One of the problems with family succession planning is that the two key objectives – liquidity and preservation of the business legacy appear to be in conflict – how can you get cash without selling up? A sale to a trade buyer may be unattractive if the plan is to keep things in the family, and this is where the idea of a sale to family comes in.
This is a form of management buyout – the family members buying the business are very often the team running the company. Often it goes beyond that to key managers – hence the occasionally used abbreviation the FAMBO. This is meant to mean Family and Management Buyout, or Family Buyout, although just to confuse things I’ve recently seen it used in East Anglia to refer to a Franchisee and Management Buyout. It can also be called a VIMBO or Vendor Initiated Management Buyout – because it’s usually (though not always) the older generation which initiates the sale to the younger family members. At PEM, we prefer to refer to such deals as Succession Buyouts – because that neatly encapsulates the overarching strategic intent of the deal.
Because family relationships are involved things can go wrong so as to delay the transaction or even kill it completely. So here are some key thoughts on how to preserve family harmony whilst successfully completing a buyout.
Families ought to know one another pretty well. They know about personality traits or past circumstances giving rise to unusual levels of loyalty, or even resentment, or jealousy. This might all come out in the run up to a transaction, sometimes they are deep-seated psychological feelings, and can be almost childlike – “Dad always preferred you.” Being alert to such attitudes and steering the transaction in a sensitive way that respects feelings will help ensure success. Often the most important thing is to make sure everyone is listened to.
If your shareholder agreement doesn’t prescribe a valuation methodology, it will be helpful to everyone involved in negotiating a transaction that there should be an independent assessment of valuation. Fairness is the key to completing the transaction and maintaining positive family relationships, and possibly sanity. Neither buyer nor seller wants to looking back on the transaction with regret or suspicion.
Truly independent advisers who have the best interests of the family in mind can be hugely helpful in communications and facilitating agreement amongst the family. Each family member can get some independent advice, but it’s much better to select an adviser with a track record of brokering/facilitating such deals amongst close knit family or business groups to work for the company/family as a whole with the objective of reaching an agreement that works for all. A skilled adviser will listen to all the agenda’s and try to manage any emotional pressures that arise during negotiations.
My tax colleagues would point out that it’s really important to consider the tax and financial affairs of the whole family, up and down the generations. And a deal like this is an opportunity to consider these things holistically. Has the family provided for everyone as they intend and have they done inheritance tax planning? Again these are things that need to be done early. One of the consequences of some buyout structures is that IHT planning becomes more important – don’t leave it to the last.
Family businesses are important to us all – according to INSEAD they account for 57% of US GDP. There’s a general perception that many don’t make it beyond one or two generations. I’m not sure that’s true, INSEAD reckon there are 5,500 family businesses around the world which have been trading for more than 200 years, and we’ve certainly worked with some family businesses which are now at fourth or fifth generation stage.