Part 4: It's a Great Time to be a Seller

Sales of family businesses are on the uptick.  One driving force is a lack of interest from the next generation to follow in their parents’ footsteps. Family members in their 20s, 30s and 40s are likely to be immersed in their own interests and careers – new technologies, creative arts, not-for-profit work –- with little sentimental attachment to an old line manufacturing company. While appreciative of what their family owned businesses have accomplished, more and more they are less and less likely to make it their future.

The increasing difficulty of operating businesses of all sizes is another reason that family-owned business are opting to sell. Disruptive forces, such as Amazon, are squeezing the supply chain, which is often where middle market companies sit. Small companies that used to compete with a handful of other family-owned businesses are now facing global competition and other exogenous factors that have added unpredictability to commodity prices, the demand/supply balance, and the business cycle.  

Market conditions are also causing owners of small- and medium-sized businesses to evaluate their risk profiles as they recognize the lack of diversification that comes from having all of their net worth tied up with one entity.  We remind our clients that risk mitigation should always be a goal because the future is unknowable and things can change in a flash, as we witnessed with the Lehman Brothers bankruptcy in 2008.

It’s now time to look at the buyers of middle market and family-owned business – the private equity firms – that have developed a voracious appetite for companies of this size. With thousands of these firms loaded with hundreds of millions of dollars, they acquire companies where they see incredible opportunity for growth and yield, and then infuse them with the necessary cash and professional management guidance so they can prosper.

PE firms look at acquisitions in two ways: either as a platform business or as an add-on.  In an add-on acquisition, a PE firm may appreciate a middle market company’s ability to contribute to an existing group of businesses they own in the same industry. A PE firm will acquire a business to be a platform when it enters a new industry because of opportunity for growth – either organic or through future acquisitions – for which they are willing to pay a premium. 

Creating a platform – which is what we aim for with our clients -- is a great benefit to the seller and it’s a great benefit to the buyer which can grow the company to create enormous returns. Traditionally, the role of PE companies has been to give companies the stimulus they need so they are growing on average 20 percent over five years and then look for ways to liquefy the company, either through an IPO, or more common today, sale to another PE firm. So everyway wins.

Whatever the reason for selling, the timing probably could not be any better than it is right now.

Write back and let me know if you know of any companies that might fit the profile I described.

Ben Schmidt