At Brightstar Capital Partners, we invest in and partner with founder and family-owned businesses to help bring them to the next level. A vital element of our value-creation strategy is the broad industry expertise and leadership of our investment team and portfolio company partners.

Here, Brightstar Partner Matthew Allard provides his insight into the role mergers and acquisitions (M&A) can play in a family business and the various issues that arise during transactions. Matt was recently invited to speak to business owners and others at the Family Business Alliance about this exact topic. Matt has over 25 years in the financial services and investment industry, including extensive experience in M&A. He currently serves as Vice Chairman of QualTek and as a Board member of Texas Water Supply Company, both Brightstar portfolio companies.

How can M&A help a family business?

On a fundamental level, M&A can help a business grow by acquiring new divisions, entering new geographic markets, or providing new services. Divesting underperforming business units or subsidiaries that no longer fit into the strategy of the overall company can also help free up cash and redeploy capital into areas that are more beneficial.

In a successful family business, family members often have different objectives with regards to monetizing their stake in the company versus reinvesting into the business. Think about it this way: as we go through a third-generation ownership and assume three children in each generation, the business will go from 3 to 9 to 27 stakeholders pretty quickly. And those 27 people can have different objectives and different ways in which they want to be involved with the company. Some may want to receive current income, some may want to fully monetize, some may want to invest. M&A is a way to satisfy those different interests.

When is the right time for you to think about M&A?

Anytime that you’re thinking about significant change in strategy, growth or liquidity is probably the right time to think about M&A. M&A is a very meaningful event in the life cycle of a business and it needs to be thoughtfully considered as do various inflection points.

If your business is growing organically and you’re developing new products and services on a consistent basis, M&A may not be necessary. It also might not be the right strategy if you have a full family shareholder base that’s in complete agreement on what the overall objectives of the business are.

But in those situations where there are differing opinions or new strategies and objectives, M&A can be an important tool to accomplish those goals.

How does a business prepare itself when it’s considering M&A, and what are the key criteria?

One critical thing you need to do right off the bat is look in the mirror. It’s common to place a lot of focus on the due diligence aspect of M&A, but before you start researching other businesses you have to take a thoughtful look at your own strategy, product lines, growth targets etc. Taking an inward review of your business as you start the process is key to informing what type of M&A strategy will create the most value.

Owners also must realize once you make a decision to embark on an M&A strategy, whether you are buying or selling, it’s typically a 9 to 12-month process. You have to identify either buyers or sellers, prepare yourself to buy or sell, conduct legal, accounting and operational reviews and hire advisors. Financing is also extremely important – how are you going to pay for a new business? Is it going to be personal funds, bank loans, or third-party capital? What is the structure of the financing?

Often times you hire advisors for each of those segments. It’s essential to make sure those advisors understand your goals, and that you develop a good rapport with them.

What are key trends that we’re seeing?

M&A trends often do follow the general health of the economy. Notwithstanding tariffs, and other global issues, we’ve been in a 10-year plus positive economic cycle. And we’ve seen similar trends on the M&A side – larger deal volumes, and importantly, higher valuations.

Average EBITDA multiples for comparable businesses have increased 30-40% from their low point in 2009 and 2010. Many deals were getting done at 8x trailing EBITDA 10 years ago, many of those deals are going for north of 10x or 12x EBITDA today.

At this moment the trends are positive. Nobody has a crystal ball for what things will look like in 6 or 12 months or even a few years down the road. But, generally in a healthy economy and with a high level of business confidence, folks look to M&A as a growth strategy and value creator.

How can a Private Equity firm be a good partner when it comes to M & A?

By bringing in a private equity partner, for either a majority or minority transaction, a family can simultaneously stay involved and continue to own and operate the business, take a cash dividend for themselves and diversify into other areas and grow the business. Private equity can also help if some family members want to disengage from the business, but also want to ensure it will carry on and continue to grow.

The key is building trust with the right private equity firm. They will be your long-term partners and they’re going to have members who will be on your Board of Directors. They have valuable insights and opinions. Some you may agree with, some you may not. Hopefully the end result will be a partnership that creates significant value – where you grow the business to make it bigger, more profitable, and ultimately more valuable.

Let me give you an example: Take a middle market company whose principal investor is in his late 60s and whose focus, like many family business owners, is on his preferred cash coupon. A private equity firm, alongside the company’s management, can purchase his stake, bring new capital into business, and embark on an M&A strategy that grows the company’s EBITDA significantly over time. In addition, a good private equity firm can introduce management to new customers, assist with operational efficiencies and help employ best practices as the company grows.

Ultimately M&A can be a very effective strategy to take a business to the next level and private equity can play a very significant role in that, especially in the middle market. The key is finding the right partners and building trust with the firms and people helping you throughout the process.