PwC | Middle East

Family Business Shareholder Exit Strategies and Valuation Principles

The unique dynamics of family-owned businesses become particularly apparent in the case of a family member deciding to leave the business. Whether this step is to be taken by business owners themselves or other stakeholders, the decision triggers a process which requires meticulous planning and open dialogue. The goal is to achieve a balancing act between preserving personal freedom and financial security of family members and ensuring that the future of the business remains intact.

Navigating a shareholder exit process can be a challenging task. Our report aims to shed light onto the process and address key aspects impacted by an exit.

Objectives of this report:

Address motivations and key considerations in the case of a shareholder exit for a fair and optimized outcome
Outline main business valuation criteria
Define exit routes that are suitable depending on the exiting shareholder’s motivation
Describe the legal framework for exits
Address high level tax considerations during exits
And ultimately, raise awareness on the importance of being prepared by setting good governance well before an exit scenario arises

Typical questions that arise during a family business shareholder exit are:

What are the agreed mechanisms that regulate the exit procedure?
How can the interests of both the departing family member and the company be protected?
How can the shares of the departing family member be fairly valued?
What is the impact on the business, the departing shareholder, and the family?
Will the departing family member retain any involvement in the company?
How should the exit be structured in order to maximize value for the company in the case of a sale to a third party?
In the case of a departing majority shareholder, should the business continue in its current form, be sold to a third party or be publicly listed?
How should the exit be structured and timed in order to maximise value and mitigate taxes and other costs for both parties involved in the transaction?

Developing good governance is essential to ensure the longevity of family-owned. Formally agreed contractual documents that bind shareholders such as the Family Protocols, the Shareholders’ Agreement (SHA), the Memorandum of Association (MOA) provide a valuable guide for an exit process and can guard the family unity.

Family Protocols

A non-binding, nonnotarised document that contains guidance for the family on exits

Shareholders' Agreement (SHA)

A binding, non-notarised document that contains various shareholder matters, including some contained in the family protocols, particularly on exits

Memorandum of Association (MOA)

A binding, notarised document that contains limited shareholder matters, as permitted by the notary public, including certain matters contained in the shareholders’ agreement and the family protocols

Every shareholder exit calls for a valuation of the business in order to be able to assess the current company worth as well as the projected future value so a fair price for the departing family member’s shareholding can be identified.

For the valuation a series of business performance factors is considered – in the case of family businesses there are additional considerations which impact the valuation outcome. This is especially relevant in the case of a sale to a third party.

Family business considerations

Key-Person Risk – Is an influential shareholder planning to depart?
Decision-making process and shareholder alignment – How are value-defining business aspects such as operations and investments impacted by decision-making?
Governance framework – Are there transparent mechanisms and regulating protocols in place?
Goal congruence amongst key stakeholders – Are the interests of shareholders and management team aligned?
Well-performing vs. underperforming parts of the business – In the case of conglomerates, are parts of the business kept in the portfolio due to historic or sentimental reasons despite being under-performing?
Majority vs. minority stake – Are the interests of an incoming external shareholder and the family aligned?

General business considerations

Nature and history of the business – What has been the historic growth of the business?
Future outlook of the business’s sector – What are the growth prospects and the key risks of the industry the business is operating in?
Revenue generating capacity and dividend paying ability – What are the forecasted profitability of the business and dividend policy?
Level of diversification – Are there increased risks or benefits due to investment in a single sector?

Important tax implications and potential opportunities should also be considered in relation to a shareholder’s exit. This is particularly the case where the business and/or the individuals involved have a presence in taxing jurisdictions or, indeed, when the buyers themselves are based in taxing jurisdictions.

With appropriate planning, business exits can be structured such that any tax costs for sellers are mitigated as far as possible. A transaction is also an opportune time for sellers and buyers to implement longer term planning and arrange their affairs efficiently for tax and legal purposes.