Selling The Family Business
Achieving Optimal Liquidity Selling the Family Business
An interview with John Messervey
Selling a family business is unlike any transaction in the M&A marketplace. For family owners leading one or more generations, it is the ultimate judgment on their ability to create value.
Often, the sale of a family business is a highly conflicted event. Expectations run high. For many, it is a time when unresolved family issues rise to the surface demanding attention. The pressure to “get it right” among multiple constituencies is real.
Unexpected personal issues arise: the financial security of the older generation, dreams of the younger generation, and transitions of career, identity, and relationships. One seller observed, “I had no idea how much of my personal life would change. Marriage, parenting, friendships, and community are now so different.” For lifelong risk taking entrepreneurs, the transition can be much tougher, as the business is so tied to their identity.
Rarely are any of the overt (and covert) family issues addressed during the usual investment banker led transaction process. Too often, high performing family owned firms that could easily reach optimal price and terms are left in a crater of blame, disappointment and “no sale.” Overwhelmed by family issues, the M&A process often grinds to a halt. In the eyes of other prospective buyers, “no sale” means the family business must somehow be tainted.
Internationally known family business consultant John Messervey has completed more than one hundred internal and external sales of family enterprises in his thirty year career as “Private Advisor to America’s Leading Families.” John believes that a team of experienced advisors can optimize the selling experience to everyone’s satisfaction. As a family advisor, not a broker, John prepares his clients for the challenging process of selling the family business. His list of M&A resources is long, deep and trusted.
In this brief interview in his Lake Forest, IL office, he shares his thoughts on “optimal liquidity”
TL: You are widely known for your work resolving disputes, encouraging personal growth and creating wealth for your clients. Why get involved in the M&A process?
For years, my high net worth (HNW) clients have asked for my help on one or the other side of a transaction. By resolving the inevitable family differences that arise, I help ensure that a sale is completed. Investment bankers, in particular appreciate my work as I keep family issues out of the transaction, manage the difficult family discussions and build a team among all players. Often open family communication is the first casualty of the sale process.
There is an art to selling a family business. The investment bankers and transaction attorneys skillfully deal with the NDA’s, data rooms, valuations and negotiations, but who handles the difficult family issues that must be addressed? Who prepares the family for what lies ahead? Who guides them through the process? Who can share experienced resources to optimize value? I educate the family on process so there are few surprises ahead.
TL: Earlier, you mentioned each side of a transaction? Tell us more…
Although I often help families sell their business, many HNW clients ask me to locate family enterprises that may be for sale on a preemptive basis. There is often great benefit on both sides for a quick and quiet sale to one of many cash rich, opportunistic buyers who share the same culture, chemistry and values.
TL: Are these preemptive buyers primarily U.S. families?
Yes, most are family businesses that wish to expand as an investment strategy. However, some are overseas. I also have clients in Asia, Europe and the Middle East that are looking closely at U. S. based firms to acquire.
TL: Is it all about price?
Well, there is often a big number that many business owners like to share on the golf course. My experience tells me that deal terms are just as important and may be critical to an optimal sale. For many family sellers, the culture and values of any potential buyer ranks very high particularly for those with long term managers and employees.
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price” – Warren Buffet
TL: Tell us more about the team
Since my primary focus is on the family and the process, I welcome the work of investment bankers, transaction attorneys, tax counsel, estate planning advisors and others. In an optimal transaction, every member of the team is involved, committed, respected, mindful of each other’s responsibilities and entirely focused on the best possible outcome for the family and its employees.”
TL: What are the common mistakes that sellers make?
Well, the list is long—and often very expensive. At the top of the list would be creating a clear understanding among all parties of the process, expected outcomes, a committed timeline and responsibilities. Business owners who are insecure, have control issues or believe that they always know more than others are not good candidates for an optimal sale process. Too many sellers waste time on “targeted” buyers, tax gimmicks, and conflicted advisors. Some are waiting for everything to be “perfect.” Perfect timing doesn’t exist in M&A; some days you just get lucky.
15 Common Family Business Seller Mistakes
- Trying to manage the process by yourself
- Getting too much “golf course” advice from others who have sold their family business
- Not forming a team of experienced M&A professionals—instead using your company attorney to be your deal attorney
- Being “penny wise and pound foolish” in negotiating your advisor’s fees and incentives
- Wasting advisors time and unnecessarily delaying the sale process
- Not maintaining strict confidentiality among a very small group of transition advisors, the CEO and the CFO
- Failing to disclose conflicts of interest
- Failing to define a range of successful outcomes—including expected value
- Not considering the full income and transfer tax implications of a sale and not engaging in effective pre-transaction planning to maximize after-tax proceeds
- Avoiding spoken or unspoken family concerns—hoping that enough money will make everyone happy
- Thinking that you are a great salesman and can sell glory stories and “hockey stick” financial projections to experienced buyers
- Hiding issues that are easily discoverable— “disclosure is free insurance”
- Failing to listen to the concerns of family spouses and the next generation
- Failing to see your family business and the process from the buyer’s point of view
- After closing, managing your newfound SLE [sudden liquidity event] wealth without a plan or skilled and trusted advisors–much like a lottery winner.
TL: What about the next generation?
This is a critical question with every seller… I spend a great deal of my time exploring the talent and goals of the “rising generation.” You do not want an explosion ten years from now, when a next gen asks, “Why did you sell it? No one asked me!” So, I often meet with the next generation, together or individually, to better understand their career plans, talents and goals. Some are less interested, but appreciate being asked. In other cases, next generation family members are not able to “hit the pitching” and run a significant growing enterprise.
“Our family called John to help us ‘prune the tree’ of stock ownership. He carefully guided each family member to a win-win-win transaction — giving each of us needed financial independence and a chance to achieve our personal and professional goals.” – David
TL: What do you do then?
In as kind and sincere way as possible, I tell them what they probably already know—the business may have outgrown their leadership skills. Some of these discussions are better handled by a consultant than a parent or relative. Together we find and support new career opportunities for the next generation.
Others are able to join the management team under new owners and some become entrepreneurs – restarting the family business legacy all over again.
From the business perspective you need to look at the family demographics and ask, “Does the next generation have the competency, passion and vision to drive this business forward?” Both the supply (the next generation) and demand (the business) side of the equation are maturing, and the risk is whether they will intersect… can thirty year old Charlotte or Jake mature quickly enough to run a $100+ million dollar rapidly expanding enterprise?
TL: When do families start the process?
Unique to family business, a number of events align. Age, coupled with financial security is a major factor. Many business owners seek to minimize risk, diversify their assets, and no longer desire to put additional capital into the business. Some are just tired, others are implementing their estate plan. For a few, the death of the founder seems to give them permission to operate on their own. Others sell in unresolved conflict such as sibling rivalry, divorce or generational strife. We often begin the discussion with a very confidential, “let’s explore the option of…”
An interesting question is, “if you had the cash representing the enterprise value of your company in your hand, would you buy your firm today?”
TL: In global terms, why sell now?
We have a world awash in capital, low interest rates, generally favorable tax climates, a growing U. S. economy and a very robust private equity market. Buy or build, it is tough to build… buyers far outnumber sellers.
TL: You mentioned earlier that you handle external and internal sales, explain the difference.
External sales are to an outside party; strategic, private equity, family office or individual investor. Internal sales are within the family. Those transactions are often the most challenging. In many families, the internal sale process becomes so competitive and conflict ridden that I have to work through myriad, simultaneous family dramas and find very creative solutions.
TL: Tell us more about your usual scope of work
Well, every transaction is very unique. And, in every transaction, I serve as a consultant, not a broker. My goal is the family owner’s goal: maintain family harmony, enhance rising business value, work with a very talented team of advisors and secure optimal price and terms for family owners.
Each transaction is a multi-disciplined approach, aimed at keeping the ball moving down the field in a relatively seamless fashion. There are always surprises. My goal is to coordinate the effort, manage many moving parts, enhance communication and build consensus around the many decisions that the family will face in this process.
“Experienced family advisory is very, very important. I would recommend someone who knows the idiosyncrasies of the family, someone who has been through that role before especially for a family who’s having a first liquidity event. It’s very rare for anybody having a first-time event to really know what it entails. The lawyers will take care of the legal side, the bankers the financial matters, but there are so many family issues that arise unrelated to the transaction itself that are really critical and can actually make or break a deal.” – Family business buyer and seller, Midwest, multiple transactions
TL: In the end, what happens during and after closing?
For many, closing is bittersweet. Family members are changing from being owners and operators to being investors. That’s a big difference in skills. Additionally, letting go of the family legacy, which is a big part of their identity, and foregoing a bit of esteem in the community as the owner, employer and civic supporter, constitutes a significant life transition for many family members.
TL: Thanks, John, for sharing your experience and wisdom on this fascinating topic. Anything else you’d like to add?
Know what you are selling; competitive position, proprietary technology, sustainable cash flows, etc. Manage your expectations around a range of outcomes.
Finally, life moves on. Not selling a family business when the family no longer has the talent and drive required to keep it growing is a big mistake. Selling the family business without an adequate team of advisors who work together to serve the best interests of the family is also a big mistake. Regretfully, it’s much easier to go down either of these paths than it is to pull together the best team. Do the essential planning before the transaction occurs and prepare the family for investing the proceeds of their optimal liquidity.