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The US: Heading for the exit - selling the family business


Families in Business held a roundtable meeting at the Families in Business conference in Chicago to discuss how family members can prepare, plan and execute the sale of the family business and the opportunites they may face afterwards

The Roundtable Panel

Jonathan Blue is chairman and managing director of private equity firm Blue Equity, LLC. His original family business, Blue Industrial Group, was sold to Progress Energy 1998 and has since been recently purchased by Caterpillar.

Dennis Kessler is a principal in Family Business Innovations, a firm specialising in helping families overcome challenges inherent with mixing business with family.

John Messervey is an organisation behaviour consultant who counsels family-owned business throughout the US and overseas. He is president and founder of the National Business Council.

Jack Moore served on the board of his family's paint company, Benjamin Moore & Co, until its sale to Warren Buffett in 2000. He is an advisor for the Family Business Initiative, sponsored by the National Association of Corporate Directors.

The roundtable was chaired by Mindy Rosenthal, managing director of Campden Conferences, North America. Campden Conferences will be unveiling several exclusive Families in Business conferences throughout the US in the coming year, in New York, Miami, San Francisco and Chicago, as well as introducing proprietary research on multi-generation families with businesses in North America and Europe.

What is going on in the market now that liquidity events are so much more prevalent?

John Messervey: For the first 17 years of the 27 years I've done this [advising], almost no one sold the family business. They didn't want to go through the agony of taking down the flag, turning off the lights, and leaving their grandparents' legacy asunder.

In 1997, I started to notice businesses being available for sale, which was highly unusual, but it worked. Then we had the tech wreck, 9/11 and an economic downturn. But since then we've had ideal conditions for family business selling. We have a world awash in capital, low interest rates, favourable tax climates, a strong economy and a very robust private equity market. People don't feel as badly about it [selling] as they used to.
And then there's the demographic side for family businesses: the early retirements of the baby boomers, their financial security and what their children want to do. So it really got down to a hold-hold or sell-sell decision. Do I hold inside the family with family ownership and management; do I hold the family ownership and outside management; do I sell to insiders; and then we have complete outside sale of ownership and management.

Jack Moore: That's spoken from the sell-side. This morning I was in Connecticut, in the heart of Fairfield County, where the private equity money is. They spoke of the inflated values and having a hard time finding deals that they feel will play out well in five to seven years because the bidding is running things so high – which is great for the sell-side.

Messervey: I think this window is going to end in 18–24 months. The political and economic climates will change, I think maybe the interest picture will change and tax
considerations will change. But right now conditions are ideal.

Dennis Kessler: Maybe there's one other thing that's going to prolong the window – the next generation, who are different than in the past. They're better educated and have so many opportunities staring them in the face. And dad doesn't feel so bad about not passing the business onto them because he knows they could succeed in a lot of other ways.  

Jonathan Blue: I think there's a third side too, the investment side. Twenty years ago, private equity wasn't a word in the English language. Today, even the least sophisticated families know about this new asset class and many people want to sell out to a private equity firm.  

People are becoming much more willing to sell – partially because there are so many buyers. What are the first steps that you take when you consider a sale?  

Kessler: I phrase it sometimes as, "How do you talk about the unthinkable?". How can you possibly talk about selling grandpa's or great-grandpa's business? It's the conversation that is the most difficult thing to start. The thing that you've got to keep in mind all the time is which hat are you wearing. Are you wearing the family, business or ownership hat? You need to wear all three hats but, hopefully, not at the same time. We sold our company, Fel-Pro, an automotive products manufacturer that had been in our family for 80 years. Four of us in my generation were running the business and there were three different generations active in the business. The first thing we did was to get the four of us in my generation who were actively managing the business to address the question. It took months of discussion, and the thing to understand is the emotional impact, which can be
Through our strategic planning in 1997, we saw that the automotive industry was going to change dramatically in the next 10 years. So we ended up selling for market reasons, but it can be for many reasons. You need to clearly identify what the reasons are for selling. And you need to sell that reasoning to the other stockholders. First you need to identify all the players. Who are they? They're the family owners who are active in the business; the family owners who are inactive; the non-owner top management; the board of directors; the run-of-the-mill employees who built the family wealth and built the company; suppliers; customers; trade associations; and the press. All of these have to be part of this decision. And the first, middle and last step is communication. You've got to figure out who you're going to talk to, what you're going to say, when you're going to say it and how you're going to say it. In our case it was a 10-month process.

Moore: For us it was a very different experience. Our paint company had 15 years of growth thanks to the rising tide of baby boomer demand for new housing. But when demand started to cool, our inefficiencies became more obvious. It became clearer to the fourth leader, now free from the oversight of his predecessor, that we had to go through a lot of change. He was non-family, so when I joined the board in 1994, he was interested in me because I had an interest in organisational change. He had been moving the board in that direction with outside, or independent, directors. The first thing we did was to hire a consulting firm who did a thorough analysis of the business. One of the keys to our success was that we knew how to use outsiders and listen to them to get benefit from them.
We went through a significant overhaul of our operation, which started with changing the management's mindset of how decisions get made. It was driven by people from the outside, who said you have to do this. We changed from being a manufacturer with independent paint dealers as our customers to a consumer product manufacturer for the end user.
We overhauled our manufacturing, and we closed half of our plants. We reduced the workforce by 25%. As a result, our profits increased from $40 million to $80 million. We looked at going into retailing, we made ventures internationally and we also seriously looked at making an acquisition. We also looked seriously at going public as a way of achieving liquidity. We tried to sell the company using a Wall Street firm to make the enquiries but we didn't get the price or a buyer that was acceptable.

We were so accustomed to change, all through the workforce, the ownership and so forth, that when the opportunity came up, it was very easy to execute. We weren't frozen in place with this "elephant in the room".

When you're thinking about selling the business what are the things you need to do, to get that business ready for a sale?

Blue: I think good advisory is very, very important. I would recommend somebody who knows the idiosyncrasies of the family, someone who has been through that role before – especially for a family who's having a first liquidity event. It's very rare for anybody having a first-time event to really know what it entails. The lawyers will take care of the legal, the bankers the financial, but there's so many external things that arise unrelated to the transaction itself that are really critical and can actually make or break a deal. What we do is a formal interview process and full due diligence on each and every service provider.

Messervey: From the family perspective you need to look at the demographics and ask, "Do you have competency, passion and vision in the next generation to drive this business forward?". I call it hitting the moving target. If you're a $300 million company and you have heirs in their 20s, do you have enough to run a $500 million operation?

Moore: That was key in our case, not having any further family involved with running the business.

Does that make you more likely to be emotionally ready to sell, when the family members start stepping out from running the business? Or are families just as intent to want to keep the business for other reasons, such as keeping the family together?

Messervey: Well, you're really asking a family member to move from being an operator to being an investor. It's a big difference in skills. Letting go of the family legacy, your identity, business acumen and the respect in the community – all of those are changed because if you're now just a custodian with a lot of money, people view you differently than the operator of the empire.

Moore: There is a difference between an owner and an investor, and I had really not thought about that before. When the family is still thinking like an owner, the owner really doesn't have a liquidity exit mentality. The investor can get in and get out. Fourth and fifth generations often still think like an owner, but they're passive. In my family there were two branches, roughly 50 of us, all at a distance. But my brother had an expression – "Everyone ought to own a paint company."

Kessler: We had 35 shareholders spread all over the country spanning three generations, and the interesting thing is none of us wanted to sell.

Moore: That's the ownership. It's not rational.

Kessler: It was pretty rational until you did strategic planning. We were on the cover of Fortune magazine, which ranked us as a fourth-best company to work for in America. Working Mother magazine put us in their Top-10 for 12 years running. We got tremendous publicity, and our stockholders who were not active in the business loved it. They also liked the dividends. They were really proud and didn't want to sell. It was my dream to run a manufacturing business, and there I was, doing it. My second dream was to have my kids come in and take over the business, and I had two with MBAs ready to act within the business. We had no reason to sell, unless of course you considered the market. In our case we did strategic planning and found this business was not going to grow the way it had in the past. In the end, we thought maybe we should consider a sale.

Blue: If you grow up in a household with grandparents and parents who worked in that same business and you're in that business, it makes it infinitely more difficult. I think it's a very bittersweet moment from the day the money is wired and the business sold. It's what happens from that point on. Because at the end of the day, everyone becomes an investor. To go from one business to potentially managing multiple businesses is really the perfect world because you can repeat it over and over again, depending upon your risk tolerance and depending on other factors. It can be a very, very positive

You have had a lot of opportunity, post sale, to go on and do dynamic things. Did that help with the sale of the company knowing that?

Blue: I think it helps. But, the difficulty is, you can't just go out there and do it. First of all, you have to have some training, and you have to be very aware of the hazards out there in private investments. There are a lot of danger areas. There's a lot of people out there now pedalling deals, and if you're not groomed for that, don't have the appetite for that, don't have the skill set and most importantly the passion, it can be a very rough road.  

Moore: In a lot of family businesses, to be a long-term centennial company, there has to be a re-platforming with each generation. And that goes back to the passion because just carrying out dad's concept of the business is not likely to be very passionate. But dad is not likely to give allowances for the next generation to take that risk unless the business is in trouble. In the long haul, each generation has to make up their own mind and they have to find their way to rekindle that passion.

Blue: I agree 100%. And the art, maybe the science, is how far do you let that leash go. Within the scope of the business and maybe outside the scope, it's a very fine line. It's very, very difficult.

If we go back to the companies that have decided to sell and look at these transactions, what are the types of things that happen that weren't planned?  

Messervey: I think one of the hardest things is to keep the confidentiality. You don't want to mislead anyone, especially your valued employees – you want to keep the team together. You really are operating in concentric circles of truth, trying to keep the story under management. I think it's important that you try to work with speed, to get the transaction completed within 90 days or so. I think the hardest part is keeping the company running smoothly during this period – when decisions get postponed or altered, or things don't make sense to other managers and yet you know the eye is on the prize, which is the final sale and the money being wired.

Blue: The most difficult thing I had to deal with was when we sold to a competitor the first time. You walk into work on the morning of the sale and you don't know which hat to wear. You don't know if you're wearing the future hat for every move you make or the present hat to maintain the viability of your business autonomously. So you think, long-term I want to do the right thing for that business, but then the sale may not close and I don't know which direction to go. The biggest challenge for me personally was how do I act that day, what do I do, what decisions do I make. Up until the time you close, you don't know what to do, and that's a pretty tough area to be in.

Moore: Getting back to readiness, we had our knock-down twice. First when we were looking at public markets, we were advised to step down our appraised share price about 30–35%. Secondly, we went through a formal process of searching for a buyer, and we were very disappointed. The investment banker just couldn't get the price. So to me that's realism. And, in the context of the organisational change, we were able to execute it without a lot of problems.
But you also have to come back to the composition of the family. One branch had heavily concentrated ownership. Six people could still sit around the kitchen table and make strategic decisions, and they were ready to sell. Our branch was cast all over the US, and we were passive, but all that meant was we didn't get to go to the annual meeting anymore and have a nice lunch. So the family dynamics were really a piece of cake. The fit with Warren Buffett wasn't a competitive situation, it was a mutual fit. We went from one meeting in August, 90 days to due diligence, and the board committed its 18% of equity in November, which precipitated the tender offer and people turned in their shares by January.

Kessler: Surprises either come or they don't depending on preparation. You hear of all kinds of surprises in terms of legal issues, things that you had forgotten about that have to be cleaned up because the buyer doesn't want to inherit them, environmental issues that you didn't know existed until you did an environmental impact study. All of these things you never considered when you were busy running the business.

Messervey: A big part of the preparation process is to set a budget for what the transition of the ownership is going to cost. I find that clients lose track of the stick-around bonuses, the staying bonuses, the appreciation bonuses, the employment contracts, the fees for the bankers, the tax, the lawyers, the environmental issues and all of that.

Kessler: This is the wrong time to get your lawyer who's been drawing up your wills to be your corporate lawyer. Go for the best help you can buy. It's going to be expensive, be aware of that, but don't penny pinch because it can cost you millions of dollars to have the wrong people.

That brings us back to an earlier point. Who are the key people that you've found you needed on the outside?

Blue: With the selection of legal or other people, you need someone who does this day-in and day-out. It has to be someone that knows every single issue that will come up, someone who knows the schedule disclosures, environmental issues – all of those things are absolutely critical.

Messervey: I would add that you really need to get great tax attorneys or tax accountants to work the numbers. At the end of day, it's what goes into your pocket after tax. So much money is being lost by bad deal structures. It's also important that all of these advisors are on the same page because we see deals where the lawyer is not communicating properly with the tax or the investment banker or the consultant or the family representatives or whatever. The family needs to define a successful outcome and then put the people to work.  

Kessler: Make sure that you get a team that can really work together and that they know teamwork is your expectation right from the start.

Once the company is sold, what are some of the post-liquidity issues and how do you address them?

Blue: You need to decide whether you are going to have the same person paying the bills, making the appointments, taking care of the house as before. Or whether you are going to take it up to a new level, such as investing in different companies or a
private equity platform.  

Before the company is sold, do families start creating a family office to help with that decision so that the transition is easier?

Kessler: In our case we started talking about those kinds of issues during the sale process, so that by the time liquidity happened, we all knew what we were going to do. We had three family branches, and each family branch decided to do it slightly differently.

Our branch developed what we call a virtual family office. We each had individual offices but we analysed what a family office does, what the classic family office functions are that we needed to do together and which ones we needed to do separately. We ended up creating joint operations, for instance, in investments and philanthropy. Joint philanthropy is a wonderful way to keep the family together.
One other aspect is new careers. I know guys who retired and passed away in six months cause they just couldn't find themselves.

Blue: No identity.

Kessler: Absolutely. I opened up my consulting office the day before we closed, and so I was ready to go. You really need to focus on what I call the next third of your life … so plan for it.

Moore: It has always bothered me how in the literature they talk about the rarity of succession of ownership within families and there's always that twist of failure not to have passed it on to the next generation. But here's my take, the change of ownership was just another source of renewal. The sale brought our branch together because we had something to discuss: managing the assets. Before, it was just a single stock with dividends. And it was good for Benjamin Moore & Co to have an active,  owner-investor instead of a whole lot of passive owners. That's as good as it gets. 

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