Determining the value of an ongoing company is often more art than science, especially when factoring in organizational priorities that often come with a change in ownership. The enterprise value is unquestionable, a vital component of any M&A transaction. That said, reducing the focus of the transaction to that point, parties can lose sight of several factors that can add value for the individuals on either side of the negotiating table.
You can often find opportunities to move the needle in ways other than going back and forth over the purchase price by understanding and considering the entire range of goals that both parties have in the transaction; in this blog series, we’ve addressed a range of different types of sellers and buyers that we commonly see in the M&A space. We have not been exhaustive or scientific, but add in your experience and judgment, and you should have a good jumping-off point for looking at ways to negotiate the transaction beyond just the dollars.
Earlier blogs in this series looked at owners who see the company as their baby, owners who know it as nothing more than an administrative necessity, owners primarily interested in maintaining a job, and serial entrepreneurs. We round that cast of characters out today with the institutional buyer/owner and the family legacy business owner.
This Company is Just an Asset
This owner takes a strictly economic view, seeing a company as a money-making asset. When evaluating the company, this individual will place far more weight on broad economic trends and external circumstances than others on this list and will always want to see that value represented in the financial statements rather than in more subjective things like team quality or the history and reputation of the company. These folks are sophisticated in high-level operations, management, and finance. The asset-focused owner will look for opportunities where they believe a company has undervalued assets or could be better managed. And may be interested in only certain pieces of the business.
If you’re buying
The owner is likely sophisticated and value-oriented and will often have minimal requirements beyond payment of the purchase price when it comes to the sale – they’re ready to move on. They will not typically want to be involved or have relationships during the transition. Still, there is often an opportunity to hire key employees whose services the owners will no longer need.
If you’re selling
As a buyer, this type of owner is the most likely to move the business, cut staff or customers, eliminate product or service lines, or even shut down the business entirely, transferring the assets they want to another business. Be prepared to see the company move in a very different direction, and consider whether you wish to make arrangements for your employees and customers to be ready as well. With this type of buyer, you’re selling your financials and the quality of your revenue – so make sure to get your financials cleaned up, well organized, and complete before you begin serious discussions.
This Company is the Family Legacy
Owners of an inherited company have something different than a business – they have a family legacy and a series of complex relationships with family members for whom the company provides jobs, perks, and lifestyle support. As a family legacy, the business has a different kind of value to second and third generations business owners.
The pressure of familial expectations can be high, and the financial needs to maintain the lifestyle and benefits the business has afforded these owners are often paramount. The benefits lost can run far longer than typical benefits, with things like housing, cars, club memberships, professional services, and a range of other perks subsidized by the business.
If you’re buying
Make sure you identify and work with the decision-makers. Ownership and authority can be complex, vested in trusts or family offices. Understand that the company you want to buy is part of the family legacy of its owners. There may be concerns about plans for the employees, taking care of family members inside and outside of the business, and how you will maintain the reputation of the family name. Start working with the decision makers early in the process to understand the role the business has in the lives of the family members and how they may be able to have those needs addressed once the family no longer owns the company.
If you’re selling
Start the conversation with the other family members before you talk seriously with potential acquirers. Make sure to understand the concerns of each of the members – and how elements of the transaction can be structured to address those concerns. Getting ahead of these issues will make the transaction smoother and help to avoid unpleasant situations at family get-togethers.
That wraps up our broad overview of the character types we commonly see in M&A transactions. As noted, we’ve made broad generalizations and offered simplified explanations of many complex relationships and dynamics involved in getting a deal done. You may see parts of yourself or others in many of these examples. Rather than a complication, see that as an opportunity to dive deeper into the parties’ motivations. The purpose here is not to provide a playbook but a set of things to consider as you approach your first – or tenth deal. Please feel free to contact the team at Stock Legal to discuss ways to structure a winning transaction.