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April 26, 2016

Competitive Advantages for Family-Owned Businesses in M&A

Underestimated or Overlooked?

“Conventional wisdom” once held that family-owned and managed companies were at an inherent disadvantage when it came to competing with larger corporate counterparts.  Even today many executives and investors who I encounter in the general business community assume this supposition to be true.  I often find myself stopping them and politely challenging this presumption – because it is simply inaccurate.  Often, in fact, nothing could be further from the truth.

If you regularly read major publications such as the Wall Street Journal, Forbes, or the New York Times or watch broadcast news, you find they predominantly cover public companies.  As such, it’s easy to fall into the habit of completely overlooking private enterprise and to join the many who perceive this segment of the market to have one competitive arm tied behind its back.

However, consider this – of the total universe of U.S. companies with more than 500 employees, 86.4% are private companies, and these businesses contribute over 50% of the GDP of this country.  What might have been a disadvantage in the past has now become a leg-up for the family business owner relative to their larger rivals.

My message to private and family-owned businesses is this: that you possess numerous competitive advantages over your larger market challengers.

While most of the observations I make below can apply to day to day operations as well, my comments center around strategic M&A since that is the focus of our work at Bulkley Capital.

The ability to be nimble
In the arena of M&A, as a private enterprise you can compete very effectively against companies many times your size simply by being more agile.  It is true that in most cases these larger companies have more resources than you do, financial and otherwise.  That means they can often pay more than you can.

But with their girth also comes layers of decision making, bureaucracy, and red tape.  Just as it takes longer to turn the Queen Mary II in route than the tug pulling her to port, you as the more nimble competitor are able to be more responsive.  Those extra layers between the ultimate decision makers and the feet on the ground at larger companies often translate into delays in time.

Time is the enemy of any transaction, and for an independent quickness is a key advantage.  Momentum is everything.  As a private business owner, you have the ability to act more quickly.  I have end-run the big guys on many occasions just because it took them too long to jump off the snap. 

Creative thinking and the ability to be proactive is already in your playbook – not necessarily in theirs
Growing the family business and competing against the big guys requires out-of-the-box thinking on a daily basis.  When it comes to making acquisitions, many groups repeat the common mistakes of simply considering what’s already for sale or alternatively casting too wide a net to see what gets dragged back in.  Being largely dependent on the broker’s call yields what is “in inventory” but not necessarily what you want and, most always, at a higher price.

Being in a position to focus on what you really want and then pursuing those companies, whether or not for sale, meets with greater success.  The big guys are often far more reactive.  When an opportunity is brought to their attention, it either fits their playbook or it does not.  As a private owner, you have the ability to think more creatively and really focus on how an operation may look differently once under your umbrella versus as an independent.  Tuck-in acquisitions of adjacent and/or complementary companies are a good example. 

You aren’t a conglomerate and don’t think like one either
I remember when we represented a family-owned operator of funeral homes and frequently were up against the publicly traded consolidators when it came to acquiring independent locations around the country.  These companies always had more money, were the household name, and were very aggressive.

However, the independent owner who was contemplating a sale usually wanted to stay on board post-purchase, at least for some period.  As a buyer, we wanted that too.  These owners did not want to be told how to run their business, but the big guys just couldn’t help themselves!  They would hand the independent operator a manual of how things were done in their company and expect that individual to respond favorably.

As a buyer, we used this behavior against our competition.  Through demonstrated respect for the former owner’s market knowledge and the fact that their approach to the business was exactly what had made these attractive operations to begin with, and by recognizing the needs of this individual owner, we beat out the public conglomerates time after time.  As a family-owned suitor, we were simply better listeners and partners.

In part because of this mindset and approach to the market, over the course of five years we successfully grew the business from three locations to the largest independently owned funeral home company in the country.

In cases where legacy is important to the current owner, it doesn’t always come down to the last dollar
Often for the owner and particularly for the founder of a private business considering an exit, it isn’t all about the money.  Sure, you have to be competitive as a buyer, but sometimes the intangible elements of the deal are what tilt it in your favor.  A conglomerate closing down a plant post-acquisition or cleaning house in search of efficiencies is not a legacy most founders wish to leave behind.

I can think of one example in the food industry where we were competing for an acquisition with a few public companies many times our client’s size and the tipping point turned out to be our agreement to leave the production plant in the small town where this company was located at least for a number of years.  The owner was retiring there and did not want to be remembered as the person who sold the largest employer in town and put numerous people out of work just to squeeze a few dollars more out of the price.

As a family-owned acquirer, you can convey your appreciation for these elements of a deal – because they would be important to you too if you were exiting.

To you and the seller, culture is important
Based on over thirty years of making acquisitions on behalf of clients, the challenge I most commonly see underestimated is integration.  You can take a perfectly good company purchased at a very attractive price and turn it into a bad investment by not properly integrating the target.

Sure, there are the tangible processes and systems – IT, HR, payments & collections, and financial reporting, just to start.  But a positive culture drives most success stories.  Culture is the heart and soul of any company, and the cultures of merging companies need to be compatible; the wrong combinations can destroy value.  And even the seller who is most focused on price would like to believe the culture of his company will not be completely eliminated after closing.

As a family-owned company, you can genuinely convey that you know this element is important.  You are able to accommodate and embrace cultural change.  Certainly family-owned companies implement new ways of doing business and bring their own improvements to bear, but not at the expense of completely eliminating a culture that contributed to the target company’s success.  Knowledge of your approach and sensitivity to these issues will give the seller a greater comfort level with you as a buyer.

You have the luxury of measuring returns over the long term
Today there are not only a large number of conglomerates and public companies in pursuit of acquisitions, but also an increasing number of private equity funds.  As an independent family-owned business, how do you compete with so much money chasing after so few deals?

One answer is that you have the luxury of being able to measure results over a much longer term.  Public companies must focus on near-term earnings results and often operate on a quarter-to-quarter basis, and for their part private equity funds raise capital from limited partners based upon the promise of delivering certain returns over the near term – usually an IRR measured over a three to five year period.

As independents, our clients don’t buy to flip or to cut operations to the bone in order to maximize next year’s margins at the expense of future years’ capacity.  They buy to create long term value.  Our clients have so often used this fact to our advantage as family-owned acquirers.

The personal approach
I would be remiss if I did not point out that as a family-owned business, you have the ability to convey a personal commitment to the companies you are acquiring – to the exiting owners and to their employees.  Your secret weapon when on the acquisition trail is your ability to connect as one owner to another with the person on the other side of the table.  How many larger strategic players can extend that personal touch?

In the end, business is about people, and people do business with people they like.  It’s easier to like an individual than an organizational chart.

Brad Bulkley is President & Founder of Bulkley Capital, an M&A advisory firm based in Dallas and focused on family-owned and other privately held, middle market businesses nationwide.