Are family businesses ever sold?

Are family businesses ever sold?

June 21, 2018 | Cress Diglio

Are Family Businesses Ever Actually Sold?

The short answer is yes, but they typically incur a cost that goes beyond a price-tag.

Many family business transactions end up breaking the resistance of the family, and can resultantly cause significant internal rifts. As such, it is traits such as stubbornness and having an emotional connection to the company that often prevents one from objectively appreciating the competitive dynamics of the sector, and in many cases, generate a vicious circle that ends with the life, closing or bad sale of what was once a magnificent organisation.

With this in mind, family businesses will only typically be sold when there are genuinely potent reasons for the transaction; health problems, strong discrepancies between the family members due to management, old age, urgent need for capital injection, clear technological obsolescence, a diminishing profitability or a strong process of concentration in the sector. As such, many family business owners make the mistake of delaying a necessary decision: an acquisition, a recapitalisation, a merger or even a sale when there is no clear succession in the family and the owner as the manager enters the age of retirement.

The emotional difficulty of transitioning to new investors when selling your family business often causes family businesses to borrow too much, causing liquidity problems as soon as a business cycle change occurs. This happened to thousands of family businesses during the last financial crisis, which in turn saw the end to so many family enterprises, robbing the kin of their precious family assets.

The Time to Sell Your Family Business is NOW

Currently we are in a historic moment with many significant changes throughout Asia and Australia as well as the USA, Canada, in which we are going to experience the longest period of intergenerational transfer of private companies in history: The “Baby Boomers” must retire. In most cases, their children or “Generation X” (those born between 1965 and 1980), have had more sophisticated education and have opted to work in large companies. Behind them come the “Millennials”, a generation that claims to be the least enterprising in recent history.

This lack of desire to be entrepreneurs by the next generations will enhance a phenomenon of concentration, making our business fabric more resistant when the next crisis comes; and rest assured, it will come.

Many entrepreneur “Baby boomers” have lived to work, have hardly developed hobbies and are faced with the vertigo of not knowing what they will do with their time when they retire. Therefore, they resist selling the company, complicating its future viability. Thus, we find that 70%+ of family businesses do not pass on to the next generation.

Succession Planning is Crucial

The high mortality of companies is due, among other reasons, to the lack of planning for a transition towards a competent successor when selling your family business, the failure or exhaustion of a business or a sector, family difficulties, fights between partners, a lack of capital or a lack of financing.

Many of these closures could have been avoided if the entrepreneur knew how to choose the right time to part with their company.

In recent years, competitive pressures have accelerated the need to be quick to identify the opportune time to part with the company. Every company has an optimal time to be sold. It is vital to strive to know and be aware of it and then not regret it.

Business families must be alert to perceive the warning signs and, in case of need, know how to put the icing on a long process of creating business value by way of culminating it through a magnificent sales operation. The Mergers and Acquisition process consists of a myriad of long, complex, and in many cases arduous steps that must be approached with patience. Please do not hesitate to contact us to find out the market value of your business and whether the ‘time is right’ for you to consider what’s next for the family business you built!

Blog By:

Robert Brown
Managing Director
Calder Associates of Australia
rbrown@calderassociates.com.au

Perth (Australia) Office:
Level 24-25, 108 St Georges Terrace, PERTH, WA 6000 | +61 (0) 8 6397 1100

About the broker blog

The Blogger- Cress Diglio

“Should I sell now?”

“Should I sell now?”

September 27, 2019 | Susan Rosner

Should I sell now?

Here’s one tell-tale sign you should sell your company

If you started and own your own business, then it is only you who truly understands how much time, effort and money you’ve poured into it. No one else will invest in it as you have.

However, if you’re lucky enough for your company to succeed and flourish, there may come a time when someone else will find enough value in it to buy it – and therefore, be the one to risk the time, effort and money like you have.

But how do you know when it’s time to sell your company? Here’s how it worked out for one New Jersey-based company:

PTM Inc.

Started back in 2000, PTM Inc. was a reseller of web conferencing. Continuously searching for the right path to take, the owner eventually decided to sell learning management software, and it worked out very well.

Fifteen years later, the company received an acquisition offer from a large private equity company. The owner was unsure of what to do. This company was his pride and joy. He put in the blood, sweat and tears to get his company to where it is today. On the other hand, the offer was quite generous, to say the least.

After giving it plenty of careful thought, the owner of PTM Inc. came to the realization that he was taking fewer risks as of late. As his business grew, he became slightly more conservative because he didn’t want to risk losing what he had built.

Conversely, the potential buyer was willing and ready to take a big chance by integrating PTM Inc. into another one of its acquisitions. The current owner’s penchant for taking chances with his own business was now than that of this potential acquirer. It was at this point that the owner decided to accept the compelling offer.

To Sell or Not to Sell

Everyone has a different idea of how much money they want or need. It could depend on what kind of lifestyle you grew up accustomed to, or any other reason. Therefore, the scenario of a potential buyer being willing to risk more than you, the current owner, can happen at a different time depending on the current owner’s particular goals.

Whenever that time comes, it’s a sign that your company is in need of a new owner. If you think it might be the right time to sell your company, whether you’re in in Philadelphia County or anywhere else in the world, contact us at Calder Associates. We can help you prepare your business by increasing its value and making it more attractive to potential buyers – so you get the most out of it. Call 800-419-5754 at your convenience.

About the broker blog

The Blogger- Susan Rosner

Susan is a Managing Partner in Calder Associates and is responsible for Calder’s Pennsylvania, Delaware, and surrounding area. Susan’s past experience has served hundreds of business owners and buyers in their pursuit to sell or acquire the right business. A past President of the Lower Bucks Chamber of Commerce, business coach, and speaker at local business events and exit planning conferences, Susan has helped thousands of companies and individuals to success!

Diseases of due diligence

Diseases of due diligence

October 29, 2019 | Steve Wain

Diseases of Due Diligence

Pitfalls and tips to avoid when buying a business

This individual thought that with the money he had and the time off from work, he could handle almost any issue and get a deal closed. When asked what he would do to finalize on the sale, he thought for a minute and said, “I’ll put a plan together shortly.” The reason this individual was so cavalier about the next steps was that he did not understand the game.

The game is a very detailed and, at times, extremely nerve-racking process that can lead to failure almost as often as it leads to success. Buyers who take on this task without adequate professional help eventually come down with an illness I call Buyers Attention Deficit Disorder, or BADD.

BADD occurs when the sum of the moving parts exceeds the buyer’s ability to control them and then process the information to come up with a valid decision when needed; when a buyer tries to “squeeze” out dollars when hundreds of thousands are on the line; and when short-term desire for success outweighs long-established practices of successful concerns.

We all know that a business’s primary objective is to make a profit. Yet, could you be happy if you had a loss? The answer is yes if your other concern is cash flow. Ask yourself this: As a buyer, can you dissect a company’s financial operations to make a distinction between profitability and cash flow trends? What does it mean to lose money on one hand, and then take home a lot of cash on the other?

I am sure many people will say they understand the difference but do they really have the time to evaluate the nuances of cash flow, including effects of monetary policy on prospective debt service, capital expansion needs and use of funds, or short-term “tax-planning” vs. longer term inventory carrying costs?

These questions, and about 10,000 more, usually either pop-up during or just before the period called “due diligence.” (get a taste for what you have to review here in this interesting Forbes article) Good business owners will work with others to create a memorandum that helps paint a picture of the business they want to sell. As a buyer, you will rely on those “facts” to help in determining whether the business is a good investment. If you are one of the lucky buyers who happens to get comfortable with these facts and makes an offer for a business, then the next stage is where the fun starts.

Due diligence is a period of time between an accepted letter of intent, or more formally after definitive documents have been signed, and the exchange of money between the parties. During this period, you as the buyer need to get ready for battle. The battle is to convince yourself that both the facts presented and your belief in the future potential of the business are what you believe them to be before you take control.

The fact is you WILL find discrepancies, whether it be a reasonable or large amount. What you can be relatively certain of is that you will not find a “clean business,” because all businesses have issues — issues that are either not presented, not understood originally, not aware of by the owner, or classified as derived. A derived issue is one that “crops up” during the due diligence period. In any case, these should be expected.

So does this mean the deal is off? Absolutely not! As a buyer, you must go into the process knowing this will occur. The question is a matter of severity and resolution. Case in point: During due diligence, you find out the seller carried a line of insurance you feel is necessary upon further review of the company. Does that mean the seller was withholding the lack of insurance? No. It could be innocent on their part for not knowing, or more likely, they knew but decided to take the risk without the coverage to abate the loss if it occurred.

Now, think of trying to handle figuring out what this issue is, its impact to operations if a loss occurs and if coverage is obtained, how much it will cost, what it will cover and what impact it may have on your ability to financially run the business. These questions are reasonable, but when you are under pressure to investigate their answers, you must consider the analysis of that “inventory planning” you determined earlier. Is this the correct amount of warehouse space, and what about the eight years left on the lease that is $3 per square foot more than the current market?

Here is a fact: Even the best professionals in this business, those people who I respect, need to spread the analysis and investigation to make a purposeful and educated evaluation of a business to many people. The objective of the closing day is to feel confident about your decision to acquire a company. Buyers who do not recruit the best professionals will invariably make a decision that puts them at risk for poor pricing, poor financing and, worst of all, possible business failure.

As a buyer, put together a team of professionals who understand the game.  Who should be on it?  Here is a list of your team and the positions they play:

 

Business Broker or Intermediary

As a person who plays the game every day, this is your quarterback. Business brokers/intermediaries have a 12-month season, usually with no bye weeks. A certified and/or very experienced and competent business broker or intermediary will understand all the aspects of due diligence, what information needs to be collected, how to evaluate it, and how to work with the other team members to achieve a goal. A big benefit to the buyer is also this person’s ability to value a business and help negotiate a fair and equitable price that allows the buyer to acquire AND run the business from day one! That last point is important because many buyers tend to stretch themselves to acquire a business and then find themselves short of working capital to keep it running after the acquisition. Qualified business brokers and intermediaries will help ensure you do not misstep here.

Accountant

Accountants typically work for smaller businesses as tax preparers. They do not spend a lot of time planning for the future. If sellers plan effectively, their accountants will work with them to determine reasonable times to sell their businesses, put the accounting records in order to be GAAP (Generally Accepted Accounting Principles) compliant, and be able to address trends and issues with buyers to answer their questions. In our experiences, many sellers do not use their accountants effectively or at the appropriate time, and therefore greater investigation by the buyer during due diligence is required. An experienced M&A accountant working for the buyer will help spot these issues and identify problem areas.

M&A Attorney

Your attorney will be chartered with drafting the definitive documents. His or her objective is NOT to negotiate the business terms of the agreement, but to adequately memorialize what you and the seller have agreed to, in principle, and ensure that the seller warrants you from anything that could cause loss for you after you take over the business or for which you were not told about and could not be reasonably expected to uncover during your due diligence. Ultimately, you have assumed risk when the money changes hands, so your attorney will try to protect you from issues that may arise after closing. Granted, there will likely be issues, but it is a matter of magnitude. An important and key area that many sellers and buyers overlook is to obtain a good and competent M&A attorney — not real estate, not litigation, not bankruptcy, etc. You want a qualified M&A attorney that has worked on commercial deals before.

Tax Attorney

Although your accountant may know taxes well, the intersection of the law and taxes sometimes need further clarification by a tax attorney. If you need one, the other professionals on your team will take notice to you so that you may select one. Typically, this person comes from the M&A attorney’s firm based upon his or her recommendation.

Financial Planner

Although needed far more for a seller, a buyer needs to understand what the reduction in their capital accounts will mean to them going forward. A good financial planner will work with you to help you understand what the outflows and “projected” inflows will mean to your everyday life.

Insurance Broker

You will need new insurance when you buy the company. The insurance broker can be the existing one that handles the company or you may find a new one. You need this person’s advice not only for pricing on existing policies, but also to advise you on what policies are available and possibly needed by you when you take over the company.

When due diligence starts, and your intermediary tells you to start analyzing the information — including financial reviews, operational reviews, technology reviews, quality of earnings, regulatory issues, union issues, contracts, competition, etc. — you will see why taking on the task of buying a business yourself is a “BADD” idea. The number of balls being thrown into the air is not the only issue; it is the fact that they are not all going straight up and straight down. When one goes off course, it makes grabbing the rest a challenge even for the best juggler.

Due diligence is the world’s biggest juggling act, partially because of the number of balls, and because some of them are invisible and require experience to know they are in the air and when to grab them. Typical due diligence periods last from 4 weeks (for a very small business) to 3-6 months (for a larger mid-sized business). It is a full-time job for the buyer, not a part-time exercise.

You are probably thinking, “Wow, that is a lot of work and a lot of people involved. How much is this going to cost me?” Although you think it will cost you a lot of money, you need to think of this as an insurance policy that is part of the acquisition cost. This cost can get bundled into the sale and amortized over a period of time. All of the professionals will charge a combination of retainers, hourly fees or a percentage of the deal. You will likely see a combined deal cost up to 10 percent or more just for the professional assistance you need. It is expensive, but these costs are typically factored into EVERY GOOD DEAL. Does planning to spend less mean you will fail? No, but your odds of jeopardizing the capital and acquired debt you put into the deal will increase significantly. On a $1 million deal, the $100,000 paid could be the difference between losing the $1 million because of poor analysis and decision or, just as likely, helping you from paying $1.2 million!

So as a buyer, go about the identification, offer and due diligence carefully. Buying a business should not be seen as an easy exercise. Because most buyers invest significant personal capital in their investments, make sure you do not take on what others can help you do better. Do not make a “BADD” decision.

As one attorney recently said to me, “In the grand scheme of things, 10 to 20 years from now the amount in a transaction will seem to blur, and the only memory will be one that shows you either succeeded or failed.”

About the broker blog

The Blogger- Steve Wain

Steve is the President and CEO of Calder Associates worldwide operations, and also the past Chairman of the International Business Brokers Association, and President and Founder of the Mid-Atlantic Business Brokers Association. A professional whose owned and sold a number of businesses in the past, Steve has provided expertise to thousands of business owners and buyers. Steve’s background in technology and finance has served many business owners and buyers over the years. Steve is a Certified Business Intermediary (CBI), and one of a select few worldwide to be awarded the certification of Mergers and Acquisition Master Intermediary (M&AMI). Steve is also a frequesnt speaker at industry conferences, as well as mentor and educator to many professionals in the industry. Steve sits on the Boards of Directors of multiple companies and associations.

How to Gauge If Business Owners Are Ready to Sell

How to Gauge If Business Owners Are Ready to Sell

October 9, 2017 | Susan Rosner

How to Gauge If Business Owners Are Ready to Sell

When an M&A firm is devoted to selling—not simply listing— businesses, they take the time to assess the likelihood that a business will be saleable. At Calder Associates, we have formulated a process for selecting the businesses we want to work with. After assessing that a business is indeed saleable, we posit two crucial questions to a business owner:

I. Are you realistic about your selling price?
II. Are you truly ready to sell?

If we hear a resounding “YES,” and we believe the market is receptive, we proceed with the signing of an agreement. Nonetheless, as our firm has learned, a business’s viability on the market can always change. Under financial pressures or losses of personnel, desirability is not a certainty.

An Anecdotal Indicator

Our Mergers and Acquisitions firm is working with a 75-year-old business owner focused on retirement. Since signing an agreement with this client, his business has had a 25% drop in sales. Accordingly, the offers from buyers have been lower than what had originally been agreed to; frustrating the owner. He argues that the value of his business is in the business that he has built over 30 years; not the way it’s currently performing. We sum this up as: our client wants to be paid for his efforts.

All businesses, regardless of the industry, are valued according to their EBITDA or “earnings before interest, tax, depreciation, and amortization.” The more financially successful a business is, the higher its valuation. Despite how venerable it may be, a business’s legacy has no bearing on its valuation if the business performance is declining. In the case of our client, he requires at least a 25% increase in sales and a 50% increase in EBITDA to obtain the selling price he envisions.

Take the Deal!

Unless they’re prepared to maintain and market their businesses for years, owners have to make a decision. Dismissing a buying offer, during a period of underperformance, can have disastrous consequences if there is no plan to turnaround performance. For an owner that is burnt out and not able or willing to commit to growing the business, accepting a deal that’s 20% below expectations can be the best deal that they can get. Rather than risk further decline in performance and value, an owner can still retire comfortably, while retaining loyal employees, and providing ongoing service to long-term customers.

At Calder Associates, we can confidently say that 99% of clients regret passing up on such a deal because in retrospect it was the best deal that they could get. The best advice that we can give is when a business owner is ready to sell, be realistic about selling price

About the broker blog

The Blogger- Susan Rosner

Susan is a Managing Partner in Calder Associates and is responsible for Calder’s Pennsylvania, Delaware, and surrounding area. Susan’s past experience has served hundreds of business owners and buyers in their pursuit to sell or acquire the right business. A past President of the Lower Bucks Chamber of Commerce, business coach, and speaker at local business events and exit planning conferences, Susan has helped thousands of companies and individuals to success!