Buying a family-owned and -operated business requires more than the right economics. While there is no one set of rules for buying a family-owned business, here are five common approaches and best practices that should comprise any serious buyer’s toolkit.
1. Start early and build an enduring relationship
If you want to buy a family-owned business, you shouldn’t wait until the family decides to run a typical structured sale process. Many of the best businesses are not sold in a process. Developing a relationship with the family and decision-makers well before a sale is contemplated is critically important, and it can often lead to preempting a future process. Investing the time to learn the business builds trust, and finding ways to add value to the business may build allegiances.
For example, providing capital markets updates or insight into competitors or operational best practices may not only be hugely valuable to an otherwise insular management team, but it also may be viewed as genuinely helpful and selfless. Also, many private equity firms are staffed with the finance world’s smartest, most creative young minds. But these younger professionals lack practical experience and, from the standpoint of personal chemistry, are unable to close the generation gap with the prospective seller of a family-owned business. Having your firm’s senior professionals interfacing with the family not only demonstrates seriousness of purpose, but also shows an abiding respect for the owner.
2. Grasp family dynamics
A business with a multiple-generation history often has numerous family members with management positions and even more members with ownership positions. Regardless of titles or ownership, however, there will be many opinions and motives when it comes to an important decision, especially one as important as selling. The business is often the largest source of economic net worth for many or all of those involved.
A prospective buyer must try to stay neutral in any family disagreements while at the same time understanding the goals of the different decision-makers. For example, one family member may not want or need liquidity, while another does. Or, one family branch might want to pass employment onto their children, while another branch’s children have no interest in working for the company.
Depending on the issues, a prospective buyer may want to partner with a wealth management expert or an estate planning attorney. A prospective buyer can address these issues and others effectively in structuring a transaction, but before that problem-solving process, the buyer must have a firm grasp of the family dynamic.
3. Preserve family legacy
If a family has built a successful business over multiple generations, it will have an enormous sense of pride in the company. Often a family’s identity is tied up in its business, and the thought that the business may not persevere for future generations is frightening and sometimes paralyzing. A prospective buyer not only must be sympathetic to this emotion, but also have a carefully crafted plan to preserve the family legacy or brand well beyond any sale.
Maintaining the company name for a guaranteed time, having family members in key management roles or providing a retained ownership stake for family members are traditional means of providing continuity. More creative examples include leaving behind a subsidiary of the business for the family to own and run entirely, creating a charitable foundation in the family’s name or building a ballpark in the family’s name in the local community.
4. Plan for all constituents
Many family businesses are intertwined with their broader communities, employing, serving or doing business with longtime friends, classmates, children’s friends and so on. Often these businesses can be the lifeblood of a town.
Breaking up the real or perceived obligations to these constituents is likely hard and could be simply impossible, especially if the family expects to continue living in the community after a sale. Thus, having a well-thought-out and credible plan for all constituents, including employees, the local community and maybe the local suppliers or lenders, can be the difference between buying a business or not. Although a plan for constituents doesn’t necessarily mean additional costs for a buyer, in many cases it does. However, if constituents are important to a selling family, it is not uncommon for a seller to forgo the highest value paid for their company in lieu of a more holistic, accommodative plan.
5. Don’t underestimate the seller
There is a commonly held view that family-owned businesses are less financially savvy than a public company or one owned by a private equity firm. A prospective buyer should not fall into this trap. If an individual or family members have built a successful business that is worthy of your attention, then you should assume they are not just savvy, but wily and possessing an innate understanding of negotiating and getting what they want.
Secondly, a company’s financials may be structured to accommodate the different needs of family members or constituents, creating a seeming hodgepodge of adjustments that otherwise would not make sense. While such adjustments do not suggest a lack of savviness, they do highlight the importance of the prospective buyer’s diligence on family compensation and perks such as corporate planes, hunting lodges, etc. Thirdly, good business people know when they are being talked down to, and it’s insulting.
Family businesses present many unique deal-structuring dynamics highlighting the need for patience and flexibility as a buyer. It is important to remember that family-owned businesses are neither burdened with the fiduciary responsibilities of public company board members, or the obligations of general or limited partners backing private-equity-owned businesses. Family companies have the luxury of doing business with people they like and trust. So prospective buyers should focus on the relationship and start early.
Kenny Gunderman is executive vice president at Little Rock, Arkansas-based investment bank Stephens Inc. Marshall McKissack is a managing director at the firm, leading it M&A practice.