PwC reveals vital factors to consider when selling a family business

PricewaterhouseCoopers’ (PwC) recently conducted a survey related to the business issues facing South African family owned businesses. The results of this survey showed that family businesses in the country are most likely to change ownership in the near future for reasons which include:

  • addressing the ownership requirements of Black Economic Empowerment;
  • immigration of business owners and their families; and
  • because many young South Africans would rather look for work opportunities in large corporations, opportunities outside of South Africa or are interested in alternative life experiences.
This means that when change of ownership occurs, it would most likely include a third party.

“Sellers of the businesses need to be well prepared for the sale in order to get the best price for their business. Buyers are generally very efficient when it comes to acquiring new businesses and are sure to negotiate in order to drive the price down,” says Jean-Christophe Bouche, associate director of corporate finance for PricewaterhouseCoopers.

For the reasons set out above, the third party interested in buying the business could be an empowerment partner, trade buyer or even a financial buyer such as a private equity firm. The need for advanced planning becomes essential for many reasons but PwC highlights four of the most important:
  • To prepare the business and the staff for the impending sale;
  • Attract the right level of interest from prospective buyers;
  • Achieve the best price and terms upon sale; and
  • Concluding an efficient sale process.
In most cases family owned businesses often lack the necessary financial and reporting disciplines that exist in larger companies. Therefore, it is imperative that these aspects of the business are understood and appropriately addressed in light of the potential sale. Generally speaking family businesses also have an unrelenting dependency on the owner. If the owner wishes to exit the business, the rest of the management team needs to be mentored to prepare for the sale or an appropriate replacement must be found,” says Bouche.

It is important to note that prospective buyers are interested in businesses with a strong management team, positive cash flows and the ability to grow earnings. These factors are important value drivers. According to PwC many family businesses have never been correctly valued. This can be a serious problem because it may weaken the seller’s negotiation position as they will continually be expected to defend their price relative to the various valuation mechanics that will be applied by potential buyers. “This is a key reason why family business must place more emphasis on preparing accurate business plans and budgets,” says Bouche.

Valuation methodologies vary but should consider amongst other things, current economic conditions, the nature of the business and the industry within which it operates. Many family businesses tend to rely on a multiple of earnings figure and whilst it is certainly one methodology it is by no means full-proof.

Two important points to consider relative to value and pricing are:
  • The extent to which the results and budgets of the business incorporate private or non-market related expenses. These factors are normally considered but due to poor record keeping, a lack of transparency or similar related circumstances, most buyers are hesitant to accept these adjustments, especially where they are used to drive up profits.
  • Also, a surprisingly high percentage of business owners fail to gauge their tax exposure when selling. Very often the manner or structure of the sale can lead to a significant difference in potential tax liabilities and ultimately impact cash in the pocket.
These pointers highlight the importance of packaging a family business correctly. A successful sale can only be achieved by following a well-planned and managed process. Owners may consult professional advisors with the appropriate knowledge and experience before they embark on this kind of process. The various elements and stages of the sale process can be complex and given what is at risk, it pays to ensure that as a seller you get good advice and the best possible price for your business.