Welcome to the second in a series dealing with the challenges of selling a family-owned or closely held business. If you have not read part 1, the article is available here. Part 3 completes the series and can be found here.
If you see yourself or your company in these discussions, the time to take action is now. Many of these issues take time to develop and will need time to be resolved if you are considering an outside investment, sale, merger, or other exit for your business. The examples we discuss are based on situations from actual client work we have done at SiVal. If your business is reflected here, knowing you aren’t alone shouldn’t be a comfort. You are always welcome to contact us at SiVal to learn more.
Challenge 4 – Lack of Management Depth
The press creates big stories out of entrepreneurs and the great things they accomplish. Names like Gates, Jobs, and Bezos generate mental images not unlike the lone cowboy in the old westerns who rides in to save the day. Reality is much different. The failure to build a substantive team and have significant depth in the management structure can significantly hurt a deal. The company can’t be all about founder-owner. Chances are the founder-owner will not want to remain long with the combined entity after the deal is done, except for possibly a transition period. Depth in the management team provides confidence to the acquiring company that the deal can be a success, and that the business will continue to grow and prosper post-acquisition. Lack of management depth can impact both sale-ability and value. Build your team with an eye to the future!
Challenge 5 – Customer / Revenue Concentration
A company that depends on one or few customers for the bulk of its revenue is a common issue and challenge for founder-owned businesses. The risk to the acquiring company increases simply because of the potential revenue impact if that customer decides to take their business elsewhere. Such a business is difficult but not impossible to sell. In the absence of being able to diversify customers and revenues, achieving a successful sale requires an experienced and diligent M&A advisor. Working together with you, the M&A advisor should identify the optimal buyers for whom your customer relationships would be complementary and ideally mission-critical to their business. In our experience, this can make the difference between success or failure of your deal!
Challenges 6 – Kids in the Business
It’s not just kids; it could be other relatives, too. Having your family on the payroll is, in itself, not bad. Many family-run businesses have succeeded across generations. If your family members are on the payroll with no clear function or responsibilities, this needs to be addressed prior to selling the business. You can be guaranteed that the company who acquires your company will not have the same allegiance to your family as you do. Dealing thoughtfully with family members ahead of the sale is paramount to head-off any legal issues, and to present the most professional organization to potential buyers. This is particularly important in the case of family members who have assumed they will be ‘heir apparent’. Emotions can run high, so it’s critical to sort this out early.
In the last part of this series, we will address challenges 7 through 10. In the interim, if you would like to learn more or discuss these challenges, please contact one of the team at SiVal Advisors. We are happy to be your guides on the M&A journey.