Selling a Business: Family Offices
9 October 2023: Selling a Business: Family Offices
One of the most important components of preparing a business for sale is identifying the likely buyers. This need is from the standpoint of both the business owner and the business broker.
When I say “identifying the likely buyers”, I don’t mean the specific people but rather whether the buyer is likely to be a financial buyer or a strategic buyer. But that question is really “at the top of the buyer funnel” – those two types of buyers are the most general answer to the question of who the likely buyers would be. You’ve got to dig down a little bit.
Financial buyers are usually more interested in the answer to the question, “How much money will this business put in my pocket?” Smaller businesses – the ones in the Main Street market, so-called “mom and pops” – will, as rule, attract financial buyers. But larger businesses – typically those with valuations that exceed US$1.5 or $2 million or so – appeal also to strategic buyers. Some businesses will appeal to both types of buyers.
We’ve discussed financial versus strategic buyers in the past (and you can read those previous posts at the links above) and so no need to regurgitate those discussions here.
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But there is a certain type of strategic buyer that we’re seeing more and more in the market looking for opportunities. That what we’re focused on here.
As a general rule, strategic buyers usually fall into one of several categories: 1) an existing business, usually larger but in the same or parallel industry that wants something – customer list, patent, geographic footprint, license, etc. – that the target company has; 2) private equity groups that must deploy – or return – the capital contributed by their investors; 3) search funds, funds with capital committed but not yet received, searching for a business in a narrow industry channel; 4) high net-worth individuals, such as one who has sold a business for a handsome profit and wants to get back into the game, and; 5) family offices.
This last group has been getting more and more active in the acquisition game.
Family offices are generally established by very wealthy families as a way to protect and manage their wealth.
This wealth often is the result of a family member (or members) selling a highly successful business that might have netted tens or even hundreds of millions in capital. Typically, the objective of a family office is to safeguard and grow that capital for the generational long term by offering services such as estate planning, asset protection, wealth management and guidance – financial and otherwise – to the existing family members and succeeding generations.
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Family offices are typically highly discreet. Compared to private equity, the managers of family offices shun exposure but they are increasingly active in private M&A.
Family offices generally invest for the long term. Conversely, private equity buyers have to return their investment capital to their investors within a relatively short – five to seven years – period of time. If private equity managers want to raise additional investment capital for future opportunities, they must return their investors’ capital with a handsome return. Therefore, they will often make significant changes as soon as they acquire a business to drive quick growth. This approach will often be at odds to the wishes of sellers that are concerned about their employees, clients, vendors and their own legacy. Family offices are far more patient, with their focus on multi-generational growth meaning they typically hold onto their investments indefinitely – translating to far greater stability for the business post-acquisition.
There are two overall types of family offices.
- Single family offices which are funded by the original family members and operate with a laser-like focus on the long term benefits to the family over generations. It’s not uncommon that multiple family offices will team up with one another to leverage their investment capabilities and target larger deals. The Rockefellers, Carnegies and Bezoses all have family offices.
- Multi-family offices which are often comprised of institutional money managers who manage the substantial wealth of several families.
The strategy of some family offices is to acquire less than all of any business they target. They want to keep the founders at the wheel and incentivize them financially to stick around. This is appealing to business owners concerned about their legacy – that their business will continue without serious disruption for the foreseeable future.
But many family offices are more interested in acquiring a significant majority – of not all – the owner’s equity in the business. And before they go shopping, they’ve often brought on talented business operators experienced in growing businesses in the industry of the family office’s interest which, at the moment, include areas such as healthcare, biotech, technology, infrastructure and energy.
The Bottom Line
Over the past year, we’ve seen a marked increase in the number of inquiries we get every month from institutional buyers; private equity groups, search funds and family offices.
As mentioned above, private equity MUST invest their investor’s capital or return it – which they’re loathe to do. As such, we’ve noticed that they’ve been more and more willing to consider business as small as those with discretionary earnings of as little as $500,000. Search funds have the capital committed but not yet received and, as a result, they’re under less pressure to get their committed capital deployed.
Family offices are the most patient and under the least amount of pressure to invest. Because their investing horizon is often decades, their due diligence is deliberate and their investment terms are often quite attractive to sellers.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at jo*@Wo*******************.com.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
NOTE TO READERS: Our “Searching For…” feature has been moved to our online community, The Brokers Roundtable℠. It will appear there exclusively from now on.
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at jo*@Wo*******************.com