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All in the Family: The Truth about Acquiring or Selling a Family-Owned Business

Written By: Duane Knight

In the United States, family businesses account for 60 percent of total employment and half of the nation’s gross domestic product. More than half of all public companies in the United States – and 80 percent of the world’s businesses – are family controlled.

The fact that family businesses are pervasive around the world is clear. Their impact on the economy is more than significant. Yet when it comes to selling or buying a family business, mystery seems to prevail. In fact, family businesses do operate differently than the rest of corporate American in some ways. When considering the sale or purchase of a family-run business, understanding these differences can be the key to achieving success – for both sellers and buyers.

The inner workings
In the competitive environment of corporate America, businesses that want to succeed will try everything in their power to tip the scales in their favor. Although they may not realize it, family-owned businesses have already tipped the scales in their favor. By their very nature, they have several advantages over their non-family-owned counterparts. However, many of these family enterprises – as well as many prospective buyers of their businesses – do not realize this, and therefore operate at a disadvantage.

Three key strengths are inherent to most family-run businesses: ability to maintain patient capital; risk-averse planning; and market agility. Family businesses that learn to capitalize on these factors can maintain a competitive advantage in today’s economy. Prospective buyers that learn to recognize and respect these strengths can gain greater insight into the businesses, and in turn, greater negotiation leverage.

Maintaining patient capital
Patient capital, the first key strength, refers to ownership that is stable. Family business owners generally are optimistic about their businesses and can see beyond the short-term. Since these owners typically have been there for the long haul, looking to build long-term value, they have the confidence to see beyond the next quarter. In contrast, public companies often have a short-term focus, the result of the need to show results in the next quarter.

When the focus in managing a business is more about the next five years than the next quarter, it is far easier to build value and address challenges to growth, year after year. Family business owners with this longer-term perspective often have weathered the ups and downs over the years far better than other companies.

The long-term focus results in greater loyalty, too. Family-owned firms are less likely to lay off employees regardless of financial performance. This resulting surge in loyalty means lower turnover, lower training time and costs, improved efficiency and productivity, and a greater sense of community. Prospective buyers often do not take into account these factors, which can provide major benefits to new ownership if understood and used wisely.

Family businesses often have outperformed the competition by continuing to keep their long-term goals in mind, by capitalizing on employee loyalty and by maintaining steadfast resolve when short-term results fall short of expectations.

Embracing risk-averse planning
Goal-setting, planning, and focus on growth are all important parts of running a business that intends to be around for the long term. Owners of family businesses, though, tend to have more realistic business plans than companies owned by private equity firms – and that can be a key competitive advantage.

Private equity firms may be all the rage, but with them come demands for aggressive growth. Hoping that one of the companies will hit a home run, they often take unnecessary risks as they look to achieve hoped-for investment returns. Consequently, the portfolio companies are forced to develop overly aggressive, impudent business plans, betting the farm on hyper-growth. These companies then run the risk of losing their identities in the process.

For example, Cabela’s faced rapid expansion immediately after JP Morgan became an investor and pushed for a more aggressive business plan, with the goal of taking the company public as soon as possible. As a result, Cabela’s expanded exponentially, and its brand - the "golden goose" - became over-extended in the process.

Owners of family businesses that have avoided business plans which promote overly aggressive, gung-ho growth can be in a much better position to outperform the competition. Both sellers and buyers who recognize this as a strength, vs. a weakness, will likely find that the most successful businesses have planned their futures by taking more thoughtful, deliberate steps.

Market agility
The third inherent strength is market agility. Just because a business focuses on the long-term and avoids overly aggressive business plans does not mean it cannot capitalize on opportunities when they present themselves.

Family owners tend to be more nimble, understanding better when to say no (or yes). They also generally know how to avoid spreading themselves too thin. Family firms traditionally are clearer on what they stand for than their non-family-owned counterparts – putting them in a position to respond quickly to market opportunities. Look at it this way: When you are crystal clear about who you are and what you stand for - and what your objectives are - you can make a well-thought-out decision quickly rather than forming a committee to investigate it.

Sellers and buyers alike need to recognize that one of the most important tasks of a family business is taking stock in its organizational values. Those who clarify, on an ongoing basis, what they stand for, will be able to garner the highest sustainable value, as they will have created more robust companies with stronger organization, more clarity, more uniformity and less ambiguity.

The weight of responsibility

When a family-owned business decides to seriously consider the possibility of selling, it will likely first consider all ownership options that could address its needs, carefully weighing the positive and negative aspects of maintaining ownership vs. selling the business. At least the wisest businesses will do so. Choosing to ignore the possibility of selling is a serious matter. It does not represent a failure to plan; rather, it is a plan to fail.

Prospective buyers need to understand that families consider selling their businesses for a variety of reasons, and not assume they are doing so because they must. Family business owners typically look at and balance key signposts related to the keep-or-sell decision, addressing concerns about asset diversification, next-generation management, and the ability to sustain the business through future economic downturns as well as upswings.

Keep-or-Sell Signposts

Capital needed to compete
Management succession
Next-generation involvement
Economic outlook
Competitive landscape
Investment diversification
Business sustainability                              
Shareholder alignment

In contemplating the possible sale of their businesses, these owners are carrying the weight of responsibility for the next generation and the legacy of generations past. And since wealth diversification is a key factor in any ownership decision, well-prepared family businesses will research and identify appropriate specialists with which to work on any potential sale.

Choosing the right advisory team to guide the sale process is crucial. The team will need to identify appropriate buyers, conduct confidential marketing, guide the deal structure and negotiation, and manage the transaction planning and closing. These specialists also must be able to quickly and accurately determine the company’s marketable differentiators, and provide counsel on any additional advisors needed, including an attorney specializing in mergers and acquisition transactions.

Buyers can expect communications to include all family members across all generations – not only those assigned to the deal team – on an as-needed, when-needed basis. For potential acquirers of a family-run business, this may be different than what they experience with other businesses. Those who realize what is happening will have much greater success in working out deals with family business owners.

Understanding and accepting these differences – sometimes subtle – between family-owned and non-family-owned businesses de-mystifies the process of buying or selling a family business. Acquirers and sellers alike can learn to work on more common ground, and in so doing, achieve more effective, efficient transactions.

Family business is here to stay, with American families starting more than three million firms over the past five years. These businesses represent an organizational system that is vastly different from public companies or companies owned by private equity firms. Owners who recognize that their systems can play to their favor will be in an excellent position to sell their companies for a fair profit when it is time to do so. Prospective buyers who recognize the particular strengths of a successful family-run business will be able to communicate better, negotiate from a stronger position and ultimately make the best purchases possible.

Duane Knight is a partner with Denver-based Trinity Capital Services, LLC (, which provides merger and acquisition, and investment banking, services for family and other closely held businesses. Trinity Capital Services also operates The Trinity Group, LLC, a FINRA-regulated investment bank.

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