Going Private Still Best Option For Family Businesses

July 14, 2008

Family business owners can be a downright difficult lot, especially when it comes to selling their own companies.

After what can often amount to years spent building a company and untold amounts of “sweat equity,” who can blame founding shareholders when it comes to concerns about the future direction and growth prospects of their business enterprises? It can be a nerve-wracking process handing over the corporate helm to new owners, especially a prospective private equity buyer.

A new report by Ernst & Young, though, might just be the panacea to help allay some family owner anxieties about private equity-owned businesses. The study by the financial advisory services firm found that businesses owned by financial buyers outperform their publicly-traded counterparts and demonstrated that the overall worth of portfolio companies, or their enterprise value, was double that of publicly-held enterprises.

The Ernst & Young report, which analyzed the global buyout industry’s 100 largest exits last year around the world, should also please family business owners to know that the Ebitda of same financial buyer-owned companies increased by more than 33% over that of public companies. It should also offer a vote of confidence for business owners worried about the long-term growth prospects of businesses sold to financial sponsors. Secondary buyouts or the selling of a company owned by one private equity firm to another buyout group, resulted in an enterprise value increase of 27%.

As Ernst & Young principal John Vester puts it, private equity firms have become serial value creators.

Interestingly enough, the biggest driver of value creation for private equity-backed companies came through increases in revenue derived from organic business initiatives rather than via acquisitions. Employee growth, too, increased at the businesses owned by financial acquirers compared with public companies, which pretty much flies in the face of the conventional wisdom that private equity firms slash jobs to cut costs.

LBO firms, of course, do restructure operations, which can result in layoffs. But, corporations also trim their employee headcounts to balance costs. One look at Wall Street’s publicly traded investment banks proves that notion.

So, when the nation’s largest mortgage lenders, Fannie Mae and Freddie Mac, are on the verge of being bailed out and American enterprises wrestle with economic uncertainty and rising commodity prices, a private equity buyout might just be the most attractive ownership transition avenue available for middle market family business owners.

Kelly Holman
kelly.holman@sourcemedia.com