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.
© 2014 Generational Equity, LLC All Rights Reserve
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
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