The Value of Emotion When Selling A Family Business
How do you view emotion in business? Do you think that it should be avoided at all costs or do you feel there is value in emotions?
Emotions are subjective. Emotions can be reactions to internal thoughts, memories, desires, or events that occur in our environment. The Disney Movie Inside out is definitely one for the grownups but you will see the that five basic emotions are shown: Joy, Sadness, Disgust, Anger and Panic (Fear). In reality there are far more than five but it helps us understand emotion a bit better. As the movie progresses you see that the emotions get more complicated and interact with each other. What it shows us is that as we go through life, our experiences colour the way we view things: something that was once only joyful can start to create a more complex emotional response. Conversely, we can start to find the joy in things that made us angry and fearful.
Some of the most diverse emotions are always present in any business setting but they are especially heightened in any transaction that involves a family business. Business owners have a really special pride in the businesses they created.
They may think they know what their business is worth. But do they really know?
Privately held business owners also use the business for non-financial goals which can relate to the business. This may vary from producing the highest quality products to providing employment for all the family regardless of qualifications. Their standing in the community and how they contribute towards it may also be an important factor for them.
Selling a business is a deeply emotional experience and it is easy to feel a sense of bereavement. But how does this impact the price of a business when they decide to sell?
I should know because I am almost at the finishing post of selling our family business. Last year we didn’t sell the business because the valuation the buyer put on it fell short of what we wanted, so we hung on to it rather than selling it. In fact, their valuation felt insulting to us. We were right because this year we sold it for exactly the same price we were asking for it.
Believe it or not, there has been quite a bit of research on how there always seems to be a difference between what a buyer values a family business at and what the business owner thinks it should be worth.
But why does there always seem to be a difference between what a buyer values a family business at and what the business owner thinks it should be worth?
Two gentlemen called Joseph Astrachan and Peter Jaskiewicz have actually come up with a formula.
Total Value = Financial Value + Emotional Value
Financial value is simple. It is the financial performance of the company and usually based on a variety of valuation methods e.g., multiples of EBITDA, total profit, market value of similar firms, a figure based on the demand and supply in that market.
The slightly elusive amount in this is the Emotional Value (EM). EM is dependent on two things: the emotional returns and the emotional costs for the family owners.
Emotional return is what the owner gets from the business.
It is why we have pride in what we do. It is the investment in future family generations; the legacy from founding fathers (or mothers); the attachment to ther owners’ people and communities; the attachment to the owners’ business portfolio even if it is not performing. I could go on but if you do own a family business you will understand immediately what I am talking about.
Emotional cost on the other hand is what it costs the owner.
It includes family conflicts and group dynamics, jealousies, and lack of satisfaction of individual needs. Emotional costs are also health issues, either affecting the owner or their family, financial problems and having to retire without an internal successor. All of these are far too common too.
What is not really a surprise is that the true value of the business only comes close to the financial value when the emotional cost is greater than the emotional return. In my experience from selling our own businesses, this bears this out.
What has always struck me is that most buyers only focus on the financial value and don’t give any relevance at all to the emotional value.
In this last year, emotional intelligence has been talked about a lot, and mental health in particular has been very important, but very few buyers seem to have any emotional intelligence and very little sympathy for the mental health of the seller. I know this is a broad sweeping statement but if you have put a lot of sweat equity into building your business and had it valued (especially by a broker), the figure that came back would be far less than expected. Conversely, it may also be highly inflated and then the broker would tell you that he would see what he could do. Brokers themselves tell us that most businesses sell for only 70% of their listed price.
So, how do we start buying businesses without the sellers feeling like they have been raped and pillaged? Without them feeling as though the vision they had for the business they worked so hard for is being casually tossed out like a tissue used to catch a sneeze. When your ambitions, your values, and your beloved company are treated like germs to be discarded, why would you sell?
Before discussing the financial value of a company, I want to talk to owners about their emotional returns first. The things that give them their own sense of place in the world - their own identity. I want them to quantify how important these are to them and what they feel that this sweat equity is worth.
Then I look at the emotional cost to them and their loved ones because it doesn’t just affect the business owner. This is the hardest bit because most family owners do not even consider selling unless there is a big emotional cost to them. When you put together the whole picture, piece by piece with the owners, you can start to see what value they place on the difference between the positive and negative aspects of running their business. Only then do I even consider talking to them about the financial value.
What emotional value would you place on your businesses? What has your business given you and what has it taken away?
These two things go hand in hand. We know that for all the emotional returns you have had from your business, there have always been plenty of emotional costs.