M&A for a Family Office: How a multidisciplinary approach yields better results

November 12, 2018Article
Middle Market Growth

To paraphrase George Orwell, every deal is unique, but some deals are more unique than others. And at the risk of overselling the metaphor, when it comes to a family office acquiring a company as an investment, its ability to engineer transactions from a bespoke perspective often results in innovative, custom solutions that serve both the business and the family. Family members’ needs go beyond those of a typical limited partner in a private equity fund and transactions need to be evaluated, structured and implemented accordingly.

Family offices exist to provide for the unique, sometimes idiosyncratic needs of multiple generations. In that context, value (or lack thereof) is not simply a financial term. It is highly personal, dependent on the individuals involved—their strengths, weaknesses, plans and priorities. All of which can, and perhaps should, profoundly affect both the structure of a transaction and the places and ways in which value is identified.

Family goals are a typical factor. The patriarch or matriarch of the older generation may have built a business, and it may be time to cash out. But what about the next generation? All the financial engineering in the world does not change the fact that you still can’t take it with you, and that one day, succeeding generations will have to do business on their own. For that they need to build a skill set. Children and grandchildren also need to develop self-esteem, judgment and maturity. It is hard to put a price on these things, but when a family office is pondering an acquisition, these things matter and can affect valuation. An acquisition that enables the next generation to learn the ropes may be worth much more than the financials alone would indicate.

If a family member is being groomed through involvement with the target company, another critical question that must be addressed prior to a purchase is often whether the next generation is ready to operate the business in the first place. Families and family offices are highly sensitive to reputation, and a candid, internal discussion about whether the founder’s child is suitable to be in charge is greatly preferable to having that discussion with a potential buyer in the middle of negotiations.

Family offices exist to provide for the unique, sometimes idiosyncratic needs of multiple generations.

When considering this issue, it is typically the case that one generation is well aware of the strengths and weaknesses of the next. However, unless an adviser brings it up, the issue may not surface until it is too late.

Another family goal may be the ability of the founder to stay involved and to tap into his or her network and expertise. After devoting most of a lifetime to building a business, when it is disposed of, the skills and relationships that created the enterprise are still very much alive. Many a subsequent acquisition’s value is enhanced by the ability to put those intangible assets to work. A well-selected acquisition, typically in a field related to the original enterprise, will allow the senior family member to play a strategic advisory role, and to draw upon the expertise and contacts built over a long, successful career. Because of this, a family office may be able to better identify ways to grow EBITDA than a traditional private equity fund or other investor.

In many respects the family office is a hybrid of a strategic and financial buyer. It has much of the same capital (or access to capital) as a PE firm. It also has most of the same industry insight and ability to identify true synergies and opportunities of an operating company purchaser. Because it is family money, there are no limited partners, and a longer hold period or non-traditional deal structure can be utilized to enhance the chances of a significant return on investment.

The key to effectively achieving the family’s goals is always careful planning. This planning should involve the M&A team as well as the estate planning, financial advisory/business manager, and the accounting advisers. In addition to family goals, early attention should be given to tax issues. In this instance, though, consideration needs to be given to both income/capital gain and estate tax. For example, can the value of an enterprise be shifted to the next generation (or generations) prior to a sale through establishing an entity to be the buyer in which the next generation(s) are participants from the outset? Sometimes an LLC makes the most sense to preserve control for the patriarch or matriarch. Can the proceeds of a sale of a portfolio company be moved into a trust, making it a tax-free transaction and directing the funds (eventually) to a future generation?

The patriarch/matriarch’s cash needs, goals and tax situation also require planning. What do they need personally? What will taxes be? What do they want to do with respect to philanthropy? What about future generations? What other assets are out there? A generation-skipping trust might, for example, be the right destination for growth assets, but what if the client plans to purchase an aircraft, which generates both depreciation and losses from a chartering operation? It’s much easier to source and acquire revenue-generating assets to offset those losses with advanced notice and planning.

Companies are not fungible commodities. Neither are families. By structuring an M&A transaction for a family office with the unique needs of the latter in mind, a family office can effectively leverage its unique capabilities to provide for the best interests of both. The combination of capital and industry expertise of a family office can, with sufficient planning and professional guidance, deliver tailored results that fit both the family and the business perfectly.