The alumni department introduced the speaker and his topic by referring to the challenges and conflict potential within mergers and acquisitions (M&A) governance, the alignment of family business and the role of communication and emotional intelligence in managing the M&A process.
How is a Family Business Different?
“Family businesses are a peculiar species,” said Mr de Schorlemer. “What we admire in family businesses (such as Villeroy & Boch) is some of their gloss and glamour. At the same time things like succession planning, in-laws, non-family aggregative boards, third generation pivots, and transfer of ownership, to name but a few of the hot topics, can be bumpy.”
Research reported in the Family Business magazine, he said, shows that the key to family enterprise sustainability is the family, not the business. The reason is that long-term continuity sometimes requires divestitures, or the creation of new business – the ability to innovate, adapt and respond to changing markets, and to take tough decisions in the best interests of the business.
“Of the 80+ M&A — mostly family-related — business transactions in which Mr de Schorlemer has been involved in, each deal has had multiple, almost unlimited facets. They include:”:
- Strategic drivers – why you want to proceed with an M&A transaction
- Dimensions/number of sites/employees
Understanding M&A in a Family Business
In simple terms, M&A refers to the transfer of ownership of all or a part of a business. This can be extremely complex. Of real importance is the vision of where you want the business to go in the medium-to long term. This vision could encompass:
- Assimilation – acquiring another company in order to grow
- Transformation – a new and improved version of the company
- Metamorphosis – incorporating the best of both, the old and the new
- Retention – separate and distinct.
The “people” side of any transaction is complex and follows a pattern, referred to sometimes as the RASCI principles of communication:
- Responsible – who is responsible for managing the transaction (usually ‘management’)?
- Accountable – is there a formal board of directors? Who is empowered to make decisions?
- Support – the need for external advisors to the business and/or the family.
- Consulted – stakeholder management: who needs to be consulted.
- Informed – who needs to be informed.
The way in which these issues are handled and communicated impacts the basic psychological and self-fulfilment needs of the stakeholders. Regardless of the industry or position within the hierarchy, any announcement of M&A moves people out of their comfort zone.
In terms of Maslow’s Hierarchy of Needs, people start asking: what is going to happen to my job? Will I still have a job? Basic needs of safety and security, in addition to feelings of belonging, are brought into question. Even self-actualizing career plans may be threatened by an announcement of M&A activity.
Specificities in Family Business M&A
Family businesses have certain specific needs, said Mr de Schorlemer, and these ‘specificities’ impact the M&A process:
- In terms of the family legacy and perpetuity, what is in the best interests of the business? Is it in the business’s best interest, for example, to continue on the path that the founders created?
- How will business ownership be maintained or redistributed? There are decisions of materiality (e.g., taking on the company’s historical debt), and morality (e.g., can you sell something that you have inherited?).
- Who qualifies as ‘family’ in terms of legitimacy of decision power and ownership? What about non-family business partners, and next-generation family members who may anticipate inheriting ownership? How can they be included in decisions to buy or sell the business?
Whether the market perceives a transaction to be positive or negative at the time of its realization has long-term implications for the company’s stock price. One study found that positively perceived transactions added value to the business a year later, while negatively perceived transactions destroyed value in the longer term:
- 65% of the negative deals were still negative a year after the announcement, while 57% of the positives remained positive.
Turning to the question of emotional intelligence. Mr de Schorlemer said that our brain, our central nervous system and our immune system are inherently connected. Our first reaction to change tends to be one of defence—fear of the unknown—which generates behaviours (positive or negative) that influence those around us as well as our own health and stress levels.
“The cost of emotional illiteracy is high,” he said. The good news is that the ability to handle entrepreneurial risks can be developed. Nevertheless, M&A within a family business may still give rise to conflicting emotions:
- Feelings of relief that the tensions and stresses of running a business within the family have been released, and family members can begin to relate to each other on a deeper, more personal level.
- Feelings of resentment and anger that a legacy has been denied, or an expected inheritance squandered or dissipated.
How to address this dilemma
How does one prepare for these risks? There are actions that should be taken before getting involved in a transaction, once you’re in the process, and after the process has been concluded.
- Before any M&A transaction is contemplated, conduct a strategic assessment of M&A at generation change:
- Conducting due diligence to determine issue mapping: stakeholder analysis (what could go wrong with family members, employees, customers, etc.), key messages (‘an easy way to tell your story’), and leadership preparedness.
- At the time of the deal execution, manage the first impression—pre-signing, upon signing, and pre-closure of the deal:
- Devise a communications plan (who to inform, and when; beware of premature announcements/leaks and the risks of non-disclosure agreements), prepare the announcement, monitor the reaction(s), and plan the integration.
- Creating value for the M&A rooted in clarity for integration:
- Create the ‘new normal’ for the business through onboarding (who stays and who goes), customer/supplier communication of the changes, and integration. The importance of leadership at this stage is to be emphasised.
- Start with the end in mind and know where you want to go.
- Connect and engage with stakeholders. Communicate incessantly.
- Excel in delivery, long-term, to ensure the business continues to thrive.
- Part of our real estate business location has been rezoned for residential development, and we will be selling it off. What should I do after the sale? (The question and solutions to be discussed offline).
- Participants were referred to the EU Business School Alumni Hub, where questions and experiences can be shared and discussed.
- Dan in Lebanon has experience of due diligence (DD) in a family business environment —what is the specific mindset, scope of responsibility, in a family-owned setting vs. a corporate setting? Financial, legal and commercial DD is common, but ethical DD is rarely carried out, e.g., sexual harassment of employees.
- Sustainable development goals are increasingly being addressed, including diversity goals, ethics, etc. The push to include sustainable development goals is coming mostly from private equity firms, not family-owned businesses. However many smaller family businesses take the time to meet the buyer/seller and form a relationship prior to the transaction, and that is how ethical DD is carried out.
- In reflecting on the key points, Mr de Schorlemer emphasised the importance of sustainability as a key skill set at company board level. How is this defined? It depends on the nature of the business and may include being a member of the audit committee, having engineering capabilities, understanding energy efficiency, appropriate leadership, diversity (gender, internationality), social responsibility and capability. Different businesses will define sustainability differently.
- What are the core questions to ask in negotiation? An obvious starting point is ‘How much is your business worth?’ Many family businesses (and their family members) are asset rich, but cash poor. There is no objective answer to this question, and the question may be posed to the family members/owners themselves: how much do they think they need to get out of the business, and will a buyer be willing to pay that amount? At what level does everyone involved in the transaction feel comfortable with the value?
- What is the role of the active family member(s), and what about their future role? This is an important but subjective and highly emotional discussion.
- How do you make sure that the transaction really creates value over the long term? By addressing the people/communication question, the ‘how much’ question, and ensuring the business continues to create value. These are the key issues.