Transfer of a family business, choosing the right buyer

According to statements obtained from Bertrand Knipper and Pascal Kim, MBA Capital Strasbourg

For many years, MBA Capital has been supporting SME and mid-sized company leaders looking to sell their family-owned businesses. As they approach retirement, these men and women have spent a significant portion of their professional lives surrounded by family members. Some hold stakes in these companies, which often bear their family name, and where they have made numerous collective decisions.

At the time of retirement, the succession of the family "captain of the ship" often raises many questions.

• Will the family remain in control?
• Does a child, or grandchild, have the skills to take over the company ?
• Has a member of management been trained for this role ?
• How to conduct a search for an external buyer and then reach an agreement with a new leader, using new methods ?

Here is our vision. It starts with a piece of advice: even though it involves family, individuals who hold a significant place in your life and heart, it is essential not to let irrationality or emotions guide this critical process of divestment, which is crucial for the future performance of the company.

A family-owned business is...

First and foremost, a company in which the majority of operational positions are held by members of the same family, or even two families, whether they are qualified or not. They all hold a share of the company's capital and often have in common:

• The occupation of strategic positions.
• The ability to fully direct 100% of the company's strategy.
  • The peculiarity of a family-owned business : the strategy is not solely based on the logic of investors driven by financial results.
• A long term approach, guided by the family's interests.
• Some paternalistic methods, that involve salaried employees.
• Some values, a mindset.

You know, I support a hundred families!" 

In the course of their duties, the leader of a family-owned business feels particularly responsible for their employees and the families of these employees.

The family can choose a leader from within their own ranks, a current employee, or an external candidate.

Hence, the family decides who they appoint to which position within the company. The leader of a family-owned business can be a family shareholder who is also an owner, or they can be a hired salaried executive. They have the task of managing the company while upholding all the values that the family wishes to see preserved, much like any other family member would.

Furthermore, they have the ability to voice their dissatisfaction or demand correction in response to the behavior or underperformance of certain employees, including family members. We refer to this mission as « the painful demand ».

I know he makes mistakes, but he's my cousin..."

A sentence that a leader who is not part of the family circle does not utter. They feel more freedom to express their disapproval, as emotions have less of a place in their assessments. This can prevent intra-family tensions.

The significant topics in the transfer of a family-owned business

When it comes to preparing for succession, visibility is not always optimal within the family. Some companies have a readily endorsed successor who is eager to take over and has been preparing for the operation for several years. In contrast, others are in a state of uncertainty. The intentions of the children are not known, putting the head of the family in a delicate situation.

Here are some lines of thought to proceed methodically and rationally when the identity of the successor is not immediately obvious.

Selecting a competent and legitimate governance

It's THE central topic. The primary goal is to put the right person at the helm of the company and choose them based on their capabilities. It should lead to the selection of one successor over another. The ability of the company to continue growing over time depends on this choice.

MBA Capital observes this in the succession projects it supports: if family members currently in positions lack the qualifications to fulfill a governance role or are deficient in skills, choosing to place one of them in a leadership position can negatively impact medium-term performance.

I've witnessed a case where a salaried CEO had a small stake in a company's capital. Over the years, he might have felt like part of the leading family, knowing all its members and shareholders. When it came time for him to retire, the patriarch appointed his son to the position, completely sidelining the CEO, who had no say, couldn't defend his perspective, or present his candidacy. The decision was entirely a family matter, driven by interests that were hard to discern. Economic or strategic aspects were not taken into account, which proved detrimental."

Pascal KIM

Confusion between personal legitimacy and professional legitimacy is a risk. "As she's my sister, I can trust her to succeed me." is a thought that the person transferring the business should not prioritize in their decision-making. Skills are inherently factual and measurable.

In the case of an intra-family transfer: knowing how to commit

It is important for the seller to be able to demonstrate that his son, daughter, or any other family member taking over the reins is equally capable to carry forward the historical performance of the company into the future. He must be able to assure the financiers of the transmission operation of maintaining sufficient profitability for the repayment of the commitments made. These stakeholders must be convinced that the family successor is up to the challenge.

Faced with a complex selection process, this assurance from the selling leader can also prevent conflicts that may arise within a sibling group or between parents and children.

Consider the possibility of seeking an external successor outside the family

A salaried executive can be chosen from among the existing employees or selected externally. Its experience curve must be taken into consideration andanticapation is the best of counselors. Hence, it is better to avoid parachuting someone who has just arrived into the leadership of a family-owned business.

In the electricity sector, an intermediate-sized company client of MBA Capital experienced this openness to external leadership when the founder passed away. The family spontaneously designated a family successor as the leader, but he did not feel capable of taking on the role. He chose to delegate the responsibility of the CEO position to the long-standing Sales Director instead."

Bertrand KNIPPER

Thinking about communicating the progress of the sale project to the employees

Our experts often find that a leader nearing retirement doesn't always share the succession plan they have in mind, even if they've been engaged in the transmission process for several years. Their fears may include creating family conflicts, relinquishing power too early, or potentially jeopardizing the success of the business.

Nevertheless, considering the significance of the situation, it is important to keep employees and management informed about one's intentions in broad strokes, upcoming timelines, and to address questions and even emerging concerns. A good way to prevent the topic from becoming taboo or confidential. It's better to maintain a climate of trust, not allowing uncertainty and demotivation to set in before the succession.

A transparent internal communication, following the stages of the succession project's progress, is a key to success.

Selling a family business to a third party : MBA Capital's contribution

In 2019, the National Observatory of Family Entrepreneurship (Opinion Way) revealed that 89% of the surveyed family businesses did not have a formalized succession or transmission plan. This statistic highlights the challenges that leaders face in anticipating and mobilizing their efforts for this issue that they will have to confront sooner or later. So, why not seek guidance, methodically, while trying to preserve the family DNA as much as possible ?

When an SME or a family-owned intermediate-sized company seeks the expertise of MBA Capital to advise them in their sale or succession process, the experts primarily focus on indentifying what drives the performance of the company. In cases where a family successor is in consideration, they will form an opinion on their ability to take on the role and may sometimes recommend the appointment of a salaried executive or an external candidate.

The case of selling to a third party outside the company is the one that most justifies seeking the assistance of a consulting firm. This process is not something that can be improvised; it is complex, and it is preferable to seek assistance for the benefit of both the family and the company. In fact, the competitiveness of the company can be strengthened, and its development accelerated through proper guidance.

MBA Capital participates in the search for buyers and focuses on studying various criteria.

• Effectiveness in their roles and the added value of familty members in operational positions.
• The ability of openess of the family so that the acquirer doesn't see themselves as an outsider when they become the leader.
• The compatibility of the acquirer's personality traits with the family mindset.
• The acquirer's ability to secure the financing plan and to raise the funds needed to ensure the company's development.
• In the case of an acquisition by an individual, the alignment between the buyer's experience and the required skills.
• In the case of an acquisition by a group, the project in which this acquisition fits, allowing the client to select the best prospective acquirer.

 I have seen cases where the wife remained in the financial leadership while the husband sold the company to a third party, and this lasted for many years because she brought significant added value, a key performance factor."

Bertrand KNIPPER

Many times, MBA Capital has assisted a family to enable the transfer to a company executive. Together, we have built the succession plan in which the family was involved alongside the acquirer, and it was not uncommon for certain family members to be part of the project in the long run. Acquirers are often individuals who were recruited a few years ago and have since risen in prominence." 

Bertrand KNIPPER

This article focuses on the issue of the acquirer in the delicate process of selling a family-owned business. Such an operation involves other technical and financial challenges to which MBA Capital also knows how to respond perfectly: business valuation, taxation, financing, financial engineering, and more.