Focus on the Family Business: Options for Buying and Selling a Family Business

Years of blood, sweat and tears shed by plastics company owners and their respective shareholders are being lost because of the one critical shortcoming: a lack of succession planning. The reality is that the life span of a family business is less than 25 years. Close to seventy percent of businesses fail to make it to the second generation and almost ninety percent do not make it to the third. Many of these companies do not survive because no one is ready, willing or capable to carry on the operation of the enterprise.

What then are the options of the owners and stakeholders of these enterprises? Divestitures are a common means for families or shareholders to exit their investment. For minority shareholders (which could be other family members) the sale of the entire company is often one of the more desirable exit strategies to consider as it provides liquidity at optimum values. In general there are three options for divesting a family business:

1. Divest the business to a strategic acquirer.

A strategic buyer is usually within the same industry sphere as the seller. An example is a large compounder buying a smaller compounder. Strategic buyers often have good financial resources, however, as such buyers are frequently direct competitors, there is a perceived risk should the deal not be consummated. Such a risk can be minimized, but not eliminated entirely, by confidentiality agreements.

A strategic buyer or target company can bring “hidden value” to the combined or “merged company” by way of economies of scale in manufacturing, reduced distribution costs, and the elimination of duplicated overheads. A potential strategic buyer is also interested in identifying synergies, such as removal of barriers to market entry, technology, special skills or competencies, distribution arrangements and channels, market position and customer lists. If the proper research is conducted, negotiating with a strategic acquirer usually nets the best financial deal for the owner and the stakeholders.

2. Other buyers

These include financial buyout firms, private equity, institutional investors and high net-worth individuals not aligned with the seller’s particular industry segment. These groups are ready and willing to look at any opportunity in the plastics industry. They are buying on a financial formula. They require a minimum return on their capital in whatever form or amount they invest and a defined exit period. These firms usually request the enterprise owner and stakeholders assume some vendor take-back financing or an earn-out of profits going forward. This group usually negotiates a hard deal with more hooks attached.

3. Management buyout

Today, one of the most popular types of exit strategies is the management buyout. There are numerous reasons why a buyout opportunity may arise within a company. These include loss of the business unit’s core relevance to strategic aims, lower profits or owner/shareholder succession.

Whatever the reason, opportunities for management to step in and take control of their operations are emerging regularly, and management teams should be aware of the fundamentals of initiating a buyout.

For a family business, management-led buyouts have a number of benefits. They provide a convenient alternative to acquisition by an outside suitor, while at the same time allowing the business to avoid the conflicts that often arise between management teams and outside buyers. They can also be conducted more quietly and efficiently than a sale to outsiders. And, of course, the prospective management buyout team doesn’t require the same warranties or detailed due diligence investigations that an outsider would. But more than this, there’s often a significant public relations dividend for the parent group in selling off part of their concern to a group of employees. If the proposal is serious, and the management group has consulted the appropriate professionals, the potential for a deal becomes excellent.

The general rules for structuring a deal with management are well known to the financial community. People have to be realistic; “you get nothing for nothing.” For a management team to be taken seriously, they must produce at least $500,000 in capital and security.

Problems can sometimes arise, however, when inexperienced groups decide to approach their parent companies themselves.

But far from a death knell, this is an opportunity for a management team to find the will to take the risk. The bottom line is that there are more buyers then sellers in the plastics industry. Sellers need not be in a hurry.

Mark Borkowski is president of Toronto based Mercantile Mergers & Acquisitions Corporation, a mergers & acquisitions brokerage firm. He can be contacted at mercant@interlog.com or (416) 368-8466.