to be distracted from the needs of the larger family group.
Tips and Traps for the Family
Awareness of the needs of the business, owners and the entire family ecosystem can provide the sales leadership team with better information. This will assist in a sales process that better meets the family's objectives or at least gets ahead of issues that negatively impact them.
In our experience, we have seen some tips that can help ensure a smoother sales process for the entire enterprising family ecosystem.
Start with the family circle.
Before or at the time a sale is contemplated, the family leadership should evaluate the family’s vision, values, mission, and goals. If the family has not established these, starting the process with a qualified facilitator is crucial. It is important when examining the family dynamics/issues of the family that the facilitator has skills in dealing with family dynamics. The psychology of loss of meaning and transitioning from a business family to an investing family can be triggering for families. Latent or new emotional issues can and likely will arise. Having qualified resources to help evaluate and work through these matters is critical to ongoing family relationships. Enterprising families should ensure their advisor has skills or access to skills in family wealth psychology.
Set goals collaboratively.
Working with the sales team, provide guidelines and targets that are essential, non-essential but desired and showstoppers for the family. From there, drill down a layer and consider each generation's varying issues, examining the same for family units and individual members. The end goal is not to meet every requirement but to at least consider them in the process and analyze results to manage arising issues. This can be done by the families alone. Still, we have found a facilitated process that allows for fuller discussions and manages things like group thinking, bullying, and ensuring everyone is heard.
Implement formal meetings.
Implementing formal meetings with the family group earlier is always better. The examples above were not solely the result of a lack of communication during the sales process but started very early in the relationships. The sooner a family starts a communication and decision-making process, the better the chance of strategic and family harmony. When a critical event occurs, the family will be in a better spot to navigate emotional, significant decisions.
Maintain open communication.
If the discussion around the exit is tied in with the family mission, vision, values, and goals, it is much easier for the family to accept and discuss. In one situation for a Blackwood family, the family value was to treat the employees as part of the extended family. The final sale terms did not maximize shareholder value but guaranteed ongoing employment for the team. The family discussed and agreed this was the best course for them, leading to celebration as opposed to conflict.
Address financial concerns.
While the most important thing is not money, many deep-rooted family issues will come from the financial aspects of the sale. This should be addressed upfront in family discussions. People can manage through almost any situation where there is certainty of decision, but anguish where there are unanswered questions. Discussions regarding the use of sales proceeds, including the terms and conditions around wealth distribution, will be critical to ongoing family harmony.
Keep the family informed.
The sales leadership team can make better decisions when they have more information. Knowing the family's objectives and vision can help them make decisions more efficiently. Establishing communication lines between the team and the family can prevent decisions that will negatively impact the family and provide awareness of potential issues they must navigate. Some advisors caution against such communications if they interfere with the sales process, so we advise caution about what is communicated and when. Setting expectations and boundaries early in the process is critical.
Talk About the Pyramid in the Room
When founding a family business, the purpose was to build, grow, and harvest the business to help ensure the family had all they needed to flourish. Family businesses are often linked so closely to one or more family members that they are part of their identity. Families are often associated with the businesses they own and operate, even without involvement. Society links all family members to a family business, and family members link themselves.
Upon a sale, the family identity can be torn apart. This concern impacts not only the founder or family members included in the business's ownership but should be considered for all family members.
Maslow’s hierarchy of needs addresses the idea that people are motivated to fulfill needs in a hierarchical order, fulfilling basic needs before moving on to more advanced or higher-level needs. The pyramid starts with a foundation on physiological, or survival, needs and progresses up to self-esteem and self-actualization, where a person is achieving their full potential.
Successful business founders are often looked up to, admired, and revered. They live a structured and full life. Every waking hour is filled with places to be, meetings to be had, and decisions to be made. Valued relationships with customers, suppliers, employees, and professional advisors are planned and critical to success. All crucial decisions, business relationships, and mentorship were funnelled through the founders and family members at the top of the business.
Upon exit, this identity disappears or dramatically changes. Exiting founders often comment that they feel unimportant, unvalued, and alone, which impacts their self-esteem and self-actualization. Often, a sale progresses to the 11th hour only to be stopped as the founder realizes that his future self is undefined and does not know how to fulfill the two highest needs in his life.
“I went from hero to zero overnight” remarked one of our clients.
“Penthouse to outhouse overnight,” said another.
In another situation, family members were employed in the business but not owners. Upon the sale, no proceeds were allotted to those Family members. At retirement age, they had planned on a distribution from the sale to augment their retirement planning, which was hinted at during their employment. This resulted in an unbridgeable divide in the family and financial anxiety for the retired family members, impacting their love and belonging needs as well as their safety and security needs.
In another similar instance, a founder controlled the business purse strings and doled out distributions as a control mechanism over the family. The family expected that there would be a distribution to family units upon a sale. When the sale occurred, the founder put the proceeds in trust and continued to use the distributions as a control mechanism over the family. The family currently has suspended Christmas dinner!
Work should be done to help family members impacted by an exit to help them define or redefine their path to meeting the hierarchy of needs. Without this work, the family members and the family could suffer destabilization. Some firms specialize in this work. Next Chapter Lifestyle Advisors out of Toronto specializes in this work and suggests that it could begin well before an exit is contemplated to allow for exploration of many options after exit. It is important to work with advisors skilled in identifying these emotional triggers who can address them or have resources ready to do so.
In addition to outside advisor assistance, it may be beneficial for the family to work on supporting each other through this transition, as it will impact family members differently. Working with a psychologist specializing in the impact of wealth on family enterprises has been transformative. Dr. Moira Somers of Blackwood Family Enterprise Services is a specialist in this area and has been extremely valuable to our families facing these challenges.
Conclusion
One mind is sound, but two are better. Inviting a multi-disciplined approach to an exit strategy and process is extremely valuable. Utilizing professional advisors with the family’s best interests in mind to work on the exit leads to a better result for the family. Many professionals are experts in their fields, and advice often focuses on their expertise, not considering the broader picture.
As a 28-year tax advisor, I often had a great tax plan that conflicted with family goals. Working in a multidisciplinary facilitated process broadened my thinking and provided a more comprehensive solution.
Selling the family business is a difficult decision. Working with a skilled multidisciplinary team will help you balance decision-making, ensuring all family needs are met along the journey. This is a very powerful process for families that want a successful exit for all concerned. Contact Blackwood Family Enterprise Solutions today to learn more about how we can make the sale of your business a win for everyone in your family.
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