to Consider When Selling the Family Business
a private equity firm calls and makes what seems like a generous
offer to fund your next stage of growth. Interest rates are still
reasonably low and your industry is booming, so you can command
a high share price for selling all or part of the company to the
investor. The same week, your nearest competitor calls you via his
financial advisor, inquiring about a potential merger of the two
companies. A larger size business would be able to compete more
effectively in a global economic environment. It seems like a no-brainer:
go for it!
should you? It depends. From an industry and market standpoint,
this may be a great time to sell or invite an outside partner to
raise money for an acquisition or, perhaps, for expanding overseas.
However, selling the family business involves more than how hot
your industry or the financial markets may be. The family business
is part of a complicated fabric of business ambition, family values
and relationships and long-term wealth-building goals. The patient
capital that the family has invested over one or more generations
goes beyond dollars and cents; it also involves intangible attributes
relating to family heritage and fiduciaries' duties, which business
owners are expected to pass on to the next generation. Selling the
family business or inviting an outside partner for a large expansion
project may jeopardize the ability to pass on the "family effect"
to future generations.
strategic financial transaction for a family company should fit
into four different cycles: the business cycle, the liquidity cycle,
the ownership cycle and the fiduciary cycle. While these four cycles
may not always move in tandem, the success of any strategic financial
transition for a family business may depend on how accurately one
can time the transaction within the four cycles. Let's look at each
The business cycle
weighs the degree to which your company's sector has potential
for future global growth. To attract outside capital or a merger
partner, you have to demonstrate growth in value and potential
global business development. Is your business well positioned
to take advantage of growth opportunities in the global markets?
For instance, the natural resources industry currently enjoys
global favor because of scarcity and continued demand for energy
and resources, while the traditional travel business with its
network of agencies and call centers has been challenged by
electronic and virtual agencies on the Internet.
To determine whether your company may be attractive to an outside
investor or partner, start by identifying the global macro-economic
trends (such as global population growth, rising healthcare
costs or scarcity of natural resources) that affect your business
growth, as well as global threats to your business (such as
Second, consider rise of global competitors, development of
new markets and customers in your industry, or even the speed
of innovation. What if you conclude that your business survival
is in danger in a global economic marketplace? Turn to your
company's core competencies, which every business has, and which
competitors cannot easily replicate, such as: certain customer
relationships, unique manufacturing processes or proprietary
sources of supplies. Those core competencies are marketable
to an outsider and may be combined with another business, developed
in new markets or just bought for value. So even if your business
is not quite positioned for global growth, future development
of your core competencies may be very attractive to an investor
The liquidity cycle
gauges the amount of available liquidity and the current appetite
of investors to invest in companies, especially those of your
size, line of business and structure. A successful transition
requires a highly liquid market and access to financial resources
— either internal cash flow or outside funds from investors
Judging solely by the liquidity cycle, this may be a very opportune
time to sell your business or attract an investor or partner.
Liquidity is abundant. Private equity firms and hedge funds
are flush with investable cash. Banks are eager to lend and
have been relaxing their lending standards. Many corporations
have accumulated vast amounts of internal cash, as evidenced
by the extremely liquid balance sheets of Fortune 1000 companies.
All this cash has led to many strategic deals between middle-market
family firms and larger companies looking to put their capital
to productive use.
Based on the amount of private equity being raised today, the
markets should be liquid for the next three to seven years.
When liquidity tightens, as it did during the early 1990's,
corporate development activity tends to focus on mergers and
business combinations as opposed to cash buyouts or investments.
The timing of the liquidity cycle will dictate the type of deal
that would have the greatest chances for success.
The ownership cycle
considers whether or not this is the right time for the family
to sell or to grow with a partner, in terms of what impact the
potential transaction would have on the family. Even if the
market and industry cycles are well positioned, the family itself
may not be ready. Are we approaching or just completed an ownership
or management succession? What is the status of family ownership
and family management? How spread out is ownership? Has the
family already made the transition between business management
and wealth management?
In the founder generation, the owner/founder must define the
role he or she will play after the transition, which could be
leadership of a foundation or other philanthropic initiative
that could carry the values and legacy of the founder. That
role needs to be defined and prepared prior to the transaction.
Without preparation by and for the founder, any attempted deal
may likely abort. On the other hand, potential successors may
not yet have been identified or prepared. Having outside investors
or bankers involved during that future transition would disrupt
the succession process.
In the partnership generation, usually the second or third generation,
control is shared among descendants of the founders. Some members
are active in management, others are not. Active and inactive
shareholders must share the decision to sell or to attract outside
investors. Their ability to reach consensus depends upon the
timing in the succession process. For instance, second generation
members who have recently stepped into management will not have
had time to establish their own imprint or develop their own
strategy, and therefore may not be prepared to deal with assertive
outside investors or lenders.
During the coalition generation (typically third generation
or beyond), ownership is spread among many cousins/descendants
of the founder. In order for them to reach consensus without
rupturing the family, the timing of the financial transition
has to coincide with the evolution of the family governance.
This family governance structure, whether a family council,
a family office or even a family holding company, must have
the tools to handle decisions about the reinvestment or distribution
of proceeds of a financial transaction and the perpetuation
of the family values and the family heritage.
One third generation family business that had been approached
by one of its competitors for a possible merger turned the suitor
down. The family correctly realized the offer indicated the
start of a trend in the market for greater consolidation. So
instead of selling, the family business' family council rigorously
interviewed shareholders about their liquidity needs, attachment
to the business, degree of family effect and their desire to
pool their assets. They also formed a liquidity committee and
an investment committee that helped the family evaluate various
financial options to realizing shareholder value. As they saw
the right timing in the business cycle a few months later, they
were able to handle a strategic transition with serenity and
No matter what generation, families need a solid governance
system to help them make wise decisions.
The fiduciary cycle
focuses on the perspective of trustees and owners with
fiduciary duties vis a vis the ultimate beneficiaries/shareholders
of the family company. Those owners/trustees have the duty to
maximize the value in a trust — not just the business
— and weigh how to best invest capital in the trust, creating
long-term value as well as liquidity for the beneficiaries by
evaluating market opportunities to reinvest the proceeds in
order to achieve both return and capital preservation inside
The fiduciary introduces wealth management into the equation.
Even if a potential acquisition seems attractive from the business
cycle, liquidity cycle and ownership cycle, trustees focus more
on the stage of life of the beneficiaries, and their short-
and long-term needs for cash. The owner/trustee would also focus
on finding attractive reinvestment opportunities for the after-tax
proceeds of the liquidity created for shareholders. In one recent
case, the owners/trustees voted against a transaction approved
by all the shareholders, because they could not find a reinvestment
opportunity for the after-tax proceeds that was attractive enough
to provide the desired return for the beneficiaries.
all four cycles should align when you're evaluating, as a business
owner or owner/trustee, the potential of a financial transition
for the family business. If you're not in a good place with any
of these cycles, consider what you might need to get there.
is never a perfect time to effectuate a financial transition for
your business. However, by knowing where you are in the four cycles
and knowing what to do to improve the timing on the cycles, you
may greatly improve your chances for a successful transition.
article was written by Francois M. de Visscher, founder & president,
de Visscher & Co , and originally appeared in Family Business
Magazine and also recently appeared in Bank of America's CapitalEyes
section of their newsletter.
de Visscher & Co.
Two Greenwich Office Park
Greenwich, CT 06831