MUSGRAVE: Buyers in for the long haul care about firm culture

January 5, 2018

MusgraveThe headlines for 2017 made it clear it was a banner year. Nearly every financial metric showed charts going up and to the right. Stock markets performed better than any year since the Great Recession. Private equity echoed that positive trend, with the number of deals on track to beat 2016 and purchase prices for middle-market companies continuing an unrelenting ascent. In other words, it’s a great time to sell a business.

Purchase prices are typically the first agenda item a company owner wants to talk about. I’ve been lucky to chat with quite a few Indiana business owners this year, and questions about how to obtain a high purchase price almost always surface quickly. It doesn’t bother me—it’s completely normal that this is priority consideration. You and your team worked hard to build the company; why wouldn’t you be looking to monetize that work?

But the conversations I love happen after that first question. The second, third and fourth questions typically center around the employees, the company culture and the future. Good owners understand the challenge of finding a buyer who values the company culture, believes in the future opportunity, and offers a competitive purchase price—not simply a buyer who only offers the highest valuation.

This is an important difference. Financial buyers look very attractive on a first date. They frequently write bigger checks and promise speed in closing a deal. But oftentimes, these buyers are looking at your company as a set of numbers on a spreadsheet rather than as an organization of people working hard to create a business bigger than themselves. They’ll look to see where they can optimize operations, streamline processes, and cut waste, all in order to quickly resell your company. Culture, and employees, can be seen as secondary.

And why should you, the owner, care? You might not (and that’s OK, too). After all, the company is sold, the check cashed and you’re enjoying your retirement or second career.

However, sellers should care about culture as it directly affects the company’s value when they go to sell. Sure, you can have a profitable company with a toxic culture, but for how long?

You’ve built the company over decades, fostering its culture and employees. Balancing the check size and the buyer’s character with the impact on the company’s legacy is important. The good news is that sellers can win on both fronts. There are buyers out there who can be excellent stewards of your business and legacy and offer attractive valuations. Those buyers commonly favor long-term decision making over the short term.

The investment time horizon is what defines a long-term-hold buyer from a financial buyer. Financial buyers look to resell a company in three to five years in order to satisfy obligations to outside investors, where long-term-hold buyers continually reinvest in a company over multiple market cycles, typically five to 10-plus years. This is why long-term-hold buyers understand the bottom-line value of good culture. They know that decisions made in years two and three of an investment affect how the company performs in years nine and 10.

So, what do long-term-hold buyers look for in the ethos of a company? At LDI, we’re long-term buyers ourselves, and we look for three core items: management teams who practice servant leadership, employees who buy in to the company mission statement, and clear incentives that are aligned for all levels of employees. It’s about looking at the company as a whole, not just the financial slices.•


Musgrave is a corporate development associate at LDI Ltd.

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