The Hindu Business Line : To sell or not to sell: That is the question

Replace `to be' with `to sell' and these opening lines of Hamlet's soliloquy in Shakespeare's Hamlet, Prince of Denmark, (Act III, Scene I) would vividly reflect the dilemma any businessman faces at a certain stage of his business life. I recall an incident, which happened to my nephew Ajith. His father had passed on leaving a sizeable business, investments and valuable agricultural properties to Ajith and his siblings. Though things were in reasonable order, it took Ajith a couple of years of running through the bureaucratic labyrinths to sort out all matters. He could not help asking his auditor "What should I do to help my son escape all these troubles?" The auditor's reply, to my mind, was pithy. He told him: "Die poor."

To many non-businesspersons, the import of this statement may not sink in. Being in a family business is no bed of roses as many would like to believe. For outsiders, who can only see the external manifestations of business success such as palatial mansions, flashy cars and `extravagant' lifestyles, it is hard to imagine the sleepless nights and tortuous days a businessperson goes thorough worrying about the future of his business, closely intertwined as it is with his family life. As I mentioned in a previous article, `Preparing for the future', almost all persons managing family dominated businesses have to, at a certain stage, face the question `where do we go from here?' If the business is not doing well and the future looks bleak, the options are few — `pull down the shutters' and `sell if you can locate a buyer'.

However, the way forward is not always so easy or crystal-clear. Your business may be doing reasonably well or even exceedingly well (in which case, decision-making is a lot harder) and you will have a surfeit of options from which choosing one is quite difficult. Those of us in the `advising professions' — consultants, auditors, lawyers and the like — would tell you that you must arrive at your decision through a rational process by evaluating the situation `thoroughly' and to `keep emotions out of it'.

It is easy for us since our emotional capital invested in the business is zilch. But it is your call and the attempt here is to provide a checklist to help you through the process. At the same time I would like to remind you to be aware of the unspoken emotional overloads in the process. Herbert Simon, a Nobel Laureate and an artificial-intelligence pioneer, from Carnegie-Mellon has coined an eminently apt word `satisficing' by melding together `satisfy' and `suffice'. So you should aim at `satisficing' yourself!

A possible option is of bringing in a partner, preferably an institutional partner. Assuming that you would like to keep the business in the family and you have heirs who are both competent and willing to come into the business, this is an option I strongly advocate to some of my clients. In these days, there are only two directions in which a business can go — either up or down. Maintaining status quo is not an option. One has to keep running uphill all the time since otherwise one would fall by the wayside. More often than not, small and medium businesses will run into a few major obstacles to growth, which on his own a stand-alone businessperson might find insurmountable. They generally fall into the following categories:

Non-availability of technologies to upgrade products and processes

Paucity of funds and lack of access to funds

Poor market reach

Inadequate management bandwidth

Inability to attract talent from outside

Insufficient muscle to tackle market competition

Most businesspersons are usually loath to bring in a partner for fear of losing control, though the forces of competition are making them see virtues in doing so. If the company's financial numbers are strong, it is possible to interest strategic partners who could plug your shortcomings whether it be technology, funds or market reach, provided your company is on the upward gradient in the business cycle of your industry. Now there are very active private equity players in the country who could come in. And in the current `gung ho' mood, you could get good valuations too! Some of the benefits of bringing in a private equity/strategic partner are:

Good corporate governance practices, often neglected in closely held companies, are insisted upon and rigorously implemented.

Greater financial discipline and accountability.

Opening doors to new technologies and markets.

Taking the company to a higher trajectory of growth.

Scope for repossessing full ownership through appropriate share purchase agreements or exiting with higher pay offs at the appropriate time if one so desires.

Most importantly, taking the market value of the business through a quantum jump which otherwise might have been denied to you.

However, almost all statistics available across the world, suggest that closure or selling is the option followed by the majority of first-generation business promoters. The mortality rate, if one might use a rather unsavoury term, of a business remaining with the same family after the second generation is as high as 90 per cent. Though the thrust of this series is on exploring ways to retain the business in the family beyond the third generation, one could look at some of the base situations in which selling could become the most preferred option. Some of the situations, the list is by no means exhaustive, that usually lend weight to such a step are:

The business is built on some unique capabilities or skillsets of the members of the family management and that is totally absent among the heirs and inducting outside professionals to fill the vacuum would rob the business of its value for them.

You feel that there is no member of the family to succeed you in the business or even if you have, you would not like to saddle them with the responsibility of running the business.

You may feel that monetary wealth is easier to leave and distribute to the heirs or that you would not, like many eccentric business tycoons, want to leave your heirs with `even a farthing'.

The areas of interest, competence and passion of the progeny are far removed from what are required by the current lines of business and they would like to embark on a totally different direction and the current business interests may not be a spring board for them, but an albatross round their neck.

It is felt that the next generation is too young to take up the burden and you are too old to carry on till they are ready and you might miss `the bus' of good valuation if you wait to cash in.

The present line of business belongs to the sunset variety and is in danger of fading out in a few years' time and it could distract your progeny from pursuing more lucrative interests.

You anticipate insurmountable conflicts of a major, dysfunctional and often value-robbing nature in the `cousin' generation and it is felt that the best way to maximise wealth benefits to future generations is to `do a partition' of monetary wealth rather than the business.

A piece of advice, which is seldom acted upon: Please do not wait to make these decisions until after you have had a mild coronary or the doctor tells you that you have cancer or that your heirs tell you that they have no intention of coming back to India to don the CEOs habit. Such decisions are best made when the going is good. And most importantly, do not rue the decision or the value you received after the deed. There will be enough busybodies around you to tell you that you could have got a better deal.

(The writer, an alumnus of IIM-A, was earlier with the consultancy division of ASCI, Hyderabad and a Director, A.F. Ferguson & Co. He is currently Director, Startup Focus Ltd, which specialises in strategic planning and counselling for family-managed companies and M&A — trrajan@gmail.com )