All entries for Saturday 24 October 2009
October 24, 2009
Your Great Uncle died and left you a company that you have neither the time nor inclination to run – hence you want to sell. Set out the options for which type of buyer might be interested and the differences in likely value that they might place on the business. Conclude by deciding which buyer you hope will buy it and describe why.
This situation is special for me because a have lived a similar experience with a old bread factory of my family. This company was founded by my grandfather and his brother. The firm grew with a lot of effort and difficulties but was able to create several little shops of sell bread. Over time the next generation had the opportunity of follow with the business but not all members had the opportunity of be proprietary of the shops although they were proprietary of the factory. For a lot of years nobody said nothing because the second generation was essential to the growth of the company in the origin hence they was the managers of the company. When arrived the time of retired, everybody launched his hands to the neck of managers and theirs descendant because they wanted to follow with the factory in order hold the value added to theirs shops.
With this situation the company fall its profit and every year the situation was worse because the investment and maintenance greatly decreased due to everybody wanted get dividends. With this situation several options was evaluated by each member of the whole family. Below I will show some of the main option that was exposed
- Siphoning cash. This option meant continue with the current situation. And obviously, that will be the worst option because nobody earns enough.
- Transfer of ownership in family firms. With this option the company follows in hands of the family and retains its values if the buyer is one family member. I and the rest of the family could see how the illusion of the previous family generation continues alive. The knowledge of the market and capabilities are safe but the problem is that the price of sell will be below of market price, and not all owners can be agree with this option.
- Partial harvest and exit. To analyze this option is important to say that the company had the location of its main asset in
Madrid city centre and there was a lot of sellers with intention of make a new building of luxury apartments. With this option the family could divide the money and could move the business outside of the city centre with the investment of the parts of the family interested on it.
- Acquisition for another company of the sector. It important to remark that the company had several employees working on it, some of them were of the family and not only at management level. Also it is important remark that the value added for the shops was that the bread was made with a traditional methods and near of the point of sell with high degree of acceptance between the customers. With the merge or acquisition the new company can increase the efficiency using economy of scale strategies, recover the morale of the employees, and hold the confidence of the customers.
- Management Buy in. The option of find a group of people in order to manage the company was discarded from the outset because everybody considered that the knowledge of the market and situation with the shops was important and to lose the management will mean to lose the company. In my opinion likely nobody thought that some of the profit troubles were due to the restrictions in take decisions according with family interests over of the aspects of business.
- Management Buy Out. This option was the same that transfer the ownership to some family member. That would be really very good option in order to continue with the activity but the market price of the main asset of the company, the location in city centre, was too high and the company would need a big restructure with a great investment and financing.
At the end the option chose was a mix between some of then, because the company was sold to a builder for a high price even over market price and some members of the family carry on an agreement with him to keep the ground floor and continue with partial business but not with the manufacture.
The acquisition might have been a good option but loosing the ownership and the management of company.
In my opinion the 'partial harvest and exit' alternative was very good option, but not the loss of manufacturing that was the origin of company. My recommendations was follow th Partial harvest and exit but continuing with the production activity in another place outside the downtown and managed by me.
Andrew Burke (2009). ‘Entrepreneurship and New Venture Creation’ Study Notes, Warwick Business School.