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.
- Relationship Capital. Controlling shareholders and managers of family firms are steeped in relationship management, especially in industries such as hospitality, distribution and retailing. Executives steeped in leveraging their relationship skills are competitively advantaged when commencing initial discussions with an acquisition target, since they can usually intuit ways to accelerate the creation of trust and new relationships with managers of target companies better than other executives.
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.
- Cultural Adroitness. Family firms are usually grounded in the culture of the founding family; and family firm managers usually integrate corporate culture and values into virtually all decisions – either explicitly or implicitly. For them, the teaching of built to last is often part of their DNA. Their internalisation of corporate culture predisposes them to notice and absorb cultural clues presented by owner/managers of target companies that other managers/advisers might miss during the due diligence process.
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.
- Decisiveness. Organisations controlled by family shareholder groups usually present flatter organisations and swifter decision making than their non-family controlled competitors. Executives who are owners as well, and who have grown up together, and even their non-family colleagues and successors, tend to be self-selected for their intuitive ability to leverage long histories together – even predating their shared working lives – to develop mutual trust. In the acquisition setting, such trust-building skills and decision-making speed can advantage a family controlled acquirer, especially when time is of the essence in deciding whether to make a winning bid.
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.
- Frugality. Controlling shareholder groups of family firms who authorise acquisitions are spending their own capital. They naturally tend, therefore, to husband their own/their family’s capital being committed to bidding for a target company – a propensity that tends to ensure they avoid overpaying. When added to the higher degree of certainty that the management of a target that the acquirer wants to retain is more likely to remain with a new ownership group that engenders trust, such frugality acts as a natural check against auction fever.
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.