Assets family firms can leverage to make successful acquisitions
In the 35 years that I have been advising family controlled companies, now, more than ever, these enterprises are growing by acquisition. Many corporate finance professionals, and the lawyers who advise them, view family firms as inventory for their deals, and low-hanging fruit at that. In my judgement, this view is both obsolete and dangerously myopic to private equity partners and business development executives as strategic players in the acquisition market.
In the first instance, most of the low-hanging [family business] fruit that did exist has been harvested by the ever-increasing tide of private equity firms. Fifteen years ago, in the US, there used to be hundreds of such firms; now there are thousands. But more significantly for the future of the private equity industry in its never-ending search for deal targets, what is left of the family business sector in the US is largely too small and too weak to be worth acquiring, or too strong and too sophisticated to be purchased at a bargain.
That is to say that family controlled companies that used to be targets for acquisition are now competitors of both financial and strategic buyers. And, most intriguing, is the entry into the acquisition business of single-family offices with both substantial liquidity and deep expertise in the world of family enterprise. Both family controlled operating companies and single-family offices bring to the business of acquisition assets that non-family controlled buyers can’t match.
The concomitant risk here for leaders of family controlled buyers is conflating high levels of relationship skills with the hard negotiating skills and experience which are needed to close an acquisition successfully. The challenge for the family controlled buyer is to integrate the relationally skilled leadership of the deal team with technical experts who respect the role of relationship skills in this setting.
The risk of depending on this superbly useful due diligence technique is that reliance on this cultural adroitness can mask inadequate diligence in financial and other arenas of investigation of the acquisition target. But, truth be told, it is much easier to hire bankers and lawyers than for private equity firms to find cultural translators for their family controlled targets.
The risk is that such management groups may become inbred and the absence of diversity in their midst can mask a failure to see new opportunities for growth by acquisition in the marketplace that other, more diverse management teams, may perceive.
The risk of relying on this inherently conservative pricing constraint is that sound financial analysis which suggests paying a fair market price [ie, one closer to ‘retail’] may be misinterpreted as suggesting the buyer overpay for the acquisition.
I do not mean to suggest that these assets of family controlled buyers will aid them in winning an auction bid against well capitalised competitors seeking to acquire a non-family controlled company. Rather, I am suggesting that like the pilot who clambers on board the world’s greatest ocean liners to guide them into particular harbours, there are many deals for family controlled target companies when the bidder oddsmakers should favour neither the Fortune 500 bidder nor the private equity firm, but rather the family controlled enterprise that demonstrates the assets described above.