One of the toughest challenges we have to deal with when working with our clients is helping them to begin thinking like a buyer would about their businesses. Although this sounds like it should be easy, it isn’t. As you can imagine, most entrepreneurs are so focused on simply keeping the business operating that they don’t have the luxury of stepping back and evaluating the strengths, weakness, opportunities, and threats of the company from a buyer’s point of view.
That is why we are hired. The key first step in the Generational Equity M&A process is a thorough and complete analysis and valuation of the client’s business. This is where we begin to ask the tough questions that a buyer will eventually pose as well.
I recently came across an article that looks at the acquisition of a privately held, family-owned business from the perspective of a buyer and offers advice on the challenges of making these types of acquisitions. Since it was written with the goal of giving advice to a buyer, I thought I would share it with our readers who predominately are owners of closely held companies.
The piece is written by Kenny Gunderman and Marshall McKissack, who are respectively executive vice president and managing director at Little Rock, Arkansas-based investment bank Stephens Inc. Their article on TheMiddleMarket.com is full of great insight into buyer challenges/issues when looking at an investment opportunity in this niche. They identify five critical areas of focus when buying a privately held company:
Having built our M&A advisory practice around helping business owners successfully transition from their companies, we have significant experience in the areas outlined above. Each of these is critical, we have found, in ensuring that a deal will close. If you are going to be approaching buyers without merger and acquisition counsel, you should look at each of these carefully.
First, recognize that buyers of all businesses abhor risk. This is especially true for buyers of small private companies. For this reason, you need to expect (and budget your time accordingly) to meet as often and as long as you need so that you truly develop a relationship with the buyer. This is also important if you are going to be retained post-sale for any length of time. Make sure you can work with your buyer after the acquisition!
Secondly, family dynamics, the family legacy, and having all constituents involved are all key, interrelated issues that buyers are keenly aware of. You need to be too. First, make sure that if there are multiple family members who are owners (even if they are not active in the business) that they are in agreement with the sale. It is amazing to us to come across family businesses where the primary shareholder thinks he has agreement from everyone about selling when in fact he does not. This is why before we take any company to market we obtain signed agreements from all owners, not just the majority holder.
In addition, as you approach the sale of your family-owned business, be prepared for a tremendous amount of emotions to bubble up. This is especially the case if the business has been in the family for a few generations. Not only you but also many of your family members will begin to have seller’s remorse as they consider that their family identity will no longer be one with the company’s. In fact, we often have clients accept offers that are lower than others simply because the buyer convinced the family that he/she would retain and maintain the legacy of the family. In many deals this becomes the most important reality.
And finally, you need to be professional and have all your documentation on point and accurate in every meeting with your buyers. Keep in mind that professional buyers look at dozens and dozens of companies annually. The ones they buy are those that impress them beyond just the financials. What they are really buying into is the viability of the business post-transaction. You can make great strides in convincing them of its possibilities and future potential by doing your homework in advance and helping them not under estimate you and your company.
So thanks to the gentlemen from Stephens for giving us keen insight into how buyers approach a family-owned business. Of course these five hurdles can get quite complicated and detailed, especially if multiple family members are involved.
If you would like to learn more, you are welcome to attend one of our complimentary, no-obligation M&A workshops. We hold these throughout North America because we are dedicated to the notion that most business sellers are woefully unprepared to deal with a professional buyer(s). To find out when we will next be in your region give us a call at 877-213-1792.
No matter what you end up doing with your business, if you do approach buyers, be sure to analyze your company as a buyer would in advance of any discussions so that you are able to see it from their perspective. Often a change in viewpoint can make a world of difference.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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