Indeed, business successors are often employees, either homegrown or brought in for that purpose. “Ideally,” says Carter, “the business owner will be able to train a successor who knows the business and knows the customers. That can make for an easy handoff.”
Not always, though. Holland describes a client who wanted to turn the business over to a proven employee—but that person was 55 years old. “The employee said, ‘By the time I’m finished with the buyout, I’ll be ready to retire,’” Holland recalls. “‘Then who will I sell to?’”
According to Holland, she helped her client discuss the deal with the chosen employee, until they finally came to terms. “We’re fans of the book, Getting To Yes,” Holland says, “and we follow its principles in this type of negotiation. As a financial advisor, my job is to create and preserve clients’ wealth. In some cases, that involves learning and using negotiating skills.”
Money Matters
In other cases, though, finding a relative or an employee to take over a client’s company might not be easy. The more valuable the company, the harder it might be for the successor to come up with the funds necessary for the buyout. In such a situation, an advisor with contacts among investment bankers and other sources of capital might be able to bring in outside buyers, increasingly family offices, to acquire all or part of the company.
“It can be difficult to find investors for small companies,” says Jim Murphy, a managing partner at Belden Hill Partners, an investment banking firm in Stamford, Conn. “Investment bankers generally want to put $3 million to $5 million or more into each transaction. Practically speaking, companies may have to be worth $15 million or more to attract much attention. The larger the company, the more choices of capital it’s likely to have.”
Besides introducing business owners to potential investors, financial advisors can give clients an idea of what they’ll have to provide. “Most small companies have not done a full-blown strategic plan,” says Murphy, “yet they can benefit tremendously by this exercise. Such a plan can show who the customers are and what value-added provisions a company offers. The plan can identify which businesses they might go into and which they should get out of. Companies that make the indicated changes may command more than a market multiple on a sale. There are lots of buyers for good companies.”
Jack Maier, head of investment banking at Headwaters, says that getting an investment banker involved well before the ultimate sale can result in profitable changes for the company. “To begin,” he suggests, “have an accounting firm do a full financial audit. Business owners don’t like to do it because it’s so costly—in management time and attention as well as money. However, buyers will insist on such an audit.”
In addition, a small company that wants to attract outside investors should have the same good governance as a public company. “Updating financial reporting systems and software enterprise systems can help the business run more efficiently,” says Maier. “The management team may need to be filled out and the company’s board should go beyond friends and family. With such changes, a company will be better positioned to go to market.”
Such enhancements can pay off for closely held businesses looking for capital. Murphy points to the example of a beverage company with more than $50 million in revenues being run by the third generation of owners. “There was no one in the next generation of the family to take over,” he says, “but there was good non-family management. The company implemented a strategic plan, emphasizing some better-margined market sectors and de-emphasizing other sectors. Eventually, this company found a strategic partner, a supplier of raw materials, which enabled the owners of the original company to exit the venture entirely.”
In another case history mentioned by Murphy, the owner of a catalog marketing company in his 50s was tired of the daily grind. He sold 85% of his interest to investors, rolled the remaining 15% to the new company and phased down his workload. “The business was recapitalized, with more leverage,” Murphy says. “Things went well, and the business was sold after seven or eight years. Not only did the original owner get liquid right away, he received almost as much for selling that 15% interest as he had received for the first 85% of his company.”