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When a buy-out is on the table

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Nine due diligence questions for business families.

By Ellen Frankenberg

A consolidator has offered big bucks for your family firm. Three different accountants concur that the deal adds up. What to do?

Flip Sheridan and his family faced that question in 1993 when they sold HAZCO Services Inc., their safety equipment business in Dayton, Ohio. They came out significant winners financially. But nine years later Flip offers the gift of hindsight: “Make sure you do due diligence on the buyer,” he says. “Actions mean more than words.” One other thing: “Five years is a long time to work for new owners.”

No matter what decision they reached—to sell to a consolidator, to become a consolidator, to stay focused on the current business plan or to cut losses and shutter the windows—the Sheridans understood that their primary asset wasn’t the business; it was the family. For that reason, major family business decisions need to consider the impact not only on the balance sheet, but also on your family’s emotional, physical and psychological well-being.

Sometimes it’s not enough to paint by the numbers; sometimes family members need to take a long look at the color, texture, form and depth of the family landscape. A machine tool shop or a trucking company looks different to those who’ve built it with their blood, their life energy. Sometimes it’s important to measure the value a business holds for family members in ways that transcend even money.

As part of your due diligence when considering a buy-out offer, here are some questions to ask yourself and to discuss with your family:

Your emotional assets

1. Is your work life-giving? Or has it become a burden?

Does your work give you energy, or suck it out of you? How frequently do you feel bored or frustrated? Feelings are often clues to our deepest values. Paying attention to feelings—what we care about most—helps clarify priorities.

2. How important is it for you to be in charge?

New owners often want to retain key managers, so it may sound like you can cash the check and continue doing the work you love. But how much fun will it be for you to work under someone else’s direction? Your spouse may have some insight on this matter. What will motivate you over the next two to five years to keep growing a company that now belongs to someone else, with its value to you already fixed? And if you really enjoy your work, how do you feel about signing a non-compete agreement?

3. Do you and your management team have the moxie to take the company to the next level?

What tells you that your business can continue to grow? Ask three successful friends in business if they agree with your assessment. In today’s economy, mere survival may not suffice.

Your physical assets

4. How is your current work schedule affecting your health?

Some managers derive so much energy from their work that they become depressed or sick once they retire. On the other hand, some businesses will kill you, if you let them. Do you sleep and eat normally? Do you exercise as much as your doctor recommends? How many hours did you work last week?

5. What kinds of steps do you need to take to sustain your health, whether you work in the family business or not?

If you continue working as you are now, what are the health consequences? Could you hire an assistant? Do you need to lose weight or limit alcohol, nicotine or caffeine? How about leaving the building at lunch and walking for 20 minutes?

6. When you think about your life as a whole, what is the “unfinished business”?

Some people want to “die with their boots on.” Others have deferred sailing the Caribbean, tutoring inner city kids or writing a novel for too long. What do you enjoy beyond work? What spiritual meaning informs your life?

Your psychological assets

7. Can you and your family members resolve conflict?

Conflict is a normal part of any mature relationship. But if family conflicts persist and prevent family members from working together, it may be time to bring in outside help. Family conflict alone is rarely a sufficient reason to sell a business, especially if there has been no serious, professional effort to resolve the conflict.

8. Are you and your relatives able to make tough decisions, based on what’s best for the business, even in the face of personal ambition?

The challenge of managing a $100 million company is different from the challenge of building a start-up. Maybe it’s time to recognize that memories fail and that potential successors may lack the ability to take the company to the next level. Testing can help determine which successor has the “CEO personality.” Sometimes the wise family retains ownership and hires competent outside managers who really can reposition the company and mentor the grandkids.

9. Are family members motivated to work toward common goals?

Some family members are motivated by profit; others by family pride. Some enjoy being “the boss”; others are driven by a traditional work ethic. One generation’s motivation will differ from another’s. Is your family motivated enough to pursue a shared dream on common ground?

Discussing questions like these with the relatives who would be most affected by a sale may shed fresh light on what matters to them most and may bring your family closer together—whatever you ultimately decide.

Ellen Frankenberg, Ph.D., is a Cincinnati-based family business psychologist who works with entrepreneurial families in transition ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it ).

 
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