A recent Wall Street Journal article focuses on a potential positive in what is otherwise described as “grim statistics” for family businesses. The statistics: Only 30% of family businesses survive into the second generation; 11% survive into the third generation and 3% beyond that. Use of words like “grim” and “only” connote a terrible fate for the families of businesses that do not “survive”. However, selling the business can be the best path for many families. And, as noted in the WSJ article, now is a good time for families to consider selling.
A “Sizzling” Seller’s Market
In the article, Family Businesses Welcome Outside Buyers, the authors note “the market for family-owned businesses has been sizzling”. Even Warren Buffett seems to acknowledge this in his 2014 year-end letter by wooing family businesses directly with a message on the advantages of selling their company to Berkshire Hathaway Inc.
Reasons given for the attractiveness of family businesses are those aspects well known to anyone connected to them including lower debt levels, conservative management and low employee turnover.
Potential Benefits of Selling
Among others, the article highlights two issues I also address with my clients. First, for most families the business is the single largest asset in their “investment portfolio” (if they even recognize it in those terms). Selling the business allows families to reduce their investment risk by applying the proceeds to a significantly more diverse portfolio.
As a possible second benefit, the article quotes one owner saying that selling his family’s business “was the best way to keep family unity.” This is particularly true if there are differences on how to run the business or who will be in charge. But family unity is not an automatic byproduct of selling. Rather, it is achieved by developing a common purpose with tools such as a family mission statement, vision statement and other governance policies for the family (or a Family Constitution as I described it in a previous blog).
Is now the right time to sell?
This decision can be viewed from two perspectives. From the market perspective, the article speculates time is running out on this “seller’s market” for family businesses. The authors point to deals with decreasing multiples of earnings and speculation of higher interest rates (although we have yet to see if the recent market selloff will dampen that speculation).
Then there is the perspective of the individual family and their business. Is the business ready to be sold? Are the company’s processes and procedures streamlined and documented? Can it be run in your absence? Are you and your family ready for the business to be sold? Have you discussed the future of the business and truly understand the expectations of individual family members? Does your family already have a Family Constitution including a common understanding of the family’s purpose or legacy?
Even if you are not planning on taking advantage of the current seller’s market, it is never too soon to answer these questions in preparation for an eventual sale or even for passing the business down to the next generation.
