March 29, 2022

M&A in a Family-Owned Business

Stuart Stump Mullens
by
Stuart Stump Mullens

According to the U.S. Census Bureau, about 90 percent of American businesses are family-owned or controlled. Ranging in size from two-person partnerships to Fortune 500 firms, these businesses account for approximately half of the nation's employment and half of her Gross National Product.

In the Home Furnishings industry this number is likely to be even higher. Leading names in the industry remain firmly under the control of the founding family: Ashley Furniture, Bassett (albeit publicly traded), Currey & Company, Jonathan Louis, Liberty Furniture, Bernhardt, and Rock House Farm Holdings (Century, Hickory Chair, Hancock & Moore, et al) … to name but a few.

Stump & Company has been honored to represent hundreds of family businesses over the last 50 years and find that several factors impact family businesses disproportionately to financial or corporately owned businesses.

Fit & Legacy – with family businesses it comes down to more than just the dollars and cents. The emotional attachment to the business tends to be very strong, and frequently it is the family’s own name on the door. This results in a high level of sensitivity to the culture and fit of an acquiring party. As a result, we spend a lot of time talking about integration, future synergies, and the long-term vision for the business. Frequently we find that the senior level integration work is critical to the final phases of Due Diligence moving smoothly and a successful closing occurring.

Shareholder Dynamics – though not unique to family businesses, we do see complicated shareholder structures emerge with greater frequency in businesses where company shares have been passed through generations. Typically, this leads to a potentially messy combination of active and inactive family members amongst ownership. This can create a host of complexities for a transaction. Stump has a long track record of successfully working with families and navigating these complexities.

Add Backs – financial review and analysis is key for family businesses as there can frequently be comingling of personal and business expenses on the financial statements. Common items that we identify that impact Company add-backs and profitability include: non-active employees on the payroll (e.g., a spouse, children), personal vacations co-mingled with business travel, and personal cars and family phone plans. In order to capture appropriate value for a business these expenses must be ‘added back’ and normalized. We are also increasingly recommend a 3rd party Quality of Earnings (QofE) in advance of a transaction, to ensure that the financial picture is clear for all parties.

Estate Planning – very frequently a sale of a family business represents the largest liquidity event for the selling family in its multigenerational history. It is an event that should secure the financial future of the family for the next several generations. This calls for a firm plan. Stump works to connect the selling family with tax advisors, wealth advisors, and other professionals who can assist in structuring the purchase and subsequent allocation of funds for maximum outcomes.

With five decades of experience, Stump & Company remains a family business led by its second and third generations, partners Tim Stump, Bo Stump and Stuart Stump Mullens.

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