Effective solutions for private businesses
By Maria-Elena Carrión
The imminent wave of baby boomer retirements, involving those born between 1946 and 1964, is a pressing issue set to significantly reshape the business landscape. As numerous baby boomer business owners near retirement age, a surge in mergers and acquisitions as a solution for succession planning looms, potentially unlocking trillions of dollars in transaction value.
A key concern for business owners eyeing retirement is succession planning. The stark reality of the high failure rates among family- owned businesses in subsequent generations particularly magnifies this challenge. Data from the Family Business Institute reveals a sobering statistic: only 30% of family- owned enterprises survive into the second generation, 12% into the third, and a mere three percent into the fourth and beyond.
The absence of a robust succession plan emerges as the primary culprit behind these alarming numbers.
One of the most frequently pursued and straightforward paths to preempt succession challenges is selling the entire business to a third party. This process involves engaging an investment banker and conducting a professionally orchestrated, competitive process that includes vetted external buyers for the complete divestment of the business. It is an effective method for unlocking the business’s full value and establishing a fair market value. A sale to a third party is logical when there are no viable internal buyers, such as family members involved in managing the business or employees capable or interested in acquiring it. It also offers the potential for a clean break and a fresh start for the retiring owner.
However, internal transaction structures – like selling to family members or employees – offer alternative avenues for owners wanting to sell while seeking to maintain business continuity. These structures include family management buyouts, where the founder’s stake is purchased by family members actively involved in the business, or employee management buyouts, where key senior employees active in management buy the business. These internal transactions can be viable when family members or employees express a strong interest in acquiring the business and possess the necessary business acumen and credibility to obtain financing. If these elements exist, an internal transaction is an ideal way of solving a private company’s succession challenge, ensuring the business’s continuity, simplifying the due diligence process, and negotiating the purchase agreement. However, internal transactions still require establishing a fair market value for the business, securing financing, and negotiating and executing a purchase agreement. Given the nuanced intricacies and emotional undercurrents of internal transactions, executing a successful one demands meticulous preparation, negotiation, and structuring.
To steer these transaction paths effectively, a business owner should secure a fair market valuation from an impartial professional. This valuation lays the groundwork for negotiations with internal buyers, whether they are family members or employees. A fair market valuation of the business becomes particularly imperative when other heirs, spouses, or children are not part of the sale transaction. A professional, fair market valuation objectively assesses the business’s worth, ensuring the selling price is fair and accurate. This valuation helps establish a transparent and objective framework for the transaction, mitigating the risk of disputes or challenges related to the value of the business in the future.
Additionally, it helps protect the interests of all parties involved by providing clarity on the financial aspects of the sale, thereby reducing the potential for conflicts or misunderstandings regarding the value of the business and the terms of the sale. Furthermore, a fair market valuation adds credibility to the sale process. It demonstrates a commitment to fairness and transparency, which are essential when transitioning the business to internal buyers within the family or among employees. For several reasons, selling a business to internal buyers, whether family members or employees, can simplify a purchase agreement’s due diligence process and negotiation. Internal buyers are already familiar with the company’s operations, culture, and potential challenges, having managed the business firsthand. This deep understanding allows them to manage the due diligence process more efficiently, as they know the company’s strengths, weaknesses, and critical risk factors. Internal buyers know the business’s history, potential liabilities, and operational intricacies. This can streamline discussions around representations and warranties, assumed liabilities, and other critical sections of the purchase agreement. Their existing knowledge of the company can help identify potential issues upfront and facilitate smoother negotiations, ultimately simplifying the overall transaction process.
Even with internal buyers, it is crucial to have professional support throughout the selling process. Engaging experts such as transaction advisors, investment bankers, and valuation professionals can add significant value and minimise conflicts by bringing their specialised skills and experience to the table. These professionals can assist in establishing an objective, fair market value for the business, negotiating a purchase agreement that safeguards the interests of both parties, and ensuring clarity on aspects such as price and transaction terms. Their expertise can be particularly valuable in navigating potential family dynamics and ensuring a smooth transition.
Securing and structuring financing for the transaction requires expert guidance to negotiate and optimise terms with lenders. A transaction advisor can also assist in negotiating and structuring options such as seller financing, deferred payments, or advanced transfer of equity ownership in the case of family management buyouts to bridge any financial shortfalls concerning lenders’ funding limits and the business’s fair market value. By leveraging professional support, business owners can enhance the likelihood of a successful internal transaction while mitigating risks and maximising the value of their business.
Selecting the ideal succession route hinges on many considerations, encompassing successors’ proficiencies, family dynamics, financial nuances, and the owner’s vision for the company’s future. Each of these factors must be carefully weighed to ensure that the chosen path aligns with the business’s and its stakeholders’ long-term goals and values. By proactively addressing these considerations and seeking appropriate professional guidance, business owners can navigate the complexities of succession planning and secure a successful transition that preserves their business’s legacy.
Maria-Elena Carrión is the Managing Partner and Founder of Multicultural Capital LLC (MCC). After decades in New York and London, where she managed funds investing in publicly listed equities in emerging markets at major financial institutions, she transitioned to private markets. She founded MCC, the leading mergers and acquisitions boutique in Puerto Rico. MCC specialises in private middle-market transactions valued between $50 million and $500 million and has successfully closed deals amounting to over $2 billion. Ms Carrión holds an MBA from Columbia University and a BS from the Wharton School of the University of Pennsylvania. She is certified as a Chartered Financial Analyst (CFA) by the CFA Institute and as a Mergers & Acquisitions Advisor.
As originally reporter by: Corporate LiveWire