Continuity, and passing on the family business to the next generation, is a hallmark of a family business, and in many ways what makes a family business stand out from others. Succession is therefore arguably the most important challenge for any family business. As such, the sale of a family business is not a common path and the focus is more often on preserving the ownership of the family business and putting in place strategies to help with succession and the wider family dynamics.
However, the transition of a family business from one generation to the next is a complex and often emotional process. It is perhaps not surprising that succession can be difficult and is also possibly the greatest cause of disputes between family members. It is important therefore even for family businesses to question whether a sale might be a better option, both for the family and possibly for the business itself. Many families do sell their businesses, often as part of a discussion on succession or simply a wider strategic overview of the future of the family, its assets and what will work best for it in the longer term.
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Whether a sale is a sensible idea will depend on a wide range of factors. The family will want to understand whether the business is marketable and what it is worth - financially, is it better to sell or continue to own the business and benefit from the continued revenue? How does the sale process work? What risks will remain for the family as a result of the sale, for example warranties given to the buyer? What is the impact on family members who work in the business, and the wider employees? Some of these questions can only be answered as the sale discussions develop but it will help to understand the broad parameters as part of the early decision-making process.
Ultimately a decision to sell will be a very personal decision and will need to be supported by all of the shareholders, and ideally the wider family members.
Sell now, but what next?
A sale can be a very positive decision and it is a chance to crystallise value and look forward to the future. A clear strategy for what to do with the sale proceeds is an important factor in the decision to sell. What will the future look like for the family after-sale? What will happen to the sale proceeds - will they be distributed to the family or used to set up a new family venture to centralise the family wealth? Without this vision, it can be difficult to make a fully informed decision to sell.
A sale can open the door to a wide range of alternative options which may better suit the family. The family’s approach becomes how to invest the sale proceeds and manage that wealth, as opposed to how to continue to run a family business. The family wealth can be put to use in different ways – it can be invested in different asset classes or allow the family to pursue a range of entrepreneurial ventures. It gives the ability to diversify wealth outside a single family business and involve a wider range of family members in different ventures.
Often a family will set up a family investment company to centralise the family wealth and provide a platform for future investment. Family investment companies provide a great deal of flexibility and they can be used to invest the wealth and to provide wider family engagement. The family may also focus on philanthropic giving and may even set up a family foundation to centralise the family’s charitable approach. We will consider and explore these options later in this series.
Selling up? Key initial points to consider
- Confidentiality is vital. A sale can be a very unsettling time for all parties involved. Therefore, any process must be carefully managed to ensure that even the prospect of a sale is kept confidential to a small group of people. This is more acute for a family business where a sale may not have been contemplated by its employees or third parties who deal with it.
- Is the business ready and can it be run without the family’s involvement? The way in which some family businesses are run is particular to the family and it may be that there is a need to prepare the business for sale and to structure the business so that it is more easily saleable (for example by appointing a non-family CEO who can transition with the business). It may be a good idea to carry out a review of the business with an eye to a sale. This is sensible in any event and will not be wasted if the deal does not proceed.
- Take advice on the sale process. There will be a number of options to market the company for sale, and this will need to be carefully thought through with your advisors. Generally, a seller will want to market the business to a wide range of buyers so that it can obtain the best price on the most advantageous terms. However, there is a tension between this and the need to keep a deal confidential. You will want to be clear about your objectives on a sale.
- It is important to understand the tax impact of a sale and what this means for the net proceeds of the sale. We also advocate taking a rounded view to tax and looking at personal tax issues, including inheritance tax. It is unlikely that these tax consequences will change your view of sale, but they should be clear and factored into the decision-making process. There may also be sensible ways to mitigate the tax exposure. For example, a sale to an employee ownership trust can have significant tax advantages (we have looked in a previous article at the use of employee ownership trusts for family businesses - here).
The decision to sell a family business will not be taken lightly and can be a difficult decision. You should carefully consider the possible impact of the sale on family members, even if they are not directly involved in the business as shareholders or employees. However, a sale is an option that should be considered from time to time; in certain circumstances it may be the better option.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, September 2021