Punching Out! Dealing with Family Businesses

Some families may have spent this past Father’s Day discussing family business issues, including when, how or whether to pass the baton. There are several issues to consider when dealing with a family business.

An owner may have started the business with the idea of passing it along to their kids. This model used to be more common, but it is rarer now for companies today to be passed down to the second generation and even rarer for those companies to succeed. Perhaps kids have more options these days or global competition makes it difficult for family businesses to succeed. Particularly in the PCB industry, global competition has put the pressure on all companies to be efficient.

From a buyer’s perspective, they are often somewhat wary of family businesses because of key person risk (the whole family might leave if they are not happy with any changes after closing), difficulty in changing the culture, potential nepotism, and a lack of professionalism and efficiency. At the same time, buyers may like a family business if the risks can be mitigated and the buyer feels they can increase efficiency and profitability (in other words, the buyer is getting a bargain). Experienced buyers will be worried that the family is not in agreement to sell the business and that there could be last-minute surprises.

For the seller, getting a family business ready for sale can take years, but preparing can greatly increase the value and improve the terms of a deal. Some things to assess include:

  1. Is the business being run efficiently?
  2. Are there too many family members in key positions?
  3. Are the family members qualified?
  4. Are family members receiving market-based compensation, or overly low or high compensation?
  5. Are the family members on the same page about selling the business?
  6. Has the business survived because it is in an increasingly niche sector of the market, or can it compete globally?

If you are thinking of selling a family business, be up front with your family members, shareholders, partners, and key non-family employees (if possible). Most likely, it will not be a huge surprise to everyone that the 80-year-old patriarch is thinking of retiring. It is good to have regular family business meetings, and not at the pool on Father’s Day, to discuss business issues. If the meetings get contentious, consider using an experienced third-party mediator (a business therapist) to run these sessions. Try to hold these meetings at least annually, but quarterly would be best. If the business is fairly substantial and can afford it, consider creating a professional advisory board. 

One issue that often comes up is that the second generation is not ready or capable of running the business. Maybe they have other talents or the apples just fell a little too far from the tree. Sometimes the founder assumes that the next generation wants to take over, but they actually want to be surf instructors in Maui. It is important not to burden the next generation with too much responsibility (or debt).

Be sure to consider key non-family employees in these matters. Good employees may feel that there is no chance for them to advance because they have the wrong last name. Perhaps the best thing for the business and the family is to move family members to advisory board positions and promote key non-family employees.

Some alternatives to selling a family business are employee stock ownership plans (ESOPs) or similar types of management buyouts. In these cases, the owners may not receive top dollar and there are administrative costs, but with the proper planning and advice, these situations can be advantageous taxwise. At a minimum, the business should have a buy-sell agreement among the owners and key person life insurance in case a key owner becomes ill or passes away.

If the owner(s) are concerned about the company’s legacy, selling to a strategic buyer might not be the best answer as they often want to change the name, move the facility, etc. Many private equity buyers want to keep the name and facility in place, but they may want to make a lot of other changes. Ask for references to see how they handled other family business acquisitions. Although legacy may be important to an owner, be sure to think about the difference between a clean strategic offer and an offer with a lot of strings—the cost of keeping that legacy may be millions.

As early as possible in the process, include your key tax, legal, wealth, and investment banking advisors. Your advisors have worked with a range of family businesses, and because they are not emotionally tied to the business, they can provide an unbiased assessment. 

We have found that it helps with the entire process if the owner has a clear goal for retirement. This is especially true for a founder/owner, and even more so for a family business. It’s not easy to give up a family business and there may be many ups and downs throughout the deal. Being properly prepared and having clear incentives for the owner and all stakeholders can help smooth the process when dealing with a family business.

Tom Kastner is the president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. Tom Kastner is a registered representative of and securities transactions are conducted through StillPoint Capital, LLC—a Tampa, Florida member of FINRA and SIPC. StillPoint Capital is not affiliated with GP Ventures.

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2018

Punching Out! Dealing with Family Businesses

06-28-2018

Some families may have spent this past Father’s Day discussing family business issues, including when, how or whether to pass the baton. There are several issues to consider when dealing with a family business.

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Fact or Myth: Do 80% of M&A Deals Fail?

05-09-2018

We are often asked by business owners if the commonly quoted figure is true that 80% of mergers fail to meet expectations after closing. There is a fair amount of research on large ($1 billion+), public deals that suggests that the 80% post-closing failure rate may be true.

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How to Prepare for a Smooth Post-M&A Deal Transition

04-05-2018

Selling a company is an exciting process, as well as time-consuming, stressful, and complex. Both sellers and buyers are sometimes so caught up in the deal that they forget to properly plan the post-deal integration.

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Cross Border Deals: What to Look for and How to Manage

02-22-2018

My firm has been approached by foreign firms several times this year and in 2017 who want to acquire PCB, PCBA, or other electronics companies in North America.

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Punching Out! Top 10 M&A Deal Killers

01-25-2018

I am often asked about some of the reasons why M&A deals die. Although this is a very painful subject, hopefully through sharing these reasons we can help some deals survive the M&A process. Here are my top 10 M&A deal killers (and some of the solutions).

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2017

Punching Out! Survey on State of the North American PCB M&A Market

12-29-2017

Recently, my firm surveyed about 20 PCB manufacturers in North America with an estimated greater than $10 million in revenue. Quite a few replied, and we have spoken with many others throughout the year, which gives us a good view on the state of the PCB market. If I did not contact your shop recently, it is because we already talked within the last 12 months.

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Punching Out!: PCB/PCBA M&A Top 10 FAQs

11-13-2017

We talk with owners a lot about the possible sale of their businesses. Here are the top 10 questions asked by PCB/PCBA shop owners about the process.

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Punching Out! Case Study—Lessons on a Deal

10-19-2017

This is a story of one of our clients, a U.S. contract manufacturer that sold a few years ago. To maintain confidentiality, the names have been changed and the details slightly modified.

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Punching Out! Making the Process Easy (M&A Process Engineering)

09-06-2017

In the M&A world, there are companies that make it easy (or at least easier) and those that make it difficult. By making the process easier, sellers should see better valuations and terms, and have a smoother deal process.

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Punching Out! Bridging the Valuation Gap Between Buyer and Seller

06-13-2017

PCB acquisitions in the U.S. are down so far in the first five months of 2017, with only two announced deals (HT Global Circuits’ acquisition of Pho-Tronics in April; American Standard Circuits’ acquisition of Camtech in May); and one anonymous deal that I am aware of that has not been announced. This compares with 11 announced deals in 2016. There are a variety of reasons for the decline, but one reason could certainly be the valuation gap between buyer and seller.

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Punching Out! How to Put a Wrench in the Rumor Mill During the Sale of a Company

05-23-2017

When selling a house, the owner’s agent puts a sign in the front yard, posts info on the Web, and invites buyers over for an open house. When selling a car, we put a sign on the windshield and take out an ad with our phone number on it. However, when selling a business, some owners do not even tell their spouses.

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Punching Out! Selling a Company—Seeing it as a Triumph, Not a Defeat

04-25-2017

Somehow, there is a still a stigma that selling a company is a negative for the owner. Many people think that there must be something wrong, otherwise, they would not be selling. In reality, exiting a business should be looked at as a triumph for the owner, not a defeat.

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Punching Out! 10 Ways to Increase the Value of Your PCB/PCBA Shop

03-22-2017

I have worked with a wide range of companies in the PCB, PCBA, and other tech and electronics sectors. Through the years, I have developed some ideas on how companies can improve their valuation. Some of these ideas are simple and involve little cost, other ideas are more long-term and involve more effort or investment.

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Punching Out! When Should I Call an Investment Banker?

02-20-2017

The quick answer is ASAP. Even if you are not considering the sale of the company for 5−10 years, it is best to be educated and prepared. Give your advisor (or a few advisors) a call to discuss what can be done to get the company ready for a future sale. The worst time to call an i-banker or business broker is when you are forced to sell due to poor performance, health issues, pending bankruptcy, or dispute with a partner or manager.

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Punching Out! Types of Company Buyers in the PCB and EMS Sectors

01-09-2017

Mergers and acquisitions in the U.S. PCB sector have been in the news recently, with at least 12 deals completed over the past year, and several more in the works. In contrast, the EMS sector has been relatively quiet, but that may change now that the presidential election is over.

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2016

War Stories from the Front Lines of Deal-Making

09-16-2016

Here are some war stories from my experience in working on M&A deals in the PCB, EMS, and electronics fields. The names and details have been changed to protect the innocent.

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Timing: When is the Best Time to Sell?

08-18-2016

A few of the top questions we receive relate to the timing of the sale of a business. The first is, "Is now a good time?" The second one is, "How are market conditions?" These are the top FAQs.

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The PCB Sector—What Buyers Look for and Recent Deals

07-14-2016

The past few months have seen a rash of PCB deals in North America, for a variety of reasons.

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What the Heck is Adjusted EBITDA?

06-07-2016

If you are looking to sell or buy a business, you will most likely come across the term ‘adjusted EBITDA.’ Other common terms are adjusted cash flow, owner’s discretionary earnings, earnings after add-backs, etc. What do these terms mean, and why are they important?

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The Additive Process: Tips on How to Buy a Board Shop or Assembly House

05-14-2016

One of the quickest ways to grow a business is to acquire another business. At the same time, acquiring a business can be risky, and a really bad deal may put your original business in jeopardy. Here are some tips on how to make acquisitions.

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Your Baby’s Ugly, Now Get Over it (How to Work with Buyers)

04-14-2016

Here’s a scenario: An owner has gone to market and is starting to get feedback from buyers, and shockingly, not everyone appreciates the hard work and achievements that went into the business. Buyers may not understand the business, or they may be trying to position things for a low offer. In any case, it is important to know how to work with buyers.

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Putting Together the Deal Team

03-21-2016

When preparing to sell, remember the old saying, “He who represents himself has a fool for a client.” While many owners might be tempted to go it alone, in my experience it pays to have a deal team to help prepare a company (and the owner) for a sale

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Punching Out: How to Sell Your PCB/Assembly Shop

02-04-2016

You are thinking of selling your PCB or assembly shop. Perhaps you are contemplating retirement, you have no successors, and the thought of going to the office on Monday is driving you crazy. This column is designed to help your planning efforts. Future columns will go deeper into each subject

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