Salient Finance

Salient Points

Planning to sell the family business

Rob McGill

Nearly 47 per cent of family business owners are considering selling their company within the next five years, according to a new research study conducted by Rothstein Kass ( Although each situation is unique, planning for such a business transition is not, and should be a part of every family business’s succession plan or governance model.

There are six primary components that need to be considered when contemplating a business transition to ensure a smooth process, not only for the family, but also for the acquiring party. Key considerations that need to be taken into account with any plan should include, but are not limited to, the following:

1. What is the motivation for selling?

This is an emotional time, and regardless of motivation, the underlying reason for selling needs to be clearly discussed and agreed on by the business’s owner(s) and leaders. This will set the stage for conversations to follow regarding valuation and the various options of selling or reducing the owner’s equity stake. Some possible motivations include:

  1. Family discord
  2. Estate planning
  3. Succeeding generation is either not in place, not ready, or simply uninterested in taking over the business
  4. Business requires a capital infusion that the family is not prepared to do
  5. The business has lost its focus
  6. Industry consolidation

2. Consider the alternatives before selling to an outside party.

Before selling to an outside party the owners should always consider alternate ways of maximizing the value of their enterprise. One option is the MBO (Management Buyout).  Another  possibility to consider is the ESOP (Employee Share Ownership Program); more than likely, your company’s staff have made significant contributions to growing the business over the years, and will want to participate. Other options will result in a shift in operational leadership and will allow for the owners to dilute their position over time,  or negate it entirely. Possible options include:

  1. Management or Employee Buyout
  2. Recapitalizing
  3. Bringing in outside management to run the business
  4. Joint Venture/Merger
  5. Going Public

3. Establishing the value of your business

Whether you want to accept it or not, this is an emotional time. If you are getting truly honest, objective advice, you will likely be told things you don’t necessarily want to hear. You need to remove the emotion attached to this process, and the first step is to hire a professional to help establish the market value of your business. This individual should not be your accountant, your lawyer, or your corporate finance advisor — while these individuals might be involved in the selling process, and will no doubt have an opinion and can apply their industry norms for determining the enterprise value, they are also (like you) biased to a certain extent. Hire a professional with a business appraisal or valuator’s designation who can determine the value of tangible and intangible assets, including brand and intellectual property, as well as look at external market factors.  Your accountant, lawyer or corporate finance advisor can refer you to the right person, or you can simply visit the websites of the following organizations: The Canadian Institute of Chartered Business Valuators, the Business Valuation Association, and the National Association of Certified Valuators and Analysts.

4. Tax planning

Taxes are unavoidable. The sooner you have a plan, the sooner it can be incorporated into your business transition plan. In all family businesses tax planning should be focused on estate planning and the potential sale of the family business. As it relates to the sale of your business, your tax bill will be based on two principles: 1) How the business is set up (is it a corporation, partnership, sole proprietorship, etc.); and 2) Whether you are selling the assets or the entity. Your audit firm or legal counsel will have good in-house tax advisors that can provide you with the right strategy.

5. Preparing the business for sale

Allow yourself and your leadership team a good 60 days to prepare the necessary information into a data room. A data room is an area where all pertinent information related to the operations, financial reporting and contract management of your company will reside for interested parties to review under strict non-disclosure agreements. Today, initial screening of information can be done electronically through mechanisms such as SharePoint or Dropbox, which your corporate finance advisor can create for you. Some of the initial material that you will require is:

  1. Previous three years’ audited financial statements
  2. Forward-looking projections (typically two years)
  3. Summary of tax filing and current government remittances (in order and current)
  4. Shareholder summary
  5. Summary of all debt obligations including real estate lease obligations
  6. Summary of all client contracts with detail of performance clauses, assignability, notice of change of control, etc.
  7. Organizational chart, compensation programs and backgrounds on key personnel
  8. Disclosure of any material change that you or your senior management is aware of that would impact the business

Once this review phase is completed, a prospective buyer will want to inspect other documents related to the business.

6. The Selling Process – Hire a professional

Some owners wait until they’ve done some preparatory work before hiring an investment banker or corporate finance advisor. This is not advised. You want to get this professional involved the moment you begin to contemplate such a transaction – not only can they help you figure out what needs to be done to maximize the company’s value, they can also orchestrate the other parties involved in the preparation, valuation, and execution of the sale process. It is a complex process, and one that requires the best of project management disciplines to ensure that timelines are met and proper control processes are in place while you continue to focus on running your company. Remember, while you are the best at selling what your company does, you are not the person to sell your company.

The planning components laid out above are basic fundamental practices that every well-managed organization, private or public, should embrace as part of their operational framework. But before you get to the last step — the selling process — you need to ask yourself two key questions:

  1. Is this the optimal time to sell the business given market conditions and the life cycle stage of the business’s development?
  2. Is the company ready, and is the family emotionally prepared, to go through the motions of selling?

Salient Finance Corporation is a professional services firm that focuses on supporting clients in the planning and execution of: business strategy; business development of channels/market expansion; mergers, acquisitions and divestitures; back office business outsourcing; and capital structuring. Call us for our insights and experience regarding business transitions.