Posted on 9.5.17 by Christian Mancier
One of the key themes that dominate any conversation in relation to Family Businesses is the theme of succession and more often than not the thought process will often go no further than the mechanics of handing the business over to the next generation.
Whilst the idea of any Family Business is for each generation to act as a custodian and look after the business on a temporary basis until they are ready to hand it over to the next generation, increasingly we are seeing Family Businesses who are coming to a conundrum as to what happens going forward, often because there is no obvious family member who can take the business forward, especially with the next generation often forging their own successful careers elsewhere. As a consequence, we often get asked what are the alternatives.
Family Office (of sorts)
Traditionally Family Offices have been set up by very wealthy families who have essentially acted as a private equity house funding multiple investments using family money as opposed to third-party investor money. However, one alternative to the next generation is to move to a model similar to a family office where the family retain ownership of the Family Business as shareholders but back away from day-to-day involvement which is left to a non-family management team.
This model allows the family to retain the capital value of the business and take profits from the business on a regular basis, however, it requires a leap of faith with the non-family management team where recruitment of a management team that understands the need for long term value and the ownership model is essential. Formalised communication structures between the Family shareholders and the management team are essential for this model to work as the management team needs structure and direction over the needs of the family without being pulled in all directions managing unrealistic and short term demands from the Family owners.
One of the key traits for Family Businesses is the way in which they support and look after their employees through a culture of rewards and values. Whilst a sale to a third party is often an unpalatable option for some Family Businesses, some have instead moved towards an Employee Ownership model. This essentially involves selling the Family Business to a trust set up to benefit the employees of the business – akin to the John Lewis model.
Such a model will usually see the Family realising the capital value of the business (albeit usually at a slight discount (e.g. 15-25%) compared to the open market valuation) by using the business assets and existing cash to pay out the Family owners who will usually take a significant cash-out payment on day one (either from existing cash reserves or from money borrowed by the business against its assets) with the balance being paid on a deferred basis over time from the future revenues of the business.
The net effect is that the Family extract capital value, the employees get to own the business without necessarily having to raise much money personally or leverage the business excessively, the employees then benefit from the profits of the business going forward, the original culture and values are often retained and more-often-than-not the original Family members will stay involved in the business either on the management board or in key positions such as chairman or managing director ensuring a large degree of continuity.
Sale to a third party
For many Family Business owners, this is often seen as the last resort where people are keen not to be seen as the generation that (literally) sold out the Family Business. However, where there is no natural next-generation Family member to take the business on and the business won’t support a Family Office type model as set out above or is not of sufficient size to make the move toward an Employee Ownership model then realising the capital value by a sale to a third party makes commercial sense as the capital value realised can then be applied to support and benefit wider Family members, albeit outside of the Family Business itself.
Sales to third parties taken many forms. It could be a sale to a private equity house who see the value of the business, often have the necessary cash and finance to hand and can conclude such a transaction quite quickly. However, they will often be looking to maximise the return on their investment with a 3/5/7 year plan to build the business up further and exit at a decent profit on their investment.
Another option is a trade sale to a competitor where competitors in the same line of business are approached to see if they would be interested in adding the Family Business to their portfolio. The competitor could be a national chain (we have seen the likes of Travis Perkins and Buildbase take over several Family owned independent builders merchants) to a local competitor looking to expand in their locality.
Another option is some form of transaction that sees a management team take on the Family Business. This could be the existing management team comprising the senior non-family members of the business or a management team brought in specifically to acquire the Family Business. Whilst not a full move towards the Employee ownership model, this route provides many of the advantages of preserving culture and values etc whilst allowing the Family owners to exit and realise the capital value of the Family Business, albeit usually over a period of time to allow them to be paid out of the future cash flow of the business.
Whilst there is no right or wrong approach to succession planning, and each succession plan for a Family Business will be different to that of another Family Business, if there is no natural Family member (or members) to take over the Family Business as a part of a succession plan then it is a worthwhile exercise to sit down with professional advisors and discuss the other potential options that may be available and the pros and cons of each so informed decisions can be made.
For more information on the dedicated Gorvins Family Business Team, please do not hesitate to contact Christian Mancier, Corporate and Commercial Partner and Joint Head of the Gorvins Family Business Team on 0161 930 5185 or via firstname.lastname@example.org or follow Christian on twitter @mancier.
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