There comes a time in the operation of most family-owned service centers when a business-altering question must be asked: should I sell the operation.
In many cases, the motivation is the absence of an obvious replacement for the company patriarch, who is ready to step aside but has no family members interested or available to fill the leadership void.
Other times, the primary shareholders seek a capital infusion that isn’t available another way.
Whatever the reason, there are many options to consider, and many steps to take between when you think about putting the business on the market, and when the sale has closed.
Vince Pappalardo is the managing director of Brown Gibbons Lang & Company’s metals and metals processing practice. He has spent years assisting metals companies in the mergers and acquisitions space, working on both sides of the buy-sell equation.
Though the process is complicated, the decision-making to a sale should be predicated on a rather simple formula: When the company’s objectives, which primarily revolve around growth, start to dis-align with the shareholders objectives, “you should start to think about the idea that maybe the shareholder shouldn’t be that shareholder,” he says.
Backing up, Pappalardo says that at a company’s launch, the goals of both the shareholders and the company itself should be the same. “They want to grow, they want to build, they want to be profitable.”
But they don’t stay in synch forever. A shareholder, particularly one that has been invested in the company for decades, may be looking to retire. Or, even if stepping away isn’t the objective, the owner may not be interested in embarking on a complicated and lengthy new project. When that happens, if no action is taken, “it can hinder the company for 10 years and put it at risk.”
Of course, a full sale isn’t the only alternative in those scenarios. Options start with simple debt recapitalization, which allows control of the enterprise to be maintained while leveraging the balance sheet to generate liquidity. Minority and majority recapitalization enable the primary shareholders to sell some or most of the company, getting money out of the business while still positioning the owner to benefit from future growth.
If those options aren’t enticing, the full sale route is the way to go. Such a decision maximizes proceeds and realizes value from synergies today, while offering the opportunity to exit day-to-day operations.
Deciding to sell, however, is just the first step. Service center operators must look at the type of acquiring company, whether a financial or strategic buyer, as well as the type of sale they’re interested in.
There are three primary types of sales: a one-on-one negotiation, a controlled auction and an open auction, each with pros and cons.
In the one-on-one setting, a most desirable bidder is identified by a financial advisor, and discussions are pursued exclusively with the single party. On the plus side, this type of auction minimizes dissemination of confidential or competitive information and disruption to operations, and can shorten the process, if successful. On the downside, the seller may not realize full value as viable acquirers have been excluded, it may yield more leverage to the bidder and, if unsuccessful, will commence a broader process and the possible perception of the seller as “damaged goods.”
The open auction process begins with strategic and financial buyers notified of the sale and invitation to review the opportunity through a public announcement of the sale. This type of transaction can maximize value for well-known companies, and keep pressure on potential buyers to ensure a timely response. On the other hand, this process is most disruptive to operations, severely limits the ability to protect information and can diminish the company’s image if no sale is consummated.
The most common type of transaction, and the one where Pappalardo most often finds himself operating, is the controlled auction.
In the controlled auction, Pappalardo says the typical sale process moves ahead in four stages (see chart): Preparing for market; initiating the sale process; selecting the buyer and closing. The entire process typically takes 5-7 months from start to finish.
In the first stage, the prospective seller is preparing the company for sale, which includes verifying the earnings potential of the enterprise. “We don’t sell off the direct financials,” Pappalardo says. “We sell off what the economic power of the business is.”
In the second stage, potential buyers will be contacted, and some preliminary offers will be received. Upon completion of the stage, the shareholders will often make the final determination if they want to move forward.
“We’ve careful not to provide any competitive information about the business here,” Pappalardo says. “We provide a 30-page memorandum with the company name, but it doesn’t have customer names. It often has information that will make the shareholder a little uncomfortable if they don’t go through with it, but not enough to damage the business.”
From there, a buyer will be selected, which will result in initial tours of the facility, preliminary negotiations and signed letters of intent.
The letter of intent occupies an interesting middle ground between initial interest and commitment, Pappalardo says. “It’s not binding, but it’s more ethically binding. People don’t provide a letter of intent unless they mean it.”
Closing the deal will likely take the most time, typically between two and three months. There, shareholders will settle the final conditions of the sale, which can vary.
From experience, Pappalardo says one of the most prominent areas of concern for the family-owned shareholder completing a sale is how the new operation will take care of the employees. He related the tale of a conversation with an owner who was in the early stages of selling a very large company.
“He said, ‘As an owner, it’s more money than I need. I’m sure my heirs three generations from now care, but I also care about my employees and what they’ve done to get me here. I want to limit the buyers to people I think will treat the company well.’”
Those kinds of conditions can be negotiated, though the more requirements that are placed on the new ownership group, the lower the price the shareholder will receive for the enterprise.
“At the end of the day, sometimes, you sell it to the guy who is going to pay the most, and give your employees their bonuses, and call it a day,” he says. “But I’ve done transactions where buyers agree not to change anything at the company for one year. Is that detrimental to value? Yes, but it depends on what they want to do with the company.”
During the process, Pappalardo says the three most common questions he gets from sellers are:
- How much am I worth?
- How confident are you that you can get the transaction accomplished?
- How much information do I have to show them?
As far as the last question, Pappalardo says “We liken it to opening the kimono. They get to see everything at some point. It’s a question of when.”
Most companies that have reached BGLC are usually committed to the sale, having already given the matter considerable thought. And those that opt against a sale often come back in a few years and say, “’Now, I’m ready.’”