Selling a family business is a momentous step for entrepreneurs and their families, with financial, emotional, and legal implications.
In order for negotiations with the potential buyer to go well, it is important to prepare this step carefully and in good time.
Below we share some food for thought on the main aspects to consider before starting the sales process.
Long-term planning.
Selling a family business requires careful and timely preparation. It is essential to start well in advance to define goals, expectations, and to address any internal issues, such as succession or family disagreements.
Managing family dynamics.
Internal family dynamics can complicate the selling process. It is important to understand the family’s motivations, involve all stakeholders, and, if necessary, use expert counsel to resolve any disagreements.
Company Valuation: An accurate valuation of the business is essential to establish a realistic and competitive selling price. It is generally useful to involve an expert to obtain an objective valuation that takes into account all financial, asset and market aspects.
Setting expectations: Understanding what the family expects from the agreement (both financially and emotionally) helps to guide negotiations effectively, avoiding misunderstandings or misaligned objectives. Having the financial expectations of the seller(s) clear from the beginning can also facilitate possible solutions during negotiations to bridge a possible gap with the buyer's expectations such as, for example, so-called earn-out price adjustment mechanisms[1] and equity rollovers[2].
Transparency in information: it is important to be transparent about all relevant information about the company, including contracts, financial situation, and any legal or tax issues. Hiding information could undermine the trust of the potential buyer and negatively impact negotiations or give rise, in the post-sale phase, to claims by the buyer for compensation for breach of commitments undertaken, starting with the breach of the representations and warranties given at closing. However, this need must be balanced with that of the sellers for protection of the Company's confidential data, especially when the buyer is a competitor. To this end, it is possible to adopt specific measures in the initial phase of negotiations such as entering into confidentiality agreements with the potential buyer And technologies such as virtual data rooms (VDR) that improve the efficiency of the due diligence process while controlling the flow of information and addressing vendor confidentiality concerns.
Legal and contractual preparation: It is obviously important to ensure that legal documents are in order, including matters relating to employment contracts, intellectual property rights and protection of company assets, and that the corporate governance structure is adequate. It is useful to have a team of legal advisors to draft contracts and ensure that all conditions are met.
Identification of possible critical aspects.
From another perspective, it is advisable to identify before starting the sales process any risk profiles or in any case critical aspects - such as the excessive dependence of the Company on personnel with key roles or on specific suppliers and customers and/or inadequate contractual regulation of the relationships with the same - to which the company is exposed. Identifying and addressing potential risk aspects in advance can in fact help to better manage them during negotiations, avoiding unexpected situations and subsequent claims by the buyer for a reduction in the sales price or compensation.
Consider business continuity: it is important to define from the beginning whether the family intends to continue to maintain a certain influence on the company, or whether some assets must be separated before the sale (such as real estate or brands). In this sense, the opportunity of involving the seller in the management of the company post-transfer should be considered, so that he guarantees the contribution of continuity and value to the company itself, and at the same time receives adequate compensation for the work performed.
Transition Management: The transition phase after the sale can be delicate. Planning how to integrate the buyer and how to manage the post-transfer period is crucial for the continuity of the business and for the peace of the family.
Tax and financial aspects: Evaluate the tax implications of the sale, such as capital gains taxes, and plan for reinvestment of the proceeds or management of the funds. A tax expert can help you optimize the tax aspects of the transaction.
Clear communication: It is essential to have clear and consistent communication with all parties involved, including company staff, to avoid discomfort or anxiety among employees and ensure a smooth transition.
Ultimately, selling a family business is a delicate moment with economic, emotional and legal implications. It therefore requires a meticulous preparation, one careful management of expectations and a strategic approach for the success of the operation.
Content by the Lawyer. Daniele Giombini
[1] These are contractual agreements that provide for the initial payment to the seller of a portion of the price and additional sums after the sale, depending on the performance of the company after the acquisition. In this way, the seller will be able to benefit from the desirable future profits of the company.
[2] These are contractual agreements that provide for the reinvestment, by the seller, of a portion of the proceeds of the sale in shares or stocks of the new company resulting from the merger or acquisition. In other words, the seller does not collect the entire sale price in cash, but converts a portion of the value of his company into equity (capital) of the new entity, benefiting from the (desired) future growth.
