June 30, 2016
You’ve Made It! Now What? Five Myths of Selling Your Family-Owned Business
You’ve made it! And in more ways than one.
You’ve made it because your family business is approaching the pinnacle. Maybe you haven’t reached Koch brothers-type scale and influence. But, after a long run of steady growth, the company your father founded and you’ve matured into an industry leader is now built to last. You’re valued by your customers, loved by your employees and treasured by your vendors. Heck, even your competitors like you. You’ve competed fairly and left a well-marked trail for them to follow, even if in a cloud of dust.
But you’ve also made “it” – the decision that it’s time to sell the business and do something else. Maybe it’s because you’ve taken the business as far as your skills and experience can take it. Or, maybe you don’t have any ready and willing family successors. Either way, it’s time to focus on some new goals, relax and take on a different kind of challenge.
But before you go off booking any weekday tee times or island-hopping in The Maldives, keep in mind that you aren’t done just yet. In fact, your biggest career challenge might be staring you in the face. Counter to what some people think, selling a family business requires careful preparation, cautious decision-making and the skill to juggle more chainsaws than you ever have before. It’s not an easy process. Below, we dispel five common myths in order to help you get through the process with all of your limbs intact.
Myth #1: It’s all about the money.
After decades of committing your blood, sweat and tears, it may sound like heresy but it isn’t all about the money. Clearly, you want to maximize value, but it’s also about making a smooth transition, preserving your legacy and ensuring that the business – maybe one with your name on it – will continue to thrive. This means honoring and respecting the other people who have helped you become successful – your customers, employees and vendors.
Define a successful sale outcome not just in terms of dollars and cents, but in terms of how these critically important audiences will be treated during the sale process and after you’re gone. Sure, you can’t control everything, but you know what made the business successful. If you have a buyer who plans to cut and slash his way to even greater profits – perhaps using strategies that you’ve tried unsuccessfully – maybe that’s not the ideal result. Even though everything won’t stay the same, look for an outcome that best preserves the essence and integrity of the business – the things that have made you and the people around you successful.
Myth #2: It’s business – selling will be an unemotional process.
Make no mistake, selling a family business is an emotional process. It’s emotional because it involves people – those same customers, employees, vendors and family members who helped get you to this point. Think through how you will manage the emotions so that you make the best business decisions and don’t wreak havoc on the family. Indeed, wrathful family members make for very awkward holidays and reunions.
The sale process will be especially difficult for some family members who have considered the company an extension of the family. There will be second thoughts, potential conflicts and strong opinions on who is qualified or good enough to be the successful suitor. Not all family members will agree. Make sure to establish clear buyer criteria and an objective decision- making process before commencing with the sale.
Myth #3: Running the business prepares you to sell the business.
Running a successful family business is entirely different than successfully selling a family business.
Private, closely-held companies have a tendency of doing things a unique way. Some of your business processes may be undisciplined, others may be disciplined but done manually. Public companies, on the other hand, have processes and disclosures that are highly disciplined and required by securities law. Their questions and data requests may be demanding and feel invasive; not unlike a prowler rummaging through your closets and drawers at home. While your spouse might call it breaking and entering, the business world calls it due diligence.
It is very common to underestimate the preparation time required to implement a successful sale process. Adequate preparation often takes four to six months. The process of organizing documents alone – current and historical financials, client contracts, vendor agreements, regulatory filings, employee files, legal claims, etc. – can be enormously time-consuming and cannot be left until requests are made to see them.
If a company is well prepared, it will command the greatest negotiation leverage in the diligence and purchase agreement process, where much of the real negotiation takes place. To be inadequately prepared is a sure-fire way to lose value.
Myth #4: Marketing to every prospective buyer is the same.
The M&A market has changed significantly, even over the last 10 years. Today’s universe of buyers is highly diverse and includes other closely held companies, larger middle-market private companies, public companies, and private equity groups. Each behaves differently and has a different ownership time horizon.
Marketing to the larger conglomerates – which may be the more aggressive buyers – could be more challenging. They could be looking simply to integrate your business with one of their subsidiaries and may not appreciate the unique aspects of your company. For the big players, it is often about earnings per share, market share, fueling – or not diluting – existing growth, or how analysts will view the deal.
Private buyers are likely to look longer term and examine the cultural fit and business processes. Private equity groups will look at the near-term potential for top- and bottom-line growth since their plan is generally to flip the company in three to five years.
With this diversity, some sellers simply acquiesce and solicit interest by sending the same offering document – or deal book – to all prospective buyers. However, tailoring the offering to a specific suitor and identifying possible synergies will almost always yield a much better result. The key is researching your audience, understanding their individual perspectives and telling the right story to the right buyer.
Myth #5: I already know the likely buyers in my industry and I can go it alone.
Going it alone can be a very risky proposition and there is a lot of work to be done beyond identifying the list of possible buyers. The sheer amount of time and the distraction involved in a sale process can interfere with the daily operation of the business at the exact time it needs to be doing its very best. The key is assembling a team that can focus on the sale while not taking your eye off the delicate, crystal ornament that is the continuity and growth of your business.
A sale typically requires specialized skills, knowledge and relationships, and using an outside party to shepherd you through the process usually makes a great deal of sense. In some cases, depending on the complexity of the deal, it might be advisable to remove the management team from the sale process altogether.
A common misperception is that agreement on a purchase price comprises 90% of making a deal. Not so. Half of the battle in a deal typically takes place after a purchase price has been established when diligence is conducted and the purchase agreement and other components of the deal are negotiated. It is not uncommon to see a price reduced more than 25% in the diligence phase. In some cases, prospective buyers just walk away. An experienced outside advisor that understands the M&A environment can lead a sale process that keeps the diverse buying audience committed while looking out for your best interests.
So there it is, five chainsaws along with one delicate, crystal ornament – the business you have so carefully cultivated – flying through the air. Dropping one – any one – could result in some serious damage at a very critical time.
So what do you do – keep juggling? Maybe so. But you might consider adding some experienced hands to the mix. You’re going to need yours for those weekday tee times.
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.