M&A Advice for Selling A Family Business [PODCAST]

You (or your parents or your grandparents) built a successful business. That is a great accomplishment. If the time comes to sell all or part of it you will likely run into a few situations that are unique compared to larger, corporate M&A transactions.
Redpath’s Joe Hellman spoke with Jake Fishman from Madeira Partners, who specializes in supporting closely held businesses as they go to market, about some of the things to consider. Their conversation was captured on The Transaction Abstract podcast. You can listen to the full episode or read the summary below.

Leaner Operations and Closely Held Information

Jake says it is common for family businesses to operate leaner. “You've got individuals that are wearing multiple hats and playing multiple roles, and they typically are a flatter organization that doesn't have as many layers of management and can't delegate duties and responsibilities as easily.”

This comes into play in the intensive process of due diligence and getting a company ready for market.

Resource: Guide to Selling a Business 

“These individuals already have busy day jobs,” says Jake. “Layering on all the demands of a sell-side quality of earnings, writing a confidential information presentation, and all the preparation that comes with getting ready for market can really burden them. Some of them can double down and crank out the hours and make it work. But in a lot of cases, it's a little bit of a slower process to get them ready for market.”

Jake says you also often see unique accounting practices that need extra attention in family businesses.

“It's not unusual for these businesses to have less rigorous or sophisticated systems,” says Jake. “So financial reporting and functions like that can sometimes be a challenge.” This plays into the M&A process because buyers will scrutinize financial statements extremely closely.

“There's also sometimes a little bit more secrecy and confidentiality concerns,” adds Jake. “Sometimes the owners are hesitant to involve anyone outside of their absolute immediate circle.”

Looking at Expenses Judiciously

A common issue surrounds what type of things the company has spent money on. It could get questioned in terms of how much value it adds versus just being a perk for the family.

“This is a no-judgment zone here,” says Jake, “but founder and family-held companies typically have a lot of personal or discretionary expenses running through the business.” 

That could be a credit card used for travel and meals or suites at sporting events. Or it could be something much bigger. “We've seen horse farms, airplanes, cabins, I mean, you name it,” says Jake.

This can impact what a company is worth because these expenses will come into play in the quality of earnings report. 

Resource: What to Expect from a Quality of Earnings Report

Accounting for Family Dynamics

Jake says sometimes his role is “to play family therapist to successfully get a transaction to a closing.”

“Family and interpersonal dynamics come to the forefront in these situations especially when there's tens of millions of dollars or more on the line.”

Jake adds that “One of the most tense situations can be when the child of the founder or grandchild of the founder learns they will not be taking over the family business.”

Jake’s tactic is to have a one-on-one conversation with each of the owners early on in the process. The goal is for it to be “smooth from the launch date through closing, but that's relatively rare. And so it is kind of an iterative process of keeping things in line, putting out proverbial fires, and trying to get everyone to focus on the big picture.”