By Ervin M. Terwilliger and Ben Robinson
This year marks a milestone for America’s 76 million Baby Boomers, with the youngest hitting 60 and the originals turning 80. It’s a group that includes owners of some 12 million privately held businesses, with an estimated $10 trillion in assets. And the vast majority of those enterprises – ostensibly as high as 90 percent – are family-operated businesses or FOBs.
It’s clear that a massive change in ownership is riding the crest of this so-called Silver Tsunami. Sadly, though, you might not know it from talking to the owners themselves. In a recent survey, about half said they had no plans to retire. For FOBs especially, the only succession plan may be a will.
But time takes its toll and circumstances change, and suddenly the owners who planned to die at their desks decide they are “done.” Whether it’s from exhaustion, illness, economics, or an epiphany, they want out – now – and they see the sale as the button on their ejection seat.
This need for speed makes it harder to sell the business. It can have a devastating effect on value, as well as relations among family members. At a minimum, selling a private business should be a two-year process, with a year of intense preparation followed by a year’s transition or more.
That is often difficult for entrepreneurs and founders to grasp. Think about what goes through their minds and the pressure they face: I’ve run my business for 30 years. I do it my way. All the decisions go through me. If I want to have a successful exit two years before I’m ready to sell, I need to replace myself. Then I have to get it to market and then exit. But FOBs always start too late, and all those loose ends that are left impact value.
Here is our advice for keeping the momentum going, smoothing out what can be a difficult transition, and locking in a sale:
Preparation
Owners often think a business is ready to market because it’s running so well. But selling a business is different from operating one. During the prep year, a team of professionals will scrutinize every aspect of the enterprise. For example:
- The business may have excellent contracts with key suppliers and clients – but can those contracts be assigned to a new owner?
- What will happen to the workforce, especially key personnel? Are there salary or pension obligations the buyer will assume?
- How about the physical plant? It’s great that the roof doesn’t leak, but is it so old it’s dragging down the value?
- What’s the ownership structure, and what implications will that have for the sale?
- How will the sale be structured, and what effect will that have on taxes?
Planning and Strategy
This deep dive into private company matters requires planning and strategy sessions with bankers, accountants, lawyers, private wealth managers and other professionals. For FOBs especially, all this sharing of previously confidential information can get uncomfortable, but there is no way around it if you are aiming for a sale.
Family Matters
Other interpersonal dynamics can also come into play. There may be relatives who wanted to take over, but whom the owner ruled out, for whatever reason. Other family members may have emotional attachments to the business, or strong opinions about the timeline, the valuation, or the potential buyers. Still others may simply have an emotional attachment to the business, untethered from the logic of the decision.
There are no easy answers here – which is all the more reason for owners to start the process before they’ve lost the ability and desire to engage in it. As Tolstoy wrote, “All happy families are alike; each unhappy family is unhappy in its own way.” Each situation is unique, and there is no canned answer; each will require a bespoke approach.
They Sold for What?
One trap FOBs slip into is they see other deals in the news that go for high premiums, and they believe their business is worth even more. In reality, they’re not the company that was highlighted in the news even though they might be in the same general market. They don’t understand what they’re reading.
For example, when a large recreational company acquired a target in one of their verticals in 2021, the headlines flashed things like “$225M-plus” and “8.5x EBITDA,” a huge multiple for that subsector at that time. Would-be sellers saw that and figured that was the new normal. They didn’t read, or didn’t understand, the factors that justified the price. They didn’t read about the target’s impressive growth or potential, its executive team with decades of storied growth experience, its transition plans, or the time and effort that went into the acquisition. Sure, business news is interesting. But if you’re going to look at a deal like the above example, pan away from the dollar signs and focus on the metrics that drove exit value for the business.
The Transition
FOB founders, especially, might well see the business as an extension of themselves and exercise a high level of individual control. That might be great for their name recognition and their brand, but it can have drawbacks for a potential buyer.
Think about it. Who wants a business that depends on the active involvement of someone who’s not going to be there? That’s obviously a bad bet.
The better buy is an organization that has planned its next phase and has a proven record of implementing it.
That’s the main purpose of the transition period, but it has other benefits as well: it allows the business to hold out for the right buyer, at the right price, while operating under leaders who still want to be there.
Ervin M. Terwilliger is CEO and Managing Partner of Tower Partners. He can be reached at erv@towerpartners.com. Ben Robinson is Managing Director at Tower Partners. He can be reached at ben@towerpartners.com
