@.E1?5 ? lw my Wha ant to sell GOmpany, t do

I need to do?

f nsr wEEK, my investment advisor I-lcalled. He had a couple of clients who wanted to sell their small businesses. We discussed the nature of the companies: what they do, who works there, the goals of the owners, etc. After bit of discussion, it became painfully apparent to us that these gentlemen, whose firms are very small and depend on the owners for virtually every single decision or function, have nothing worth buying!

Sadly, that harsh truth is the case for the majority of family businesses. Forewarned is forearmed: It's better to deal with reality now than to hope for some future miracle.

No matter how big your company is, how clever your advisors are, or how fat your margins are, there are only five ways to dispose of a closely held or family business:

Close the doors.

. Give it away.

. Sell to insiders.

Sell to outsiders.

A combination of the four above.

In the first alternative, a family could decide the business is no longer viable, they have socked away suffi- cient savings/investments for themselves, and they simply wish to liquidate the firm and walk away. There is nothing at all wrong with this alternative, if it is consistent with the goals of the family.

The next alternative would be to give away ownership to family members, key employees, or strangers on the street, for that matter. Then the company's ownership, if not its dayto-day management, would be in the hands of others for strategic decisionmaking purposes.

In most family businesses, things are pretty clear when either the older generation owns 1007o of the company or the subsequent generation owns it all. What is often murky, and usually quite contentious, is when the senior and junior generations share ownership and must develop new rules or norms about how they will make collective, group decisions and share power.

Selling to insiders means simply the owners wish to sell to either family members who are employed in the company or key, trusted managersor a combination of the two. Again, there are power sharing and decision making questions to answer. Also, since NextGen family or employees aren't likely to have piles of cash lying about for just such an occasion, how the deal will be financed can present obstacles.

A family company could decide to sell to outsiders (including the alternative of going public). Selling out, which is often seen as a valid alternative by the owners of closely held companies, is a fantasy for most family-owned businesses.

Finally, a company could use a bit of each of the four alternatives and come up with a combination plan that makes sense. They could close down a problematic area of the company, sell a division to key managers. give certain assets to NextGen family members either during senior generation owners' lifetimes or at death, and sell another portion to outsiders if this option is viable and there are suitable purchasers.

Now, in the two "I want to sell..." instances above, the owners don't really have businesses at all, although they are incorporated, file tax returns as businesses, etc. What I mean is that businesses, by definition, are perpetual. That is, they can continue in spite of the demise or retirement of the chief executive.

What most family business owners have is not a business, but a job-and a pretty demanding, often thankless one at that. If they genuinely want to have a business capable of creating sustainable opportunity and wealth for future generations, there is a step-bystep process for doing so.

To put an even more emphatic point on the assertion that most family business owners have jobs and not businesses-and therefore their companies are not worth an outside buyer's attention-we call on the experience of one of our consultants, who had an lS-month assignment for buying viable, closely held companies for an investor's portfolio. He learned that potential buyers or investors look at hundreds of deals before they close on even one.

In evaluating the viability of a closely held company, investors want the following:

. Customers and suppliers loyal to the company, not just the owner e A company with a unique niche, with barriers to entry

. Relatively little competition

. The management team can run the company without the owner being there

. There are assets inside the company that can be leveraged (such as property or receivables)

A recurring, predictable stream of revenue

. Employees are motivated to stay, rather than leave (a buyer's worst nightmare)

The absence of any one of these seven items dramatically reduces the value of the acquisition target. The sad fact is that most sellers receive far lower selling prices than they had anticipated. If you are interested in selling your family business to outsiders, use this objective checklist to see how you stack up and where you might have deficiencies that should be improved.

If there are only five ways to dispose of a closely held company, which of the five is the most common and which alternative is the most realistic for the typical family business? The two most common transition methodologies for closely held companies are giving the company to family members over time (often while retaining a salary or other income stream from the company), and selling to insiders who could be family members, loyal employees, or any combination thereof.

The beauty of either of these two methodologies-or using them in concert-is that the insider purchasers or recipients are usually more knowledgeable about the capabilities of the company, are willing to pay a higher price in one form or another, usually have extensive emotional ties to the business and senior generation owners, will rely on the departing owners as sources of funds (which can increase total return for the sellers) and ongoing expertise, therefore causing less disruption, upheaval, and radical change than might be expected from an outside purchaser.

The best advice I can give is to start planning early for the ultimate transfer of your family business, in order to maximize your opportunities and value.

- Wayne Rivers is the president of The Family Business Institute Inc., Raleigh, N.C. Reach him at wayne.rivers@familybusinessinstitute.com or ( 877) 326-2493.

Reprinted with permission of Key Resources LLC. No portion of this article may be reproduced without its permission.

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