Family Business Director How to Sell Your Family Business
Selling a business is a three-step process. In reality, each of the phases overlaps to some degree, making the process more of a continuum than a finite set of procedures. A turnkey, orderly process typically requires four to six months. Ultimately, the collective team goal as a family business is to win the race, whether it be at the pace of the hare or the tortoise. In this week’s post, we take a deeper dive into those three phases and what that may look like for you and your family business when the time comes.
Phase I 
Phase I involves “taking inventory.” Taking inventory means gathering and analyzing financial and operating data for the family business. The goal of this process for most clients is to obtain a valuation in order to establish decision-making baselines and set transaction expectations. The valuation undertaking helps family business directors understand the business and relate the “story” of the business to the financial and operating data of the company and its industry.
Phase I promotes straightforward discussions about family and ownership objectives, which, in turn, help identify the family’s priorities and preferred transaction structures. Telling the company’s story in a clear and compelling way is important in creating effective marketing materials. If, based on value expectations and market option assessments from Phase I, the family decides to move forward with testing the market, they then enter Phase II.
Phase II
Phase II involves staging and organizing the relevant financial and operating data into a confidential information memorandum (CIM). The CIM is designed to tell the story of the business, expound on the merits of the business and its market position, and describe the seller’s preferred transaction structure. The CIM should provide enough information for prospective buyers to form an expression of interest (i.e., the initial offer). Of course, before receiving the CIM, prospective buyers must execute non-disclosure agreements, which are designed to protect the seller from having their confidential information revealed to unintended audiences.
In conjunction with the preparation of the CIM, a list of prospective buyers is created. These prospective buyers often include a mix of competitive and/or friendly industry players, private equity investors, and family offices. Phase II may also involve conducting meet-and-greet exchanges with prospective buyers in order to negotiate and secure expressions of interest in the form of letters of intent (LOIs). After careful consideration of the offers, a preferred bid is selected. Signing an LOI generally marks the end of Phase II.
Phase III
By signing the LOI, the selling shareholders commit to dealing exclusively with that buyer. One of the first steps in Phase III is satisfying the buyer’s due diligence requirements. Parallel to this process, legal advisors to both the buyer and the seller begin drafting the legal documents required to complete the transaction.
It is important to understand that the negotiating process from Phase II carries forward until the deal is closed. Deal terms often contain various structural features, including non-compete agreements, earn-out arrangements, equity roll-over provisions, escrow and holdback terms, working capital thresholds, real estate considerations, etc. The terms of these side elements can represent a significant portion of the total deal value and cannot be overlooked. The wording of the documents is part of the negotiating and deal-monitoring process. The focus is on making sure that the offer and all its terms are clearly captured in the actual transaction documents.
Assuming everything continues as planned and the closing occurs, the transaction is not completely finished until the selling family receives all the consideration promised in the deal. A portion of the total purchase price is typically held in escrow for 12 to 24 months after closing to cover potential claims by the buyer against the seller for violation of representations and warranties. The amount, duration, and conditions of escrow release are essential elements of the legal documents governing the transaction. The significance of these terms highlights the importance of remaining vigilant and engaged throughout the process to maximize the outcome.
Final Thoughts
We hope this summary of the selling process helps readers better understand the steps involved in selling the family business. Family business directors owe it to themselves and their fellow family shareholders to be aware of the liquidity options that may be available in the market.
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