Business Sales on the Rise
As appeared in Business New Hampshire Magazine.
Private business transactions in New England have accelerated over the last year and the pace may be picking up. Is this a COVID-19 reaction? Or is there something bigger going on in America’s family business ecosystem?
Many business owners faced extraordinary challenges in 2020 due to the pandemic, but those challenges varied. By year end it became evident that some businesses were devastated by the social disruptions, broken supply chains, bankrupt customers, and a dramatic spending freeze driven by the global outbreak. Others, however, flourished. They discovered new markets, new products to sell, streamlined operations, and dealt effectively with a changing work force. For some, PPP payments created the bridge to renewed profitability. For others, PPP payments just delayed the inevitable decline into survival mode or worse, bankruptcy.
The gap between an iconic brand like Legal Sea Foods falling into a fire sale and Merchants Fleet ordering 12,600 new electric vans to meet growing demand exemplifies the range of effects COVID-19 had on private businesses. Legal Sea Foods faced a dearth of customers, a seismic shift in cash flow, and the sudden weight of significant debt. PPP payments provided life support for a period, but with creditors calling, the restaurant chain owner had little choice but to adopt a salvage mindset. Merchants Fleet, on the other hand, was riding a tidal wave of demand. Home delivery of goods boomed, and orders for Merchants’ vans that are used for “last mile” delivery service took off.
Aligning the 3 Clocks
So, was it simply the failure of some businesses and the success of others during the pandemic that became the super charger for the business transaction environment? Not according to advisors that counsel business owners on their strategic decisions. Those advisors know that the sale of a family or privately held business is rarely an easy decision. As coined originally by Bigelow LLC group, the value realized from the sale of a business reflects the alignment of “three clocks.” Those clocks measure the state of each business’s industry, the status of a company’s key value drivers, and the preparedness of the owning family to let go of their life’s work.
In most cases, all three clocks must align to achieve a successful transaction. Business owners have little control over the industry clock—how an industry is being priced in the market—but sometimes it is the dominant factor in a decision to sell. The business clock, by contrast, is primarily controlled by the owner. How well the company is managed (growth strategy, innovation, human capital, debt structure, profitability) and its attractiveness to a buyer, fall on the owner’s shoulders. The family clock, which reflects the interests and priorities of disparate family members, can be complex and complicated. This clock is often ignored until the other clocks are aligned, and the owner is forced to come to terms with their own and their family’s own readiness. The economic disruption of the pandemic certainly affected all three clocks, but its effect on the personal and family clock has been most profound.
Family Dynamics Shift
In basic terms, businesses are complex and challenging, but families are more complicated. How families are responding to the industry and business clocks is what really changed. And, the pandemic appears to have accelerated that new way of thinking. One NH business consultant describes the typical business-owning family as having a strong “duty of stewardship.” They are in the ‘business’ of running a business and they plan to keep running the business forever.
But the increasing pace of business sales suggests some new factors are at work on the family’s commitment to their enterprise. This consultant’s observation is that the sense of stewardship is weakening. Millennials, those who are the next generation of owners, are less willing to take on the responsibilities of running the business.
In some cases, by the time a business is looking to the third or fourth generation to take over, the business ownership structure has become much more diffuse. Some family members may work in the business, while many do not. Those who have moved away and begun their own careers are not as interested in or committed to supporting the business. When business challenges or opportunities appear, the family may not be as unified in their response as prior generations.
While the pandemic created more challenges, in some cases it spawned new opportunities. One irony of growth opportunities is they require additional investment in the business. Michael Burnell, a NH business advisor, described a family in the enviable position of needing to add additional capacity in 2020. A family decision had to be made about investing more capital in the business, which required additional debt. The family hesitated. Did they want to take on more debt in an uncertain world and add stress to the family situation? COVID increased the family’s sensitivity to risk, and it was a binary decision: add debt or sell. The owner, in his 60s, and his family, chose to sell.
All families face the challenge of who in the next generation is best suited to take over the business. But COVID seems to have complicated this decision. In one recent situation, a third-generation family business had two talented young family members, both well educated, active in the business, and interested in taking over the company. The owner understood her sons’ passion for the business and was proud of their commitment. But it became obvious that she could only choose one to run the business. She understood the other son would likely lose interest and want to cash out. With limited capital available, she could envision her sons being pulled apart by her decision to ultimately choose one as her successor. The family decision was to sell.
Pandemic Drives Tech Investment
Perhaps most importantly, the pandemic has intensified business investment in technology. Now more than ever, companies need to advance their connectivity, data collection, data analytics and product distribution to remain competitive. And in some industries that have been slow to embrace technology, the game is truly changing.
Educational publishing is one of those industries. Until 2020, most educational content was still presented on paper and in books, according to Boston industry consultant Barbara Russell. But that changed at an unexpected pace during the last year. Book sales dropped like a rock last spring. Many traditional publishers fell into distress. Talented content creators were dismissed. And the race to find new ways of distributing educational content was on.
Business owners in this industry were in a bind. The industry clock was not only misaligned, but prices plummeted, and the clock effectively stopped. No owner wanted to sell at the bottom. The alternative was to merge or partner with other companies, to gain scale, access to better technology and faster product development. For these family business owners there was no option but to reinvest as part owner of a new, larger enterprise and wait for the business and industry clocks to be repaired when public school districts once again start to purchase content.
Time to Sell
The best news for family business owners is that, as another business advisor Jeff Miller notes, “it’s a good time to sell” because most industry clocks are lined up. Private equity funds are overflowing with capital and looking to finance the purchase of companies. Many successful businesses see acquisition as their cheapest and fasted path to accelerated growth. These strategic buyers, looking to buy competitors or suppliers, are actively pursuing candidates. And, as Miller sees it, “good companies are not in good supply”.
Is COVID-19 the reason more family businesses are being sold? Not solely, but it is part of the picture. The rest of the picture is being driven by demographics, with many family business owners in their 60s facing unprecedented challenges. Addressing those challenges will affect the business for many years, but will likely require additional investment, through more debt on the company balance sheet, or by changing the business strategy.
The family must make a long-term investment and get a substantial commitment from the next generation. Glancing at the “clocks,” many business owners see the industry and business clocks in near perfect alignment and the next generation of family leaders headed in a different direction. This picture is motivating them to “wind the family clock” and take advantage of a sellers’ market.