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University of Massachusetts Amherst

Family Business Center

When to Buy a Competitor? FBC's Sponsors Share Advice

by Shel Horowitz

What a panel of experts: Ron Weiss, of Bulkley, Richardson and Gelinas, LLP; Michael Long, from Axia Insurance; Kris Houghton, Meyers Brothers Kalicka; Charlie Epstein, Epstein Financial Services; and Rick Giombetti, from Giombetti Associates. A last-minute conflict prevented Hampden Bank from participating, but that left a lawyer, an insurance agent, an accountant, a financial planner, and a human resource expert to examine the ins and outs of buying an existing business.

All of these experts are sponsors of the Family Business Center, and all had important observations to make in looking at a hypothetical acquisition that had some serious issues.

The acquisition target had some environmental problems that could turn into serious liabilities later and employees who seemed less content that those at the acquiring company. Still, Weiss said, "this example is not at all atypical. These facts wouldn’t cause this to be considered a difficult transaction; this is what we find in the real world. A well structured transaction and a good transition team can protect against most risks and handle most problems if the deal makes sense otherwise."

But Houghton wasn't so sure. "When we got done picking this apart, we were wondering why they wanted to buy it. It's going to come down to the economics: what ROI? You've got a lot of risk here. What would you be expecting for a return? 11, 12 percent? Are you able to obtain that?

Sellers, she noted, want to sell stock, while buyers prefer to purchase assets—but sometimes, for instance if that's the only way to acquire patents, buyers will take over the stock. But Houghton will make sure the buyers are protected in other ways, such as insuring the liabilities, setting up escrow accounts, and extracting non-essential assets (such as real estate) from the deal.

Long concurred with the need to balance protection and profits: "We look at risk and how to avoid it. This company is importing products from China. If they buy the corporation, they could be open to product liability suits. They had layoffs. Are there going to be any employment practice or workers comp liability issues? We'd want to examine the prior history of workers comp. The pollution issue: perhaps we can insure it or pass the risk off to somebody else. Buying the stock is buying the old sins, hidden or not."

Giombetti brought the HR perspective: "Leadership: who's going to run the new entity, who has the competencies? Cultural issues: If that culture is totally different than their operating style and strategy, they are predisposing for headaches."

Yet Weiss said he'd seen poor seller employee relations stall, but never kill, an acquisition—except where unionization was imminent and unavoidable. And in his view, while projected ROI is an important determinant of whether a deal makes sense, immediate returns and some of the other immediate factors in some cases may be less important than longer-term benefits, including long-term multigenerational tax planning opportunities. "This should be looked at both as an acquisition and as an enormous estate planning opportunity. A company owned by the next generation could be buying that company, or the real estate, or some other, severable aspect of the seller’s business. For example, if the younger generation bought the company, over time production could shift over to the acquired company. That would cause and a significant portion of the value of the family business to be in the company owned by the children, and could substantially reduce estate taxes at the older generation level. In terms of ultimate tax savings, that blows the socks off most traditional estate planning techniques."

Epstein agreed that strategically, the way a deal looks on the surface may not have anything to do with buyers' reasons. "You've got to lay out the reasons why you're buying the business. 'Capablism,' capitalism, and 'competitivism'—you've got to wrap those three up. Will I be more competitive by buying? We end with a final outcome—is that going to make us more strategically positioned? If it was three years from today, what has to appen to know you've made progress?

"Sam Walton had two hardware stores and set up a family limited partnership. None of that company ended up in his estate"—and this was, Epstein believes, a visionary move that is reflected in the enormous success of Wal-Mart decades later.

All the panelists agreed on the need to involve your chosen expert advisors early and thoroughly. Weiss indicated that the attorney and accountant should be involved in helping the structure and draft the letter of intent. Also, as Long put it, "Whether you're buying a company, developing a new territory, or a new product—involve your property and casualty agent. There are a lot of pitfalls."

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