Managing Emotions in a Family Business Sale: Entrepreneurs may balk at letting go when it’s time to exit

Entrepreneur A: A family business patriarch in his 80s, after resisting it for many years, faced the tough realization that he needed to hand over the reins, but he had established no obvious succession alternatives. Entrepreneur B: With a father unable to fully step back and let his two sons run the company he had founded, the relationship between the three had suffered to the point where what he had always thought of as a logical succession path was no longer available. Entrepreneur C: The founder of a successful venture realized that his company was quickly outgrowing him, yet the business was a key part of his identity. He was concerned that a sale would destroy the culture he had developed and leave him with no role to play. Entrepreneur D: An owner, looking forward to several more years in the business followed by a long retirement in the Caribbean, suddenly discovered that he had less than a year to live. The financial security of his widow now depended on the successful sale of his company. The sale of a family-run business can mark a gut-wrenching time, given that the implications of a transaction can be enormous both for the finances of the family and the livelihoods of individual family members. Often the company has to face difficult succession issues that have been postponed for years. Most owner/operators are so tied to their business that they don’t think the time will ever come for them to retire completely. This characteristic helps explain their success, but also highlights their weaknesses. The situations described above are examples of owners confronted with the painful reality of an exit. All owners will exit their business at some point in time, whether through a transfer to children, a sale to a competitor, or by bringing in a new investor. Often, however, family business owners don’t face the prospect of ownership transition until they’re literally forced to do so – often by succession challenges. It’s then a time of emotional turmoil. As if selling any private or closely held company weren’t difficult enough, divesting a family business further complicates matters. Emotions run deep and in many directions when it comes to these deals, particularly when the owner is the founder and the company is a strong part of his identity. Spending every day on the golf course or beach doesn’t always sound appealing to the characteristically driven entrepreneur owner. What will they do with their time if they sell their company? How will a new owner treat their loyal employees? Does the buyer simply wish to absorb the business into theirs, to the point where all signs of the company the founder built would vanish? Will the legacy the owner created disappear? With all of these factors and many more to be considered, the sale of a family company poses unique challenges. It isn’t just about price when dealing with a family business. It’s important to remember that divesting a family-run company is a process, not an event. A successful transition only occurs in numerous and well-coordinated steps – an approach that’s often contrary to the naturally impatient character of the entrepreneur/owner. One family business patriarch that we represented in his 80s recognized the need to hand over the reins but had established no obvious succession alternatives. He had no sons or daughters to whom he could pass the keys, and management did not have the financial capacity to buy the company. Identifying the Right Buyer We took the time required to meet with a number of potential suitors so that the owner could evaluate their respective philosophies on the business, their views on industry trends, and their plans for the workforce. For our client, it wasn’t simply a matter of where he could get the highest price but who was “good enough” to take over his company. It was frustrating to him, a person accustomed to quick results, that finding the right solution was likely to take more time than his last product sale to a customer. The financial adviser must control this impatience and provide a steady hand in guiding the family business owner through a coordinated process. We returned repeatedly to a set of financial and non-financial criteria we had developed up front so we could evaluate offers from suitors while minimizing the emotions that can cloud decisions near the end of a deal. We were able to ensure that the client had all of his questions answered, which was key to giving him confidence that he found the right buyer for his company. Separating Business Issues From Emotions With another client, the family viewed a sale as a way to heal the relationship between a father and his sons, who were also in the business. Pressures of running the rapidly growing company had sometimes been intense. Management styles of the patriarch and the next generation differed considerably. The father wanted his sons to take over management of the company, but in reality he was reluctant to relinquish day-to-day decision-making. He was accustomed to being the driving force behind the business and would not let go. When the sons tried to become more assertive, he repeatedly attempted to change the course. They shared the same values and they all wanted the company to be successful, but the sons had different business styles than their father. This resulted in friction that strained the father/son relationship. With the father now in his early 80s, and virtually all of the family’s net worth concentrated in the company, it became clear that a sale had to be considered. While the founder continued to be disappointed that, from his perspective, his sons did not share his passion for the business, recruiting my firm as an objective adviser in evaluating their alternatives provided a means for open communication among the family members. Such a forum had not been available to the family before, and previous discussions had been colored by emotions and personal conflict. Through our process, all three recognized that, in wishing to improve their interpersonal relationships, their priorities were in fact aligned. By acknowledging this common goal, the decision to sell the company was an easier one for the founder to make. While he had once felt a father’s obligation to pass the company on to his sons, he now realized he could fulfill his role as a provider in another manner. Selling a family-owned business is a complex process because it encompasses two different but interrelated emotions – business and family. By successfully delineating the two up front, we were able to build consensus among the shareholders and focus on finding a buyer worthy of owning the great company they had spent so many years and so much sweat building. In pursuing a common goal, tension between the family members immediately began to subside. When it comes to family companies, business issues aren’t the only factors governing decisions; personal relationships often weigh heavily in the process. Owners should not wait for advisers to set up a dialog between the generations, but rather should establish open communication early. Feeling Good About The Buyer A Midwest business owner we had worked with in the past year realized that he had grown the company as far as he was comfortable taking it. The business was approaching a point where it had outgrown his abilities as a manager. Moreover, the company was going to require additional investment. The owner’s net worth was already all tied up in the company. He was debt-averse and not about to take on a partner. At the same time, there was some reluctance to let go entirely. His wife doubted if he would ever sell, even though she felt it was the right time to exit. What would a new owner do to the strong culture he had built? Would his successor share his philosophy about exceeding customer expectations and looking after employees? We encouraged him to look within. He had a good team of senior executives who had been under his tutelage for years and were young enough to carry on. What about the idea of selling to them? Sure, the family was interested in receiving fair market value, but a third-party valuation coupled with the introduction of a few select sources of capital could produce the funds. The owner wanted good value for the company, but at the same time he didn’t need to squeeze the last dollar out of a sale, especially since he was selling to the management team he had mentored. Having never before raised capital, management would need guidance. As a part of our role representing the seller, and with the seller’s blessing, we educated management on the fundraising process, enabling the team to become a viable bidder for the company. Supporting a management-led buyout by a team developed by the founder served to ensure the continuation of his legacy and effect a smooth transition, while retaining and rewarding the people that had helped him build the business. The deal was structured to allow the founder to remain as an advisory board member, and even make calls on certain important long-term clients. In this way, it did not feel to him as though he had to let go entirely. Sometimes succession can be made easier by looking within. Preparation Leads to More-Predictable Results Early in one of our engagements, the unimaginable occurred. It was an event for which no one can realistically prepare. Reluctant to face the fact that the day would eventually come when he needed to turn his business over, a company owner refrained from even educating himself on transition alternatives before our firm was involved. We were retained when his advisory board insisted on a complete valuation of the company and an objective review of its financial alternatives, as well as assistance in succession planning. Two months into the engagement, the owner learned he had a fatal illness and had only six to 12 months to live. The stakes of this engagement were abruptly raised and the process accelerated. Our team had to quickly and quietly prepare the company for sale. What started as a routine valuation and planning project had become a time-sensitive sale assignment. When the owner thought he was well ahead of the curve, he suddenly found himself in need of a swift and smooth transition, without revealing the gravity of the circumstances. Our priorities became the overwhelming need to reach a closing efficiently, obtaining the best value and most optimal terms under an all-cash structure with minimal contingencies for the benefit of the owner’s wife and heirs. The owner wanted full value, but just as important, he had no time to waste. Because some closely held companies can be run as “lifestyle” businesses, we normalized earnings, making necessary adjustments to the income statement to remove non-business personal expenses and reflect the true income potential of the company. We also sold extraneous real estate holdings in separate transactions, negotiated retention and incentive agreements with several key executives, and rapidly positioned the firm to approach suitors discreetly. Because the founder already had begun to take steps in succession planning with the valuation work we performed, we were able to turn a potential disaster into an opportunity to complete a successful sale quickly and at a good price. If it had not been for the advisory board’s direction and the planning we were able to do, the overwhelming emotional pressures of the situation would have made long-term business decision-making difficult for the founder and his family. We accomplished our goal in approximately four months and with minimal disruption to operations. No knowledge of the founder’s illness leaked until the transaction was complete. Unfortunately, the owner passed away within four months of closing, but because his board had forced this painful succession planning process, the outcome for the stakeholders he cared about was favorable. His loyal employees were treated well, the new owners kept most of the company intact, and the founder’s widow received sufficient proceeds to ensure her financial security for the foreseeable future. This outcome demonstrates that planning ahead is extremely important when ownership is concentrated, as it is in a family-run company. Different Priorities for Family Business Owners Sellers bring their own business perspectives to the negotiating table. One of our clients threatened to walk out on the deal when the buyer proposed changes to the purchase price based on due diligence findings. To deal veterans, this practice is commonplace, but in the view of the owner, who had completed many of his business transactions on a handshake, a deal was a deal. The owner had a firm expectation that the buyer of his business would share this philosophy, and his adverse reaction colored his opinion of the sale for a while. It took time to walk the owner through the reasons why the price was being changed and, most importantly, why that was equitable. Fortunately, the adjustments went both ways and we were able to close the deal on terms that our client recognized as reflections of the original agreement. In another situation, a potential target of a buy-side client made it clear that a continuing role for her son post-closing was critical. There would be no deal, regardless of price, if the buyer would not retain the son in a senior role. So her demand had to be dealt with. Similarly, in many situations, a promised future role on a consulting or advisory basis can be viewed very favorably by the family business owner who is reluctant to walk away entirely from the company. This “bonus” costs the buyer little and is frequently advantageous from a continuity standpoint, given the close ties the owner has with clients, suppliers, and employees. Sometimes the owner’s emotional ties to the business are so strong that the offer of a post-closing role has been the deciding factor in identifying the preferred suitor. It’s important to determine up front the nature of the owner’s expectations on his or her continuing involvement in the business. When it comes to the question of what is relevant and reasonable, all that matters is the perspective of the owner as decision-maker. If he or she thinks it’s important, then it’s important and needs to be managed. Everything Is Personal Every business has flaws, but the family business owner may have a tendency to take criticisms very personally, particularly if they come from a bidder who is a competitor. “That’s my baby you’re talking about!” is a common response. The buyer, therefore, would do well to recognize the emotional ties of the owner to the company and approach negotiations accordingly, keeping in mind: Avoid focusing on negatives – Don’t tell the owner his baby’s ugly, even if it does have a few blemishes. He probably already knows it but won’t appreciate being reminded. Instead, concentrate on the positive. The right pitch – Tailor what you say to the seller’s level of understanding. Avoid alienating a “down-to-earth” owner with too much financial jargon. Discuss market trends and growth opportunities rather than internal rates of return and discounted cash flows. Over-communications – Family business owners will go through a sale probably only once in their lives. More contact ensures effective communication and gives the owner an appreciation of your sincerity and commitment to the deal. Deal from the top – A good way to demonstrate your interest is to give the deal senior-level attention. In one engagement, we convinced the president of the buyer’s high-profile parent organization to help the operating managers who were leading the process by visiting personally with the seller. This communicated the strength of the buyer’s commitment and gave the seller comfort that the deal was important to the buyer. Their conversations provided our client valuable insight into the philosophy of the buying company. He felt better equipped to assess exactly who was buying his prized possession. Lending a hand – Consider offering a position to the selling owner, perhaps just on an interim basis, to ease the transition for both sides. Beware of Auctions The conventional auction is often not the most effective means of selling a family business. When it comes to the purchase or sale of a family business, a single approach does not fit all situations. It’s not just about the money. Full value is important, but so are many other factors. The transaction is about ensuring that the business ends up in the right hands. The family-run company cannot be treated like any other company because it truly is different. Auctioning it off to the highest bidder is often not the best approach. Family-owned companies are most likely to be successful niche players. News of a sale can inflict damage, impacting employee morale and affecting the company’s ability to retain good people. People already fear change. Combine this with the prospect that the company’s leadership is leaving and you have the formula for destabilizing insecurity or worse. Moreover, if rumors of a sale reach the competition, they can be used as ammunition and customers can grow nervous. Seek to create bidding competition through a proactive and highly selective search process rather than with a wide auction. You can still create a horserace to drive value without sending out 100 numbered books with bid deadlines. Buyers of family businesses share a similar mindset. They want to focus on deals that meet their strategic objectives and not waste time in crowded auctions where, even if you win, you either overpay or acquire a company that everybody else in the industry has already looked at under the covers. In our experience, the family business owner is interested in receiving full value in a sale, but not at the expense of a number of key values and principles. Who ends up with the family company and how they will carry on tradition are often just as important as the economics of the deal. Rather than assuming a traditional auction is the appropriate way to go, an adviser must look at the circumstances surrounding the sale. An auction may or may not make sense. A Misunderstood Segment Many in the financial community overlook or purposely avoid family companies. The impression is that these businesses are smaller and more difficult to market. However, family businesses account for 80% to 90% of all North American companies and should not be ignored. Success in this market requires an understanding of the particular characteristics of the family company. The financial adviser active in the family business market should remember the following key factors: * Family-owned businesses are unique in personality and behavior. * Succession planning, although it can be challenging emotionally, is particularly important for family businesses because selling a family company is a process and not an event. * Family-run companies and their employees are delicate, and selective searches are preferable to broad-based auctions. * The business is frequently an extension of the owner’s personality and part of his or her identity. * The owner often worries about what he or she is going to do after the sale and fears giving it all up in exchange for the unknown. * Involvement of several family members in the business and the relationships among these individuals impact key decisions. Ultimately, the family business owner is selling his “baby.” What happens to the company after the deal closes becomes as important as the financial terms of the deal. Will the company maintain its culture? What will happen to the management team and the employees? Whose name will be over the door? As our client stories illustrate, even when the appropriate course appears obvious, the decision to sell a family business is often a tough and tumultuous one, punctuated by a multitude of emotions and variables. All of these issues impact deal negotiations, so the financial adviser should fully understand them. Every business owner should plan for an exit, regardless of current circumstances, because there inevitably will be a transition. Advance preparation and control of the timing surrounding the transition are critical if the business owner is to achieve the optimal outcome. G. Bradford Bulkley is President of Bulkley Capital, a Dallas-based investment banking and financial advisory firm. (c) 2007 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com