Value within the family – look at me

December 6, 2017

This is not a reference to Kath and Kim, more of a story about the apparent tsunami of business owners looking for the exit, following on from my last post Losing your hard earned.

I had a recent client that was considering succeeding his beloved business to the family or selling to an outsider and drifting off into the sunset. We started discussing business value within the family and without the family.

He told me the story of how the business was hard in the early years and more recently has financially supported his family and their lifestyles. He went on and said “Look at me…I am old, but I’m happy”.

I am a big fan of Cat Stevens and nearly broke into song, but that would have been unhelpful and not so soothing on the ears.

Value within the family

The value within family owned business is sometimes referred to as value to the owner, special value, or value in use. The business has value within the family due to:

  • Sentimental reasons. The family, mum or dad, started the business and are very proud that is has survived. It must be worth something because we love it. Unfortunately an outsider may not share your passion and at some point you need to let go.
  • Lifestyle reasons. The income and others benefits generated can be substantial in private businesses, providing a lifestyle that could not be matched with being an employee or investor. This is the hardest habit to break and requires a reduction in lifestyle to increase business value.
  • Tax management reasons. Further to the above, our tax regime allows the use of family trusts, self-managed super funds and other wonderful structures to spread the wealth or manage the family’s overall tax position. I am not going to touch this one other than to say sort out your tax affairs now.
  • Key person reasons. The owner is often critical to the ongoing success of the business due to the depth of expertise and / or relationships with customers and suppliers. The business is only valuable to the extent this risk can be reduced, either by a replacement or transfer of knowledge to a new owner.

The value to the owner is difficult to quantify for the above reasons, but useless if not able to be converted to cash upon business exit.

Value without the family

Smart owners involved in family businesses know that there is a clear difference between value with and without the family. That is, what is an outsider willing to pay for and what factors will reduce the willingness, such as:

  • Profit or cash flow: is the business profitable, generating a reasonable and consistent return to the owner? How does this compare to other asset classes or businesses in the same industry?
  • Growth: has the business achieved year on year growth, either revenue and / or profit improvements? Is this growth sustainable and are there opportunities for a new owner to improve?
  • Risk: have the owners addressed business risks like owner reliance, systems and procedures, workforce structure and culture, customer and supplier concentration, asset quality, financial discipline, governance and succession, capital structure and so on?

The business owner that has considered the above, particularly risk management, will be more attractive to an outsider and more likely result in a decent sale price.

So, unlike the Cat Stevens lyrics, it is time to make a change, just sit down and take it slowly.

Feliz Navidad (Merry Christmas) to all and thanks for the support in 2017.

Lachie McColl