The flourishing of family businesses in the 1990s made them a hallmark of the Polish economy. Thoughtfully invested money, thanks to the liberalization of the economy, began to bring unexpected profits as whole families were involved in the building of the company’s value and developing Polish brands. More than 30 years later, for the generation of founders, it is time for a well-deserved retirement. Many of them are therefore confronted with the dilemma of what to do with the company and consider the possible scenarios. Most often they have to decide between passing the company on to the next generation and selling it. Either option allows owners to retire from managing the company but has completely different implications and goals.

TO SELL, OR NOT TO SELL?

The first solution involving a generational change in the company’s management allows the company to remain in the hands of the family, making it an asset passed through generations and reinforcing its traditional value as a family business. Unfortunately, in many cases, the founders are not ready to completely withdraw from the management of the company and allow themselves to rest. They have the need to constantly control and further influence the decisions made by the new board, which is not always conducive to the independence of the new generation and does not necessarily lead to further development of the company.

Selling the company, on the one hand, allows owners to completely leave the business and monetize the value built up over the years. On the other hand, it involves the necessity of accepting a surgical cut-off from the business built from scratch, which many founders are not able to do. Sales transactions can also raise concerns among owners that the terms offered by the buyer will be unfavorable to them and they will be left feeling wronged and regretting their decision. These risks, however, can be effectively prevented.

With the ongoing coronavirus pandemic, selling one’s family business may prove to be a good decision, as the risks of running a business in difficult and unstable economic conditions prove to be more difficult than expected. Selling it could be a way out. On the other hand, buying a new one, if the industry in which the family business operates is growing during the pandemic could prove beneficial as well.

PREVENTION IS BETTER

The decision to sell a business must be thought through and requires the owners to ask themselves a number of fundamental questions, such as: what final price will be satisfactory to them, are there any assets that should be separated from the company before the sale and kept for themselves, do they want to guarantee jobs for long-term employees. Clear presentation of such additional conditions to the buyer at the very beginning will prevent disappointment on both sides.

A good starting point is to have the company priced by an independent evaluator. Such a valuation can give owners an idea of the possible market price for their business and provide a baseline for negotiations with a buyer. It is also understandable that during the process of the buyers’ legal examination of the company, there may be certain risks that the buyer will use for the purpose of lowering the price or negotiating a higher amount of the security deposit, so in some cases, it is worth conducting legal examination before proceeding with the transaction in order to address any irregularities prior to the sale and take the argument away from the buyer.

Taking a closer look at one’s business helps to identify assets not necessarily essential for the activity of the company. It could be a property occupied by company owners or a side business that could be easily split into a separate entity and kept for oneself or sold separately, which could prove much more beneficial to the owners. Sometimes, on the contrary, it turns out that certain assets or rights necessary for running the business, such as a trademark or patent, belong directly to the owner as a natural person, and not to the company being sold and should be effectively transferred to the company before proceeding with the transaction.

RESPONSIBILITY FOR EMPLOYEES

Finally, some business owners are unable to decide whether to leave the company due to the bond with the staff for whom they feel responsible and obliged to look after their interests after their retirement. The ties between the owners and long-term employees are another characteristic of companies built over the years with a joint effort. Employees think of themselves as part of the company, if not of a family itself, so when deciding to sell the company, the owners often condition the finalization of the transaction upon obtaining satisfactory assurances from the buyer with regard to maintaining jobs and work conditions at an unchanged level or guaranteeing employees decent severance payments.

THE SALES CONTRACT MUST BE NEGOTIATED

Another issue is to determine the basic contractual mechanisms and safeguards of the transaction. It is not uncommon for owners to receive an extremely unfavorable draft of a share purchase agreement from the buyer with the information that the agreement contains “standard” and “non-negotiable” terms. Nothing could be further from the truth. Buyers can determine for themselves the critical boundary conditions of the transaction, whether in terms of limiting their liability for statements and assurances, the mechanisms for settling the transaction price, the extent of the non-compete clause or any additional terms relevant from their perspective. The right time for the sellers to present critical terms is at the negotiation stage of the so-called term sheet (i.e. preconditions). This document should address all of the material terms of the sale agreement, without which it would be premature to proceed to negotiate the agreement itself.

It is equally important to plan the way in which the owner should withdraw from the company and where to allocate the funds obtained from the sale in order to maximize benefits related to the transaction. Such plans may involve setting up special investment vehicles (SPV – Special Purpose Vehicles) and applying for individual tax interpretations.

COPING WITH VAST UNDERTAKING

Preparing a company for a transaction requires the commitment of the entire management team, especially those responsible for the financial and accounting departments as well as legal services. However, arranging all the above-mentioned aspects will be much easier with the help of professional financial and legal advisors in the area of M&A transactions who will be able to point out the areas which require planning and the risks on the owners’ side which can be effectively prevented in advance.

It is easier for an external advisor to negotiate with a potential buyer than it is for an owner because they operate on a purely professional level without any emotional ties to the company being sold. A good advisor will not only strive to negotiate the terms agreed upon with the client but under certain circumstances should convince them to make possible concessions, to sense the moment when the other party may, unfortunately, walk away from the table and prevent it from happening.

It is also important for the professional advisor to help the client understand that some “bargains” should be let go and await the next one. It sometimes happens that after months of trying to negotiate with the buyer, it is impossible to negotiate terms that will make the owners feel that they have sold their business fairly. And such a decision also requires thoughtful consideration and courage.

Although many of the concerns surrounding the sale of one’s business cannot be completely eliminated, proper preparation and planning of the sale of a family business should allow owners to comfortably sign the sale agreement and drink a glass of champagne with the buyer – not with relief, but with joy and a sense of having made the right decision. 



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