Before considering selling your business, understand how the ownership structure impacts your likely outcomes and the obstacles it creates for getting a deal done. At some point, you will be told by your banker or lawyer “You need to be able to deliver the vote.” As they say in Hollywood, you need to know your audience.
Ownership groups in private companies tend to cluster into three types.
If you own 100%, then things aren’t too complicated. You just need to make sure you get good advice as you move through the exit process. You also have the luxury of thinking about how you want to live your life after the deal. What makes you happy?
Many private companies are owned by a few partners or a small family group who built the business together. There are a few decision-makers who know each other well, but goals and objectives could be far from aligned. Some owners may not net enough cash from an exit to achieve financial security. If they rely on annual distributions, then they are motivated to avoid selling to secure the distributions.
Especially with multi-generational family businesses, there could be dozens or hundreds of shareholders who vote. These dynamics feel more like a public company. You should start by reviewing your bylaws and make sure you understand your fiduciary duties to each and every one of them. In this situation, there will likely be an investment banker involved at some point, who, along with the legal team, can help with the education process.
No one likes surprises, so think about the financial acumen of the group, and where you may need to spend more time explaining what you are trying to get done.
With this in mind, here is the analysis you should run before getting ahead of yourself:
What combination of voting blocks do you need to approve the deal? If you have both “A” and “B” classes of stock, you need the “A” to vote to approve and the “B” to not pressure them otherwise. What combination can block the deal? What are their needs and motivations?
Why are we doing this, what is the consequence, and what are our other options? This should serve as a “North Star” for the process. This is the guide to keep people focused during the ups and downs.
The typical choices are:
What will happen to the staff who helped to make you successful?
Net proceeds are the gross proceeds, less fees, taxes, and repayment of debts. Given the likely exit structure, how do the net proceeds impact the lifestyle of each owner? Does it provide financial security forever, or just let them buy one new car? This will be a key driver of motivations. You will want to understand this before trying to sell the deal to the unconvinced. Some of the calculations could be tricky, so consider hiring an accountant, especially if the entity is an S corporation.
The cohesion of your ownership group will influence buyers’ appetites. Buyers do not want to get entangled in your internal squabbles. It is always best to clean these things up before going to market.
For example, when we sold our family business, we had 110 shareholders spread between Paris and California. We were split across 6 family groups, and many people did not know each other. While 85% of the “A” stock was with the insiders, there were dozens of small owners who had the same rights as the controlling owners. It was important to have consensus on the decision.
Once the insiders decided an exit was needed, there was a long education process to explain to everyone else what we were trying to do, and what it would mean to them. A few years prior, we had tried a Dutch auction to reduce the number of shareholders, and it failed. Many people responded with “Dad told me to never sell!”
But the company needed a capital solution, and a leveraged recapitalization was the best answer. Over several months, we had shareholder meetings, to explain the goals of the deal, the options, and why we were recommending what we did. There were exhaustive Q&A sessions. You could easily see the differences in financial literacy in the room. But each question had to be answered to give confidence that management was making the best decision. Eventually, we had the consensus we needed to be confident we were making the right decision.
In most cases, this issue is not a surprise and not complicated. But sometimes, there are surprises, which can change the course of events. No one likes surprises.
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Bruce Werner is the Managing Director of Kona Advisors LLC, which provides advisory services to owners and investors of private and family-owned companies. With exceptional experience in finance, strategy, M&A, governance, and succession planning, Kona Advisors creates practical solutions to the most challenging corporate problems. Mr. Werner is an experienced Corporate Director, leading businesses through…