Corporate & Securities Blog

Critical Importance of a Holistic Approach in the M&A of a Closely Held and Family Owned Business

Successful business succession planning for a closely held and family owned business requires a multidisciplinary approach, bringing together professionals in several areas, including financial/wealth advisory, accounting, trust and estate law and corporate law. National surveys over the past 15-plus years have shown that the two most popular succession events are a sale of the business to an unrelated third party (representing over 50% of such events), followed by a transition of the business to the next generation of family owners (representing around 20% to 25% of such events).

In a number of instances when the business owner wants to exit via the sale of the business, they may initiate the sale process with an investment banker or directly with a potential buyer who has approached the owner; then, they must properly gather their succession planning team and consider their options. In these instances, if the sales process gets too far down the road, to where bid proposals are received by the owner or the owner’s representatives, the ability to do important trust and estate planning by moving some company equity (typically, nonvoting equity) out of the owner’s estate to a family trust will be compromised.

In a recent experience, the principal owner of a closely held corporate client engaged a nationally known investment banker to sell his company. As the investment banking firm began to ramp up its sales activities with the year-end financials from the company’s outside accounting firm, we convened a call with the owner’s succession planning team, consisting of the accounting firm, one of Stradley Ronon’s trusts and estates lawyers, his wealth advisory firm, and me – as the lead corporate M&A lawyer for the client. In that call, we mapped out a plan. We were able to put the investment banker’s sale process on a temporary hold; to recapitalize the company by creating two classes of equity (voting and nonvoting); and to get a valuation of the business before any bid proposals were received, which also allowed utilizing discounts for lack of control and marketability. We also planned to establish a trust for his wife and children and to transfer via gift, using the newly issued nonvoting equity from the recap, a material portion of his equity, valued at approximately $5 million, to a family trust before the investment banker’s sale process resumed, offering a sufficient gap in time between the company valuation used for this gifted equity and the receipt of bid proposals from third parties. Based on the projections of the investment banking firm, there is the expectation that the valuation of the company in the sale process will be three to four times higher than the company valuation used for the gifting, which will be a significant win for the owner.


Meet the Author

Steven A. Scolari

Steve provides practical and strategic legal and business advice to executives and owners of both private and public businesses in connection with a variety of transactional matters, as well as business succession planning engagements, in a wide scope of industries. Those transactions include mergers and acquisitions (M&A), debt and equity financings, joint ventures and corporate restructurings.

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