The Six Ways
We have written before about what a clock does to a good company: how the most destructive thing an owner can impose on a business is not a competitor or a recession, but a maturity date the company never agreed to. If you read that piece, you know where we stand.
A fair question followed, and it is the one every owner must answer eventually. Granting all of that, granting that time pressure is the enemy, what are the actual options?
They deserve to be laid out plainly. To insist that an owner has only one honest way forward would be its own kind of dishonesty.
When a founder decides it is time, there are six ways to go.
Sell to private equity.
Find a family office that sees it your way.
Sell to another owner-operator who understands the work.
Pursue a strategic merger.
Sell to your employees.
Transition the company to your children.
There is arguably a seventh, taking the company to the public markets, but that is a different undertaking for a different audience, and we will set it aside here.
We could offer our opinion on each and conclude there. Many would. But for an owner weighing this decision, an opinion is less useful than a method. So before we consider the six individually, here is the framework we would use.
Match the expectations, all of them
Every one of these six paths involves far more than the owner. Each draws in a full set of stakeholders, and each stakeholder arrives with expectations of his own. The buyer has them. The lenders have them. The customers and suppliers have them. And the men and women on the floor have them, whether or not anyone thinks to ask.
So begin with yourself. Define, honestly, what you expect from whoever comes next. Then move around the table and ask the same question of every other party. What does each one expect to receive? Set those expectations side by side and study where they align and where they conflict.
The reason this matters is straightforward. When expectations are misaligned, the strain does not disappear. It relocates. Press the problem down in one place and it emerges in another, further along, and it tends to settle on the people least equipped to absorb it. Align the expectations at the outset and you have a durable arrangement. Miss them, and you have created a problem that will surface later under someone else’s name.
That is the lens. Now the six.
Sell to private equity
We have said our piece on this path, so we will be brief. It is sometimes the right home. But an owner should understand precisely what he is accepting. Capital carries a personality of its own, and a fund’s is generally governed by a clock and a distribution schedule that have little to do with the operating business. For the people on the floor, that can mean being asked to commit fully to a partner who may withdraw when the fund, not the company, requires it. Some owners can accept that trade. None should accept it unread.
Find a family office that sees it your way
Patient capital, no exit clock, the temperament of an owner rather than the mandate of a fund. On its face, this is the closest option to what we would want for ourselves. But an owner should perform the same diligence on this capital that he would perform on any other. “Sees it your way” is easily said in a first conversation and expensive to get wrong. Require that the character of the capital be demonstrated, not merely described, before you entrust the company to it.
Sell to another owner-operator who understands the work
Here the buyer has carried the same weight the seller has. He understands the business in detail, he is not holding a stopwatch, and he tends to treat the workforce as partners because he knows what they are worth. There is a cost to this path. The price such a buyer offers will usually fall short of the highest bid, precisely because he understands exactly what he is purchasing. What that lower figure actually secures is a matter we will return to shortly.
Pursue a strategic merger
A merger with a customer, a supplier, or a capable peer can be powerful when the fit is genuine. But two industrial businesses cannot simply be combined in the expectation that one plus one will equal two. It rarely does, whether in forging and fasteners, in galvanizing, or in concrete. The moats are deep, the supply chains are loyal, and the cultures were built by different hands. Before signing, an owner should examine closely what becomes of the people when two floors are consolidated into one. That is where a merger succeeds or fails.
Sell to your employees
This is an underappreciated and, in many respects, honorable path. Though, there are 2 realities that deserve attention. First, it is not as tax-advantageous as many owners assume, so the arithmetic should not be romanticized. Second, the difficulty of transforming a capable manager into an owner-operator should never be underestimated. Some people are constituted to manage rather than to bear the full responsibility of ownership, and that is not a criticism, it is a matter of temperament. A gifted manager handed the entire weight of the enterprise can be overwhelmed by a load he was never built to carry. Do not entrust that burden to someone built to manage.
Transition the company to your children
This is the aspiration, and, candidly, it is also among the most difficult paths to execute well. We have chosen it within our own family, with full awareness of what it requires. The picture an owner holds is the family gathered again around the table, building the enterprise together as he remembers it. But life does not hold still. People grow up. They marry, they bring in extended family, their priorities shift. The ideal you are protecting might have been a season past.
Family succession can succeed, but only when it is built for reality rather than memory. That requires a family constitution, established before it is needed, and one discipline above the rest: do not draw your managers into your family’s affairs. Their responsibility is to run the company, not to mediate the family. Unless a business is large enough and governed well enough to keep those two spheres separate, an owner should not assume succession is the road.
What the higher price actually costs
We promised to return to the money. An owner who sells to an operator of our kind will likely receive less than the highest bidder would pay. We acknowledge that openly. But consider what the higher figure does as it moves through the business.
The higher the price, the greater the risk carried by that investment. The greater the risk, the more scrutiny and oversight accompany it. And the more oversight, the higher the expectations placed on the business, often expectations that exceed what the business can realistically deliver. When a company is asked to meet and exceed figures that were never grounded to begin with, disappointment follows. And disappointment does not remain in the boardroom.
It settles as pressure on the employees. Pressure on the customers and suppliers. And pressure on the balance sheet, because that top figure was almost always financed with excessive debt. Accumulate enough of it and the entire structure gives way. It usually begins with the balance sheet, and by then the people who built the company are the ones left holding what remains.
That is the true nature of the trade. A larger payment today, purchased with the strain your people will carry tomorrow. A fair payment today, from a partner who intends to remain in place a decade from now, is a fundamentally different arrangement.
Leaving it better than we found it
Reduced to its foundation, the lesson across all six paths is the same. The equity, the price, the deal structure: in the end, these are largely beside the point. What endures is the company and the people within it. The proper measure was never the multiple. It is whether the men and women in the plant have the best possible opportunity to excel, and whether the owner left the enterprise in better condition than he found it.
A good business, in this respect, resembles one’s own children. An owner spends years building it, and he would never knowingly place his children in harm’s way, for any premium that could be named. That is the bond a genuine owner holds with what he has built and with the people who built it alongside him. It is the reason we still sit down and share a meal with our people, and know their names.
So if you are weighing these six and finding none of them entirely satisfying, we understand. We have stood where you are standing. Define your own expectations first. Then measure them against everyone else’s, and choose the path on which they truly align.
