The Keys to Acquiring Family-Owned Businesses
Companies owned or controlled by families account for an estimated 95% of all businesses worldwide. In the United States alone, an estimated 35% of the S&P 500 are family-controlled, and reportedly as many as 90% of all U.S. companies (about 24 million) may be family-owned or controlled, accounting for a stunning 64% of the U.S. gross domestic product.
For middle-market transactions, family-owned or controlled companies are a significant portion of the deal flow and will continue to be as families decide at some point the time has come to exit. That decision point may confront an owner-founder or it may be a decision of the founder’s successors generations later.
While families may hope to retain and transition their ownership over generations, business challenges or family needs may eventually require all or part of the company to be sold to ensure its continued growth and competitiveness.
Leadership succession, financial strain, internal family conflict, health issues, or other life-changing events may trigger family owners to consider exiting the business. Even when the reasons for selling a family business are compelling, a decision to exit is rarely without human emotion, rational and irrational fears, and often complicated financial issues, internal conflicts, and concerns about the family legacy.
Buyers of family businesses must successfully address four distinct challenges:
- Separating business interests from family self-identity and public image,
- Aligning conflicting interests and motivations of the individual family shareholders,
- Weathering the natural tendency to second-guess the decision to sell the company,
- Allowing space for emotional processing as the deal moves through due diligence to closing.
The Challenges
Conflating emotional conflicts with the business rationale for selling may create ambivalence among family owners to completing a transaction, sometimes more than once during confirmatory due diligence and negotiations. Ambivalence can also contribute to sellers overestimating the value of their company regardless of market conditions and comparable transactions. When this happens, the seller might even reject out-of-hand attractive and market-competitive offers as being too low.
The decision to sell a family business should be reached through careful deliberation and consensus among the family shareholders. These deliberations often include the senior professional managers who operate a company for the family owners. Consensus building, especially for multi-generational family ownership, can take time to reach alignment and may benefit from facilitation by trusted and impartial advisors. Alignment can be complicated when the needs and interests of individual family shareholders are far apart, which can be the case when ownership is spread among several branches of a family spanning two or more generations. Suffice it to say, a successful buyer will need to understand and respond appropriately to the concerns of individual family shareholders.
Even more important, the buyer needs to be patient and sensitive to the emotions and eccentricities of family decision-making during the process of developing and closing the transaction.
A successful buyer of a family business will recognize the distinct complexities of closing this kind of transaction. The financial assumptions and negotiating strategies used typically in bidding via open bank auctions and carveouts from public companies are rarely successful with family businesses.
Rather, interpersonal and communication skills along with deal-making savvy become paramount in importance. That is not to say, however, that strategic business rationale, synergies, and objective financial valuations are unimportant in acquiring a family company. They are indeed important and necessary.
But, with family company transactions, there are always many bumps along the road. Anticipating and dealing sensitively and effectively with the inevitable challenges along that road determines whether the transaction will close or be abandoned at some point along the way.
