By Chris Parisi, Partner
Even with all the uncertainties we have seen in recent years thanks to inflation, higher interest rates and the COVID pandemic, the decision to sell or merge a family business remains at heart a microeconomic one—it’s mostly a function of the family’s circumstances, tends to be less cyclical in nature, and often has more to do with occurrences in the lives of the owner and his or her family than anything else. That is not to say these businesses are unaffected by the macroeconomic climate or market conditions in the industry in which they compete. But, in the end, M&A decisions among founder-owned companies tend to be more closely aligned with personal lifecycles than external factors. According to AARP, 45% of baby boomers consider themselves “entrepreneurs” and, with 10,000 boomers hitting retirement age each day, it’s no surprise that many business owners are motivated to consider a sale regardless of overall market conditions in a given year.
A recurring trend we have seen over the past 15 years is that family-owned businesses are less frequently transferring ownership to the next generation. With sons and daughters of founders choosing to pursue different career paths than their parents, this has created an array of new potential pathways for founders.
Here’s what we see most often when we interact with family business owners facing these critical junctures:
- Business owner is nearing retirement age
- Succession issues (e.g., children not involved in the family business or capital needed to effectuate a succession plan)
- An unsolicited offer to buy the company has been received
- Upcoming requirement for a large capital investment (new equipment, real estate, technology, etc.)
- Recent changes in the owner’s health or marital status
- News of a transaction involving a major competitor, customer or vendor
- Regulatory issues from recent changes or enforcement
The process at these critical junctures can produce a great deal of uncertainty and apprehension. For founder-owners and families, it is often the most important financial decision of their lives.
If you are a business owner contemplating these issues, there are three things you should do right away—when you begin to even consider the possibility of a sale—to position your company in the best possible light when you call in advisors to begin the sale process.
The Value of a Legacy
There is something especially gratifying about working alongside founders and families whose blood, sweat and tears have gone into their businesses, and being able to, in some small way, help them realize economic value from a lifetime of work. The sale of a family business should never be just about chasing the numbers; rather, it is about the people you trust to help you make the best decisions about your legacy and your business.
Carl Marks Securities is a family-owned business, and many of our senior professionals have started, run, and sold their own enterprises. They understand at a personal level that baby boomers are keenly interested in liquidity options and addressing generational and succession issues in their companies and their families. This interest commonly leads to questions of whether to continue to try to grow organically, buy another company, merge into a larger entity or sell the business, either in whole or in part.
The most important thing any advisor can offer family businesses is a hands-on, highly collaborative experience from start to sell. Most family-owned businesses are private partnerships or single-owner/entrepreneurs. Because they have been laser focused on building and running the business, founders are often less familiar with the nitty gritty details of their financials or what factors come into play in selling or merging a company. We try to set expectations by explaining what the process is going to look like and hold hands with our clients throughout.
As we continue to experience an historic transfer of generational wealth, there will be a greater and greater need for M&A advisors who not only understand the full range of market opportunities, but can relate to clients on a human level and help them understand what can often be a daunting process. In the end, it’s all about helping the business owner and his or her family realize the greatest benefit while giving them a sense of satisfaction that they’ve arrived at the right outcome.
