Are CEOs Cool To Your Cold Calls?

Maybe you have them on your staff: Associates who spend their time cold-calling owners of family-held companies to see if they might be open to selling.

These shots in the dark must occasionally hit their mark. But put yourself in the shoes of one of these entrepreneurs for a moment, bearing in mind that these days they’re getting flooded with such calls. Which of the following pitches do you think would be more effective?

Pitch #1: An associate calls the entrepreneur, introducing himself and his firm. At various phases in the conversation, the associate lets the entrepreneur know how much he love the company’s products, asks whether the entrepreneur has ever heard of private equity, and inquires how much revenue the company generated last year.

Pitch #2: A senior operating partner calls the entrepreneur, introducing herself and her firm. They start off discussing the biggest challenges facing the business. The senior partner interjects examples of how her firm has helped portfolio companies in similar businesses navigate similar challenges. Sales figures don’t get broached.

That Pitch #2 might lead to more serious discussions, more quickly turned out to be one of the valuable takeaways from this month’s seminar, “The Art of investing in Family-Owned Companies—How To Turn Landmines Into Gold Mines.” Hosted in New York City by The Capital Roundtable, led by industry impresario Burt Alimansky, the seminar featured a faculty of deal sponsors, investment bankers, financiers, and—most valuably, from my perspective—company founders.

Journalists covering the event weren’t permitted to quote anyone by name at the seminar, to encourage candidness among the speakers. So I consolidated the advice I heard into a set of anonymous tips for acquiring family-held companies in which at least one family owner remains a major shareholder and manager post-sale, with a partial list following below. For the full list go to our Web site at

• Be Empathetic: That not all sales are based on the highest price holds especially true for family-held companies. Often it’s the bidders that establish the best chemistry with the family that wins the day. How do you do that? It’s partly a matter of how well your firm’s experiences, personalities, and values match up with those of the family. Other things are more in your control. Talk with as many family members as you can pre-closing. Find out what problems they face, the history of the company, the way the company treats its employees, how much the company gives to charity each year. The more respect and sensitivity you show the family and its heritage the better your chances.

• Be Sensitive To Relationships: The CEO and CFO may be boyhood friends. The husband of the CEO may have played golf every Friday for the last 10 years with the owner of the biggest customer. Plotting hirings and firings at a company purely on the basis of who is best for the job can have a lot of unintended consequences in a family-held business.

• Find Out What’s Motivating The Sale:
Many families often seek out private equity to help deal with a succession issue. In other cases, the owners see storm clouds brewing—the imminent loss of a major customer, say, or the disintermediation of a key player in the supply chain. Knowing the reasons can help you tailor your bidding strategy and investment thesis, and even convince you to walk away.

• Be Humble: You’re naturally tendency is to see all the money a target company is leaving on the table by, say, not expanding distribution to mass retailers. But don’t be too eager to roll out the five-year plan. Just because a business is family-run doesn’t mean management has been naively overlooking obvious ways to expand or to shave costs. Your perceived eagerness to show entrepreneurs how you would run things could be a real turnoff.

• Identify The Seats Of Power: Who really has the power to bless a sale? Could it be the grandmother who never had an active role in the business? Or the patriarch of a family holding the smallest stake in a company out of three families altogether? Family-owned businesses, particularly those with more than one family involved, may have both formal and informal seats of power. It’s obviously best to identify these early on in the process.

• Don’t Assume Families Are Blind To Problems: Families involved in running a business may present themselves as models of harmony. But, in reality, a father may wish to sell a company after recognizing his son lacks the skill and talents to take over. Two brothers may wish to sell because they can no longer stand the sight of each other. A cousin may have proved incompetent in the CFO slot. Should you approach these situations tactfully, families may actually welcome your help solving these problems for them.

• Beware Of Deals Lacking I-Banks: Many deal sponsors boast of enjoying proprietary deal flow without an investment bank in sight. The idea is to have fewer competitors, to pay lower prices. But when it comes to founder-owned companies, so-called “un-banked” deals often lead to last-minute heartaches. Consider the founder who gets all the way to the signing ceremony only to decide that, in fact, he just can’t part with his baby. Or the founder who just wants to boast about what his company is worth to his golf buddies—or worse, wants to gather some ideas from consulting-minded deal sponsors. Many deal sponsors prefer to work with a founder who would at least feel the pain of losing his retainer fee should the deal fall apart.

• Be Prepared For Surprises: Managers eager for a sale may be all too willing to say what you want to hear. They’re definitely on board with your ideas to expand distribution, they’d love to acquire a major rival, they look forward to the prospect of operating with leverage. Then the deal closes. Suddenly your ideas are seen as unworkable, the managers have zero respect for their major rival, and they have zero tolerance for risk. Be prepared for surprises, but also don’t be too rash in pressing for changes. As with most enterprises, maintaining good relationships with your management team, and maintaining their trust, trumps just about everything else. Also, sound business judgments, rather than blind spots, may actually inform their views. The best way to minimize such disagreements? Spend as much time as possible face to face with the managers and family members pre-closing; ideally you’ll find out before it’s too late whether management will prove resistant to necessary changes.

David Toll is editor of Buyouts magazine. Check out its website