- change ups
Selling the family business or not
The long, bitter recession seems to be waning these days, which means some owners of a family business who had held off selling out two or three years ago when nobody was spending money on anything might be thinking the time is right.
But it depends on who you talk to.
John Kerschen, on the other hand, believes that “on balance, it’s a positive environment for a sale. I would further define that as ‘particularly, for a well-performing business.’”
Kerschen, managing partner of The Charter Group at 140 Monroe Center downtown, is in the business of mergers and acquisitions. He offers a plausible explanation for his opinion.
“There is a shortage of growing and well-performing, profitable businesses, combined with a very significant supply of capital available. That capital is chasing a smaller supply of quality targets” for mergers and acquisitions, said Kerschen.
Private equity, according to Kerschen, has become a huge part of the acquisition industry over the last 10 to 15 years.
“The last I heard, there is $450 billion in private equity capital available in the U.S. committed to (private equity) funds but not yet invested,” he added.
“So there is a good amount of cash, and flexibility among strategic acquirers, also,” added Kerschen.
Kerschen said his firm had recently completed a deal on behalf of a client who sold his family business, a small manufacturing company, for $30 million. Kerschen was not at liberty to identify that company, but he said it was “nicely profitable and growing.”
Kerschen mentioned the recent Aspen Surgical deal as another example of the mergers/acquisitions that are taking place in West Michigan. Although The Charter Group was not involved in the deal, Aspen Surgical of Caledonia — a privately held surgical products manufacturer owned by a private equity firm in Chicago — was bought by Hill-Rom of Batesville, Ind., for $400 million.
H&S Companies is headquartered in Fremont with eight offices throughout West Michigan and 60 employees. The firm provides small businesses with accounting and financial services, as well as IT consulting. H&S serves “hundreds” of family-owned businesses, according to Korstange, and is growing, with plans to relocate its corporate headquarters soon in Grand Rapids. In addition to Grand Rapids, offices locations include Muskegon, Big Rapids and Mt. Pleasant.
Korstange, who has been with the firm since 1991, is a CPA and a certified valuation analyst, a legal designation that allows him to set a value on privately held companies.
His caution about the economy may be a reflection of the view held by many small businesses in West Michigan.
“Michigan is still in what I would term an economic downturn,” explained Korstange. “I think that there are positive aspects of the economy — I think the automobile industry is improving, which will make the state economy stronger, as that continues. However, I don’t think it has trickled down to all the businesses that we’re talking about, yet.”
H&S clients are in businesses across the board, he said, including retail, service, manufacturing and agriculture.
“I think everyone is still somewhat apprehensive as far as what the future is going to bring — probably not as much as they were two or three years ago, but still, there is uncertainty,” Korstange added.
One issue on business owners’ minds these days “is the fact that we do not have a tax code that allows for long-term planning,” he said. With the expiration of the Bush Administration tax cuts looming, “we do not know what Congress is doing to do, come January 1 of 2013. So that uncertainty in the tax code makes it hard to plan for a lot of the business owners.”
Korstange said the predominant approach among his clients who could be in a position to sell a family-owned business is to stay put.
“They want to try to work on improving their businesses, to try to position themselves so when they feel the economy is strong enough, they’ll have a stronger entity to put on the market,” according to Korstange.
In fact, his firm counsels its clients to do just that: take a hard look at their own companies for ways to improve and strengthen them for when the market does improve for mergers and acquisitions.
Another issue that seriously complicates family businesses, he said, is situations where the older generation would like to “pass the baton” to the younger generation, rather than selling to outsiders, but the children aren’t able or willing to take over.
Despite his optimism, Kerschen of The Charter Group concedes there is a fair amount of worry among Americans today regarding government spending, health care and the government debt crisis in Europe.
“But at the same time, when you have a business that is growing” in an industry that is growing, with customers spending more, “that business can command a very attractive valuation,” said Kerschen.
He also makes a strong case for an uptick in bank financing, which has improved, he said. “Maybe not crazy, like it may have been five or 10 years ago, but it is generally conducive to getting transactions done.”
Locally, banks that have been more active in business loans include Comerica, The Bank of Holland and Mercantile Bank, he said.
He also noted that his view reflects companies that tend to be larger than many family-owned businesses.
“Our practice is $5 (million) to $50 million transactions,” he said. While The Charter Group doesn’t have deals the size of the Aspen Surgical sale, “we’re also not doing the corner convenience store kind of thing, either.”