Family valued: Getting it right on the sale of a family business

20 December, 2011
by: Cripps Pemberton Greenish

Selling the family business can prove an emotionally and legally challenging affair, engendered perhaps by the closeness of the parties involved in the business and the underlying motivation for the sale.  But with some careful planning and obtaining the right advice, many potential pitfalls can be reduced or avoided altogether. 

Sometimes the sale of a family business cannot be avoided. There are a number of reasons why the business might be sold but these are some examples:

  • none of the family wants to work in the business and the family is finding it difficult to recruit non-family executives to run it
  • family members are not deriving sufficient income from the business and/or need to fund their retirement
  • the family cannot agree on the future direction of the business
  • the business is too small to survive on its own or
  • the family receive an offer which is too good to refuse.

In many respects the sale of a family business may be little different from the sale of any other private business.  However, there are certain characteristics of a family business sale which may need to be monitored carefully and advice sought. Any or all of the following situations can arise and add a further layer of complication to what is frequently already a complex transaction.

Multiple sellers

Longer established family businesses may have many shareholders.  The greater the number of sellers, the greater the risk of disagreement over the terms of the sale.  For example, there may be a dispute over the commercial terms or over how liability under the warranties or indemnities which will be given to the purchaser, is to be apportioned.

This aspect of the sale process may be eased if “drag-along rights” have been inserted in the Articles of Association or in any Shareholders’ Agreement. The “drag-along rights” work by entitling a specified majority of the shareholders to force the remainder to go along with the sale, on the same terms as have been negotiated by the majority. This avoids, for example, a situation where a minority shareholder endangers the whole transaction by refusing to sell because he or she does not consider the sale price is high enough.

Trustee sellers

Quite often the sellers of a family business will include the trustees of one or more family trusts.  Trustees need to tread carefully if, as sellers, they are asked to give warranties or indemnities to the buyer.  In particular, they need to check carefully whether they have the power to give those warranties or indemnities and whether, if there are any claims under the warranties or indemnities, they can be indemnified out of the trust’s assets.  They also need to think about how they limit their liability in respect of any such claims.

Sellers with different agendas

Some family members may be approaching the sale process differently from others. For example, family members who have never worked in the business may be concerned with one thing only: obtaining the best possible price. Those who have worked in the business, however, may also want to ensure that the employees are looked after by the purchaser. This may lead to conflicting views on the merits of competing offers for the business.

Being prepared for the purchaser’s due diligence

When advising sellers on how to prepare for the sale of a business, one of the most common points made by professional advisers is the importance of properly documenting the business’ contractual relationships.

In the case of a family business, a lack of formality may mean this aspect has been overlooked – more so than in other businesses.  For example, insufficient attention may have been paid to issuing contracts of employment or to documenting the company’s relationships with third parties, such as agents or distributors.

The family may be unconcerned about the lack of documentation because the relationships in question have always been harmonious and commercially successful.  However, a prospective purchaser may take a different view.  For example, if the family business has an overseas distributor, it may be concerned to clarify which country’s law governs the relationship or what period of notice is required to end the relationship.

Uncertainty about such fundamental terms could unsettle the purchaser.  It is therefore important to address issues such as this well in advance of any sale.

Keeping the workforce on side

It is quite common for older established family businesses to have a number of long-serving non-family employees.  In some cases previous generations of those employees may have worked in the business and there may be a surprisingly close bond with some family members.  When the news of an impending sale emerges, any such close bond may start to loosen.  There may be a feeling among the employees that they are being “sold down the river” or abandoned.  This may be particularly so if the business is being sold to a purchaser who is likely to change the culture or identity of the business.  The employees will therefore need to be managed carefully, especially if some are key to the future success of the business.

An emotional journey

More generally, the sale of a family business can be a difficult emotional journey for family members, particularly those working in the business.  However sound the commercial reasons for a sale, inevitably there may be a feeling of sadness (or possibly even guilt) that the business has not survived as a family business.  Younger family members, on the other hand, may feel resentful that the sale will deprive them of an opportunity to earn a living.  Sensitivities such as these will again need to be managed carefully and appropriate advice sought from the outset.