Preparing To Sell A Family Business: Key Practical Considerations

For many family businesses, the ultimate goal is to preserve the legacy and pass the business down through generations. However, there may come a time when selling the business is the right decision for the family, as difficult as that often is.

While each business and family dynamic is unique, Charlie Hewlett, Corporate Partner at Boodle Hatfield shares his thoughts on several key practical matters to bear in mind when preparing a family business for a sale.

1. Minimise Dependence On Family Members

Buyers are often hesitant to purchase businesses that rely heavily on family members for their operations. While it is common for some family members to stay involved temporarily post-sale, businesses are more attractive when they can thrive independently without reliance on the selling family.

One particular issue to consider is the extent to which capable non-family managers can become more involved with running the business, a process that may take time to implement. Offering incentives, such as employee share schemes, can be a tax efficient and effective way to align staff interests with the company’s success and make the business more appealing to buyers.

2. Pre-Empt The Buyer's Due Diligence Enquiries

Any sensible buyer will conduct a due diligence process on your business before purchase. One of the biggest risks for sellers is this process uncovering a major issue that jeopardises the deal. To avoid the frustration and costs of a deal falling through, conduct thorough due diligence on your own business in advance, fix the issues you can address and ensure you have to hand the documents a reasonable buyer will ask for. You will also look a lot more credible in negotiations if you have done so.

In particular, address common issues early, such as:

• Ensuring your financial reports are clear, accurate, and well-organised (e.g., reconciled management accounts). This reporting should be set up well in advance of a sale – while many family businesses get by with informal reporting arrangements, buyers will want to see robust reports for the business's recent periods of trading.
  

• Verifying that the company owns its intellectual property, rather than contractors or individual family members.
  

• Ensuring that key employee contracts, material client and supplier agreements, and company records are up to date and well-documented.

3. Exploring Alternatives To Selling Shares

Selling shares isn’t the only way to extract value from a business. For example, setting up an employee ownership trust (EOT) can provide a tax-efficient exit while rewarding employees for their contributions.

Another option is an asset sale, where specific assets or parts of the business are sold. This approach can be particularly useful if a buyer is only interested in certain aspects of the company or if the family wishes to retain other parts of the business.

4. Managing Family Shareholders

Navigating the dynamics of family shareholders can be complex, particularly in families with multiple generations involved. It’s often a good idea to:

• Secure agreement from all shareholders before entering formal negotiations with a buyer. This minimises the risk of someone disrupting the process later.

• Designate one or two individuals to lead the negotiation process, potentially including representatives from different branches of the family.

5. Planning For Life After The Sale

Whether your family intends to invest in new ventures, purchase property, or enjoy personal pursuits, planning ahead is critical. Proactive tax planning can help you maximise available reliefs and avoid potential tax pitfalls, such as capital gains tax (CGT) or inheritance tax (IHT).

It’s also important to assess how much you need from the sale, particularly if the buyer proposes deferred payments or conditions tied to future business performance.

6. Crafting A Compelling Story About Your Business

A strong narrative can significantly influence the success of a sale. Building your brand through participation in competitions or awards can create buzz around your company. Additionally, showcasing your commitment to sustainability and environmental, social, and governance (ESG) principles can attract investors. It’s crucial to go beyond superficial greenwashing and demonstrate genuine values.

About the Author: Charlie Hewlett is a Corporate Partner at Boodle Hatfield. Find out more about the work they do with family businesses by visiting their website here