How to Prepare A Family Business for Acquisition

Thinking About Selling Your Business?

The United States Census bureau along with Capital IQ says you are not alone. A recent Deloitte study cites that nearly half of the millions of family owned businesses in the United States will change ownership in the next 5 years. Market signs are pointing to an improved environment. And there is no greater harbinger of improvement in the economy than to see the uptick in M&A activity, particularly in Private Equity. It is critical to take the right steps to take advantage of opportunities as they come. Private equity acquisition or investment could be the right option for your company.

Private Equity Acquisition

PE firms (with their vast amount of due diligence, specialization in a specific market segment and available investment capital) scour the market looking to get in front of the next wave of market demand. PE firms look to act on opportunities first and at present, have begun to make strategic acquisitions to support these overall objectives. Over the past decade PE firms have done a good job in providing value to their limited partners. Value creation is accomplished in an organization by creating a culture of urgency focusing on driving revenue growth and operating efficiency coupled with the effective use of capital and the assets. Investment capital firms that have an active board and aligned management team, have proven to be excellent catalysts for transforming organizations in all business sectors. Have you considered a private equity group as a possible acquirer? PE firms are looking for good, sustainable companies that are well managed with a solid track record. Those firms may more accommodating today than in previous cycles to make a deal with owners looking to make a transition.

So how does a family owned firm take advantage of the next wave of private equity acquisitions?

• Get a Business Valuation - Just like when you're preparing to sell your house you receive an appraisal of your home in comparison to others in the neighborhood, a business valuation is needed to determine the market value of your business. Valuations can be achieved from several sources including accounting firms, large business brokers and investment bankers. On the buy-side, PE firms do a complete due diligence analysis to determine perceived value so knowing what your business is worth upfront providing a basis of understanding moving forward.
• Stay Focused on Your Company's Operations - Far too often business performance suffers as a result of the ownership's focus on the company sale, thus losing a great amount of market value at closing. Consequently, hire a competent advisor or task a board member to source an advisor who is experienced in M&A and your industry to manage your side of this process and, if possible, demand multiple offers to create competition. On the buy-side, PE firms want to see a business plan with hard, comparable results using current and projected financial modeling as a basis to understand your value to the market. They will require a review of all current and projected revenue sources, new product or market expansion plans including projected cash-flows and use of proceeds on a three basis. Rich, is a "three-basis" common terminology?
• Get Your House in Order - Benchmark the organization to your major competitors and then optimize all business value drivers. If unsure, bring in an outside advisor/executive coach to improve the value of your organization. It's money well spent. Make sure all legal documents and patents are in place for your company and your local bank including any loan agreements, banking covenants. On the buy-side, PE firms will verify and validate this information in the due diligence process including obtaining a third-party "fairness opinion" on your intellectual property (IP).
• Succession Planning - What is your succession plan when the business is sold? If your business is family-owned, have you come to grips with how and who will take over after the sale? Don't be afraid to acknowledge any major gaps in functional leadership as this will show a maturity in leadership, but also have a plan in place on how you will fill this position. On the buy-side, a PE firm does not want to manage your company but partner with you to make it grow. However, sourcing an interim executive is a common practice to quickly assist management to drive growth and execute the strategic plan post sale.
• First Impressions are Everything - Again, just like with a home sale, make every effort to provide a good impression of order and responsiveness and avoid confusion in all your contact with the potential buyer.
• Finally be Patient and Keep Your Eye on the Prize - A business sale on average may take over one year experiencing many twists and turns. But as when you started your business, it's time to roll up your sleeves and get to work. No one said it would be easy!