In a strong economy, M&A activity ramps up. Linda Henman discusses what a huge swath of businesses should consider if selling is in their near future.
The family-owned business has been a longstanding institution for centuries, but as baby boomer founders and owners look to retire, what can we expect? Many things have changed since these founders, heirs and current owners opened their doors decades ago, so they have no playbook to help them plan next steps. The biggest question they face is whether to sell to the next generation and keep things in the family or to sell the business outright.
In my work, I find that too many people start with the wrong question. They ask, “How can we ensure the family continues to run the company?” when they should ask, “How can we protect the family’s wealth?” Families that remain determined to keep leadership in the family doom the business to a limited number of options for protecting wealth and ensuring the business stays in the family.
With good intentions, owners often want to guarantee employment for the next generation. This might accomplish the goal to keep people working, but it jeopardizes goals to grow and improve the business while protecting assets.
This is when I usually enter the picture. Families often lead with a desire to develop a succession plan that keeps leadership in the family. Frequently, after assessing family members, I find that no one in the family can take the reins; they don’t have the skills, experience, maturity or aptitude to lead the company into the future. More often than not, I find that heirs aren’t smart enough to run the business, even when they have a passion to do so. Owners find hearing this message very difficult, just as I find delivering it difficult.
At that juncture, I discuss other options, pointing out that owning a company and running a company can be two separate things. The family can retain control, even when they hire someone outside the company to lead things. This advice too often falls on deaf ears, however, because the parents or grandparents feel protective of what they have spent their lives building and don’t trust non-family members to guard their legacy.
The overwhelming mistake many owners make, therefore, involves letting emotion take the lead. We know that logic makes us think, but emotions make us act. My job, as an external adviser, is to keep introducing logic into the equation. I repeatedly focus on protecting wealth as those around me worry about not bruising feelings. Of course, family members need to be aware of and considerate of the feelings of the next generation, but they must also accept that usually someone won’t like a decision they make about the future of the company — no matter what it is.
Another mistake I see is owners sticking around too long and trying to continue running the day-to-day operations, even after selling the business or after hiring an outside leader. They can avoid this by acting as a chairman of family board while leaving the management of the company to others. They simply need to stay out of the office, because if they are there, people will approach them first for problem-solving and decision-making.
Additionally, owners too often think they can sell the business themselves or with the help of the CPA and lawyer they have always used. They need experts when their entire estate is in question – people who specialize in mergers and acquisitions. Similarly, they put their B-team in charge of selling the company because they can’t spare their “A” players. Buying or selling, this dooms the deal.
We will see fewer family-owned businesses in the near future as baby boomers die or attempt to sell. When the economy is strong, merger and acquisition activity tends to spin up. Now, more than ever, companies have cash, so they are considering an acquisition. Consequently, there will still be family-owned businesses, but they will be bigger than they once were.
