Community Voices: Lively M&A market covers need for rigor and discipline in business transitions

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More than three-quarters of family-business owners plan to sell their businesses by the end of 2025, the Exit Planning Institute said back in 2016. This represents an opportunity worth more than $10 trillion that impacts 4.5 million businesses.

Since then, however, the coronavirus pandemic has accelerated business timelines of all kinds. Just as technology upgrades and office redesigns are happening faster, M&A activity has spiked after a “temporary pause” in Q2 2020, says the Harvard Business Review. As a result, “acquisition activity of every kind is soaring to unprecedented heights” in 2021, according to Forbes.

Covid and other reasons business transitions are in the spotlight

Several forces seem to support this surge. Investors are flush with cash from soaring stock markets and a flood of government stimulus, and they’re looking for creative ways to make some of those proceeds grow — especially with record-low interest yields making fixed income less compelling. It’s noticeable that these spurs to Covid-era M&A are further sharpened by increasingly conservative traditional lenders, a trend reflected in stricter gate-keeping and higher lending rates.

Other considerations come into play. Buyers in search of distressed assets have little trouble finding business owners who are suffering in the pandemic. Sellers may also feel compelled to get in front of an expected increase in capital-gains tax rates. And, by at least one account, some sellers are having flashbacks to 2008 “and the hardships they experienced while operating under a massive economic contraction.” This sentiment is especially rife among older baby boomers who may have been eyeing the exit before the pandemic.

And of course, the demographic bulge of the baby-boom generation feeds into the need for robust planning through the next 10 years or so as older business owners looking to hand over the reins — whether to family, junior colleagues or third parties — adds another layer of competitive pressure for would-be sellers.

Only three in 10 businesses put up for sale actually sell.

In short, circumstances now present wealth managers with an opportunity to guide and advise business owners on “transitioning” their businesses. The concept of transitioning embraces everything from selling to a third party, financing an internal sale, looking for a more or less equal partner to merge with, becoming part of a bigger firm, or gaining the potential for growth and greater scale by adding established practitioners.

Despite all these inducements and permutations, however, business owners need help with their transitions — an assertion supported by the following statistics.

Only 51% of businesses even have a transition plan on paper
Only 30% of businesses put up for sale actually sell
70% of family-owned businesses don’t stay in the family in the second generation (and only 12% make it to the third generation)

But business owners determined to buck these trends can achieve extraordinary results.

Case studies: Two very successful transitions

We have a client who was getting plenty of offers for his business but wasn’t quite ready to sell. He had worked for decades to build a successful food company. As his advisor, we introduced him to a private-equity firm that became a strategic partner in the business. Upfront, our client received $5.5 million and retained control of his company with a 50% stake. Meanwhile, the strategic partners played a large part in diversifying the company’s client base, and the partnership increased gross revenue from $15 million to $24 million in five years.

Eventually, our client and his private-equity partners sold the business to a national brand for $16 million (five years earlier, he had rejected a $3 million offer). In the end, our client not only got half the profits from the final sale and the $5.5 million upfront, but his annual income also went way up in the five years he worked with his equity partners.

Another client, a 12-member family worked with us to sell an upscale mobile-home community for $64 million. The transaction netted $45 million, every family member had a financial plan, there was a strategy in place to pay capital-gains taxes, and the family exited the business knowing they’d sold at the right time, and to their full advantage.

Teamwork, and success through rigorous alignment

Results like this don’t come without preparation, organization, and outreach. The large and varied team needed for a successful business transition hints at the complexity of selling a business to full advantage. A transition team may include, but isn’t limited to:

Wealth/exit-planning advisor
Buyer (e.g., private-equity firm, bank, family office)
Spouse
Other family members
Insurance professional
Accountant
Securities attorney
Estate-planning attorney
Corporate attorney

Besides a reliable multidisciplinary team, a thoughtful approach to a business transition hinges on preparation and clarity to ensure a happy and profitable exit from a business. Above all, this calls for matching the present owner’s financial goals and legacy aspirations with possible deal structures and likely outcomes as a path to a transition that comes as close to the seller’s ideals as possible.