Ownership transitions: Exploring options

Ownership transitions for business leaders can carry an extra burden for those overseeing family-owned operations, and all the responsibilities that come in that role. These leaders can help themselves, their families and their employees by carefully considering all options — even those that may be misunderstood or even rejected with little thought. Conventional wisdom may not be so wise if it hastily rules out a path that could actually be a worthwhile fit for the business in the long run.

Some of the most common options include strategic partnerships, an employee stock ownership plan (ESOP), management buyout, family handoff, and private equity. Each of these bring unique advantages and drawbacks an owner should review as the transition approaches.

Strategic partnerships need not be limited to the same industry, and may even work with businesses in other verticals that want to broaden their reach. Business leaders seeking strategic partnerships often find that they may pay more in the sale. The new partners may have the background knowledge to quickly come up to speed on the inner workings of the business. On the other hand, redundancies can mean overlapping job functions and potential layoffs. 

ESOPs bring the comforting legacy of taking care of employees, while also offering tax benefits and continuity. In contrast with other options on this list, ESOPs do not require a full 100 percent sale. Downsides include complexity, a lower multiple and proceeds stretched over a longer timeframe. Yet another continuity option – the family handoff – leaves a similar positive legacy. But this approach can bring questions about how the seller will be compensated and, sometimes, even questions about the next generation of leadership.

Management buyouts offer yet another continuity option but can be held up by questions about whether management has available equity to complete the purchase.

One option in particular, private equity, carries several common misperceptions that are helpful to clear up, so owners can be sure not to dismiss it too quickly. While our firm, Yellow Cardinal Advisory Group, is not a private equity firm, about two-thirds of our deals in ownership transition do include private equity, and our experience in working with private equity has allowed us to understand the pros and cons of this approach.

Private equity (PE) buyouts are in the headlines so often that some may think they know more about them than they really do. PE can be used more than you may think, with benefits that are commonly missed. Some may think that PE is only available for businesses with revenues of $50 million or more. However, PE is always looking to acquire companies that fit an already existing platform so this could be a viable option for businesses of any size. 

Clearing up another misconception - private equity deals do not require a 100 percent sale in every case. The preferred structure is for the seller to retain a minority position (10-30 percent) with the goal of accelerating the growth of the company. If successful, this can result in the second sale being as lucrative as the first. 

A common belief is that private equity leads to Wall Street investors taking over, who are focused solely on profitability by cutting staff levels. While PE firms are indeed focused on the bottom line, their typical approach is to grow the bottom line through increasing revenue rather than reducing costs. In fact, most will look to add employees to accomplish this goal.

A PE partner can also bring additional resources to the table, such as greater talent to help professionalize a smaller company. This could include bringing outside faces into the C-suite. PE typically has more money to invest in the future growth of the company than other options discussed here. And a PE firm may be able to deliver new connections, such as clients and suppliers, to strengthen the business and contribute to future growth.

No one path is best for all family-owned businesses, and at Yellow Cardinal, we do not have a preference for PE or any other individual option. Private equity is not for everyone, and in some cases, a management buyout, ESOP or strategic buyers may be a much better fit for the future of the business. That’s why identifying a trusted strategic partner can be the best first step to plan ahead and understand all options to plot the best path forward for you, your family, employees and customers.