By Richard Lane, partner in the Corporate and Family Business team at leading law firm Farrer & Co.
For a family business owner, the smooth succession of the next generation taking on the reins has long been seen as the symbol of success and is one of the most important challenges for any family business. However, it has become more difficult to deliver this over the past decade, and increasingly so since the pandemic, with significant numbers of multi-generational family businesses taking the opportunity to take stock of the businesses, to review its strategic, financial and management needs and to question whether a sale might be a better option, both for the family and the business itself.
Often, families do sell their businesses as part of discussions around succession or simply a wider strategic overview of the family’s future, its assets and what will work best in the longer term. We have seen a large increase in the number of family-owned businesses at the second, third or fourth generation deciding that the time is now right to sell.
The emotional issues
With that rational economic decision to sell often comes a series of conflicting emotions for the selling generation; the most common include those for the founder, the children, the name and the often very long serving staff, all of which can be bound together in what can be described as the legacy.
For many sellers, the promise of retaining a bond with the family and the founder, as well as the continuation of that legacy, can influence their choice of a purchaser. But many families are disappointed with the promises made on a sale, because the purchaser can and often does make sweeping changes to the legacy, seeking to remove that all important link with the past.
There are, however, steps that families can take to keep that link and build that legacy even if the business is sold.
Maintaining the legacy
1. People and Culture
People will be at the bedrock of any positive legacy continuation. When deciding to sell but wanting to retain the culture, it is important to consider the management succession early. The benefit of building a management team before the start of the sale process is that the team then finds its feet and has the opportunity to flourish before a new purchaser arrives. Being able to deliver continuity after a sale reduces risks for a purchaser, allowing the culture to be maintained while also having the added benefit of increasing the purchase price.
A seller is unlikely to be able to extract concrete promises from a buyer to keep particular staff members or indeed staff numbers. Instead, a seller could allow certain employees to show their skills, their knowledge and their drive to a purchaser prior to completion. During a due diligence process before a sale, it will be important to keep the details of the transaction confidential, but as the completion date draws closer, building engagement with staff, telling them the reasons for the sale and often approaching them (sometimes jointly with a purchaser) to discuss the future vision will allow the purchaser to see the particular quality of the employees and understand what they bring to the business.