Selling the family business

Maurice Smith is a business journalist with 20 years' experience in newspapers and broadcasting. He is the author of Great Scots in Family Business.

Selling the family business can be an emotionally taxing experience but vital for the future health of the company. However, private owners should consider the reasons for the sale before deciding on the best route

When the Turkish business dynasty Tahincioglu set out its options for growth for Kent, the confectionery business it founded nearly 50 years ago, managers identified many key issues facing corporate families worldwide.

Kent, one of Turkey's biggest confectionery manufacturers, faced some of its most serious problems since its creation in 1956. It needed to find a way out of a stressful situation, while retaining some influence on the direction of the business.

Despite sales of US$110 million last year, Kent declared a net loss of US$14 million, attributable almost entirely to devaluation of the Turkish currency. Foreign currency debts rose and domestic sales fell. It was the classic type of problem studied by economists everywhere.

As one member of the Tahincioglu family commented earlier this year: "We make a good quality product at a good price but we lack access to the export routes we need to grow."

The situation threatened to worsen last winter. Kent's modern plant outside Istanbul was running at 30% of full capacity. The company's bigger domestic rival, Ulker – enjoying sales of US$1 billion – was more efficient and making progress in all markets.

The second problem for Kent's owners was the fact that years of rivalry with domestic competitors made it difficult to construct an acceptable merger with any of them. The family considered this option, but not for long.

The solution came in the form of UK confectionery giant Cadbury Schweppes, which has paid US$90m for a 51% stake in the Turkish business. The Tahincioglu family retains 34% and – crucially – joint management rights.

Kent sells to 66 foreign markets, including the Balkans, Middle East and former Soviet Republics. But the Cadbury Schweppes deal should enable a more effective market entry into the eurozone, where the Turkish company has been particularly weak.

Motivation
Family members found the sale to be an emotional wrench, but one that is good for the business as a whole. The company is run by the children of its founder Yakup Tahincioglu, and they had previously sold just 15% of Kent to the public. Kent's example covers many of the issues faced by family businesses that consider selling up. Their motives can vary but include:

- Desire to realise wealth as a "reward" for hard work in creating the business;
- Retirement, with no family successor to take over;
- Commercial need, for the benefit of the business.

Johnston Press, today one of Britain's biggest independent local newspaper chains, survived as a family-owned business in various forms for more than 220 years before going public in 1988. When chairman Fred Johnston stood down last year, his family – which had owned the business since the late 18th century, when Fred's great-great-grandfather married the daughter of a Falkirk publisher – still owned more than 25% of the company.

For generations, the family owned a series of Scottish weekly papers, the flagship being the 40,000 circulation Falkirk Herald. Like his predecessors, Johnston served an apprenticeship on newspapers, including the Times and the Liverpool Post-Echo, before returning to the family business in 1962.

He built up the company's Scottish presence over the next 20 years but it was during the 1980s that it grew into something resembling the national giant it is today, and one of Britain's most profitable newspaper companies.

The flotation has enabled the family to meet two key targets – a financial exit for those many family members scattered around the globe and new funds for more acquisitions. Typical of a public company that retains "family" roots, Johnston espouses a simple but effective business approach.

"Our speciality is local newspapers. They are the lifeblood of their communities. We understand them and how they work, and we prefer to act in areas where our title is the market leader. It is a simple principle that has served us well," he remarks.

Considerations
Johnston took the flotation, or Initial Public Offering (IPO), route. But many advisors warn that companies that do so should consider first just why they want to sell out or go to market in this way.

If the priority is to make money by selling the business, an IPO is not the best option, believes Philip L Currie, of the California-based business advisory group Shoreline. Currie has published checklists for entrepreneurs considering the merits of a sale versus an IPO.

"A business owner's world will change almost completely after an IPO for a number of reasons, most of them related to the nature of being a public entity," he explains.

He cites greater accountability, reporting requirements and a heavier management and administrative structure as a few examples of what should be considered. "The CEO's workday, instead of becoming shorter and filled with rounds of golf, will become longer. The CEO will spend a lot of time on gruelling roadshows, touting the stock's value to investors around the world, as well as handling the new pressures that come with being a public company," warns Currie.

Shoreline, and similar advisors, advise that companies should also consider a strategic sale. This can improve the owner's chance of enhancing personal wealth and achieving best value from the business. Since buyers are effectively purchasing "the future", the responsibility transfers to them rather than remaining with the owner.

Justine Strong, a lawyer with Scottish-based Wright Johnston Mackenzie and a partner in the advisory group Family Business Solutions, points out that many issues are specific to family businesses contemplating a sale and for those thinking of buying them out.

"Often we are planning for continuity rather than sale. We need to know more than simply acting as a deal-maker. With family business clients, it is quite unique. They may never have considered selling and the buyer might be approaching them cold," says Strong.

"Very often they are not geared up to sell. It can be an outright sale or bringing in minority investors. We have noticed one interesting trend recently, where we have been approached by people wanting to buy in to a family enterprise, with a view to taking over its management or, ultimately, the company outright.

"This trend may be triggered perhaps by the stock market downturn and the collapse of the internet bubble. Family businesses have a reputation for being good at what they do," says Strong.

However, she believes that business sellers can be affected by practical, personal and emotional issues above other normal considerations, such as valuation: "For example, smaller companies can be attracted to the idea of selling to their employees, even at a lower price than might be achieved elsewhere. The question of continuity is a frequent issue and an emotional one in many ways."

Recently Strong advised a third generation service business whose head had been approached many times by larger rivals eager to buy him out: "But he had strong emotional ties to the business and its employees. Some of them were working for a company for which their mothers and fathers had worked.

"In the end, he sold to the employees, probably for much less than he could have achieved in terms of cash. I would say that money is not everything to many family businesses in this situation – it is more about continuity."

The issues
Strong and other advisors warn potential buyers that private business owners can be very sensitive about confidentiality, continuity of employment for staff and the perception of the deal by the local community. Such issues are less relevant to mainstream corporate mergers and acquisitions.

"There are emotional issues and personal priorities; for example, financial planning," adds one experienced advisor. "For those who are selling out, it is an emotional decision. Are they doing it to take up golf or look for a few non-executive directorships out there?"

Strong agrees: "In addition, confidentiality may be a normal commercial issue for everyone, but for many family businesses it is absolutely key. For example, buyers or advisors may want to advertise the deal and its value, but that could be a no-no to the seller, who would rather keep such details out of the public eye.

"One issue for many family businesses is that they are very busy concentrating on the day-to-day rather than what may happen five years ahead. There can be trigger points, such as a downturn or personal health. Sometimes an unsolicited offer comes out of the blue.

"Another issue is that of succession management. The head of the business is shocked to discover that their son or daughter has no interest in taking over. It is all about those conversations they never had, where it has been expected that the child would take over."

In Turkey, the Kent group can expect to retain some reasonable control of their business, with growth guaranteed by its link to a multinational group in the form of Cadbury Schweppes. The risk for any family business in this scenario is that as the minority shareholder, the deal must carry enough legal protection for its continued role in a business that has a strong domestic base and where employee attitudes are crucial.

As Strong predicts, the new trend for smaller and medium-sized family enterprises may be the "management buy-in". If an experienced manager enters the firm, improves its fortunes and avoids stepping on the toes of the founding family, it may indeed prove to be a marriage "made in heaven".