How billionaire families plan the exit before they buy

Built on Chapter 11 of The Single Family Office by Richard C. Wilson. Full chapter text: FamilyOffices.com.

Wealthy families often say they hold forever. In practice, most direct deals end in a sale of some kind. The families that do best think about that sale before they buy.

How most direct deals end

The usual paths are a sale to a strategic buyer, a sale to another investor such as a private equity firm or family office, a management buyout, or an IPO. Most exits are sales to companies in the same market.

In some emerging markets, where public markets are thin, investors plan differently. They may get paid back from company earnings over time, or once the business passes a set level of revenue or profit.

Patience tends to pay

Research on private investments has long shown a lopsided spread. Many exits lose money, and only a small share return many times the money. Deals held longer tend to do better, and many need several years to work.

This is one place family money has an edge. A fund often works on a five to seven year clock. A family can wait for the right buyer.

Raising the value before a sale

These are the moves I have seen add the most value going into a sale:

Learn what buyers in that industry pay for. It might be market share, technology, revenue, or the team.
Show the company as a strategic asset, not just added revenue. Big buyers sometimes pay far more than revenue would suggest because of reach, technology, or keeping an asset away from rivals.
Clean up the balance sheet and the corporate structure well before the sale.
Get more than one serious buyer at the table. A buyer may pay extra to keep a competitor from getting the asset.

Structure can close a price gap

Skilled negotiation and structure can change the outcome a lot. I once spent years negotiating to buy an asset for one of our businesses. Patience brought the price down sharply, and the seller agreed to finance part of it at no interest.

I have also sat in long meetings between a family I represented and the owner of a sizable business. The family could not meet the multiple the owner wanted. Once we laid out the structure, the tax plan, and how the owner's remaining stake would be rewarded, everyone left ready to keep going.

Know when to sell

A well-run family business I admire has a simple view on this. A good time to sell is when an asset is worth more to someone else. Many of its sales were not failures. The business had simply stopped fitting its core.

I think that is a healthy way to see it. Selling is not giving up. It is moving capital to where it does the most good.

Write the exit memo on day one

One habit I recommend is a one-page exit memo written before closing. It names the three most likely buyers, the rough price range the family hopes for, and the earliest and latest year it expects to sell. It also lists what must be true about the business for that sale to happen.

Each year, the family reviews the memo against reality. If the likely buyers have changed or the business is drifting from what they want, the family can adjust early instead of finding out at the end.

What to take from this

Name the likely buyers and exit path before you invest.
Plan for a hold of several years or more.
Build strategic value, not only revenue.
Use structure, not only price, to close gaps with sellers.

This page is general information, not legal, tax, or investment advice. Speak with a qualified attorney and advisor before any sale or purchase.

Questions and answers

How do most direct investments exit? Usually through a sale to a company in the same market or to another investor.

How long should a family hold a direct deal? Many deals need several years to work, and longer holds tend to do better.

What raises a company's sale price? Strategic value, a clean balance sheet, and several interested buyers.

When should a family sell? When the business is worth more to someone else or no longer fits the family's core.