Taking Back Your Business
In late 2003, Judith M. von Seldeneck walked into her boss’s office with a bold proposition: sell me back my old firm for a lot less than you paid for it five years ago, she told him, and I’ll be on my way.
Her boss agreed to the proposal.
The economy had just gone through a rough patch, and AccuStaff, the company that had acquired her firm, Diversified Search, was struggling, she said. A few months after that discussion, she was again the sole owner of Diversified Search, the executive recruiting firm she started in 1974 and runs today. While she declined to discuss prices, Ms. von Seldeneck said she bought her firm back for less than half of what AccuStaff, then a large staffing firm that is now part of Adecco, had paid her for it.
“We bought it in the spring of 2004 just as the economy was about to get really good,” she said. “We realized how great it was to be free.”
Ms. von Seldeneck was far from alone in wanting to buy back her firm. Entrepreneurs who have seen the companies they founded, built and sold hurt by some combination of bad management and a bad economy often get the urge to take back control.
This is one of those times. There has been an increased interest in entrepreneurs buying back their companies over the last three years — just as there was during past downturns. The reasons usually seem straightforward: the companies are worth less now, other investments for the money you made offer little return, and for many people the desire to be back running a company — “being relevant” as one adviser put it — is stronger than ever.
“You don’t tend to see as many management buyouts when the market is growing and the business is booming,” said Bruce Cameron, president and chief executive of Berkshire Capital, a boutique mergers and acquisitions firm. “You do see them in times when firms have made acquisitions and they’re trying to retrench.”
Ms. von Seldeneck said AccuStaff had been on an acquisition spree in the five years after it bought Diversified Search, but her firm was an obvious candidate to be spun off. It was the only retained search firm — meaning it worked on behalf of a company, not a prospective employee, to fill a job — and that mismatch, she felt, gave her the opportunity get out cheaply. Her timing was great, and the firm has now been profitable for 37 years.
But price is only one of the reasons entrepreneurs are lured back to buying their old firms. And focusing just on the value of the deal carries plenty of risks.
Stephen G. Salley, the head of the family business center at GenSpring Family Offices, a wealth management firm, said founders should think more deeply before giving it another go. The reasons are that they tend to romanticize what it was like to run their company — forgetting all the late nights and stress of personally securing loans — and feel that in bad economic times they need to swoop in and save what they built. He said his goal was to dissuade clients from pursuing a buyback.
“If you were looking at it rationally, you’d say it doesn’t matter that this was my business,” Mr. Salley said. “The question is, Is this where I’d put $40 million today and what could I do with the same dollar amount elsewhere? Repurchasing the family business is as much an emotional decision as it is an economic one.”
Over the last few years, Mr. Salley said, he has had many clients come to him to discuss offers to buy back their former businesses, and he is proud that so far he has persuaded every one not to do it.
“Your family sold for a reason and very seldom was it just for the money,” he said he tells them. “You made the decision to get out and now you’re essentially saying you want to remarry an ex-wife 10 years after the fact.”
In most cases, business owners are not like Ms. von Seldeneck, who remained working at her firm. They sold and left, and the company a former owner wants to buy back, even if it carries his name, is fundamentally different.
John Dyett, a co-founder of Salem Partners, a Los Angeles-based investment bank and wealth management firm, said: “Oftentimes entrepreneurs can mistake luck for brains. It’s hard to replicate.”
The two things entrepreneurs often forget, Mr. Dyett said, are how important it is to have the proper financing and how difficult it is to build a company many years after that initial spark has passed and they have gotten used to a more relaxed lifestyle.
The deals that work best involve not just buying the company back cheaply, which is crucial, but also getting the right type of financing so the company is not burdened by debt, and having a leader who still has the drive to run a company.
In 1997, John Q. Adams Sr. had the opportunity to buy back the assets of his former drug company, Adams Laboratories. Six years earlier he had sold it to Medeva, a British drug manufacturer, for $100 million. He negotiated to buy the manufacturing plant and rehire the management team and the drug developers for a mere $3.5 million.
“Everything we needed was there,” Mr. Adams said. “It was an incredible deal, a deal we couldn’t pass up.”
But Mr. Adams did something different with the firm he renamed Adams Respiratory Therapeutics. In the original incarnation of the company, he had made his fortune selling a class of drugs that did not need approval from the Food and Drug Administration. He had focused on marketing medication that contained guaifenesin, the active ingredient in Robitussin cough syrup.
With his buyback, he wanted to try something different: put guaifenesin in long-acting form, apply for F.D.A. approval and corner the market since his old rivals would have to apply as well to compete. “This was a huge bet that we could get regulatory approval,” said Mr. Adams, 75.
It also was a shift for someone who had spent the previous years building a luxury ranch and conference center outside Dallas and generally living a nice life. But he said he missed the competition. “It was the challenge of being the first one to get a patent on guaifenesin,” he said.
It helped that he had paid only $3.5 million for the business, but another advantage was how he acquired it. He structured the transaction so that he bought only the assets of his former company. Doing a deal this way meant he was buying something with tax advantages — he could reduce the value of the assets over time, called depreciation — but he was also getting his company back without any potential but hidden legal problems that could come from buying it as a stock transaction.
“If you buy the stock, you’re buying everything, including, say, a sexual harassment claim, or a product liability,” said Jere Doyle, wealth strategist at Bank of New York Mellon. “If you buy the assets of a company, you’re just buying what you want and not all those liabilities.”
Initially, Mr. Adams thought he would need only $8 million and 18 months to get regulatory approval for the long-acting drug. But it ended up taking six years and $82 million.
In 2002, the company got F.D.A. approval for the long-acting drug, now known as Mucinex, and the next year it went public. The initial public offering raised $135 million for the company, and on the first day the shares rose in value by 50 percent.
“What drove me more than any one thing was the fear of failure,” Mr. Adams said. “I knew that if I managed the company well, the financial rewards would be automatic.”
One thing that surely helped him was essentially buying back the same management team from the old Adams Laboratories. When the new owners, Medeva, decided to move its operations to Rochester, many employees did not want to leave its base at the time, in sunny, warm Fort Worth. The stroke of luck gave Mr. Adams a team that had been successful before and knew how to work together — so successfully that the new company was itself subsequently acquired.
Next to having sufficient financing, Mr. Dyett said, keeping a management team in place increases the chances for a buyback to be successful. When Ms. von Seldeneck bought back her recruiting firm, she benefited from having lost only one critical employee in the acquisition, her chief financial officer. But he returned once Diversified was independent again.
Still, there are downsides even to successful bids to buy back a family business. All the same estate planning and succession issues come right back.
Yet from an estate tax perspective, putting some portion of the firm into a trust for heirs makes sense. Having a definite purchase price establishes a set value for those shares that the Internal Revenue Service will not be able to challenge down the road. The question, though, is how much.
“As a practical matter, I don’t think a lot of people are going to want to go out there and buy the business in trust for their kids and then go out there every day” and work the long hours again, Mr. Doyle said. “It’s great from a tax perspective, but it’s not realistic. They’ll only do it if the kids want to be involved in the business.”
The bigger concern is usually the current employees. Mr. Cameron of Berkshire Capital said many of the most successful buybacks were done with a group of employees getting a stake in the firm.
“While investment management companies have bought small firms over the years because they have good returns, we joke with our clients that you never really own one because they’re so dependent on the people, and they come and go every day,” Mr. Cameron said.
But it is hard to discount the strength of the emotional connection to a family firm. Sometimes it is the past that weighs most heavily on business owners’ decisions.
Alexandra Lebenthal said she struggled when her family’s financial firm, Lebenthal & Company, ceased to exist in 2005.
In that year, Merrill Lynch decided to mothball the family name after it paid $400 million for Advest, which had acquired the Lebenthal firm in 2001 and had kept the name, familiar to generations of New Yorkers for its radio advertisements for municipal bonds.
Now it was gone and, feeling a keen sense of loss, Ms. Lebenthal at first tried to do something else. She took a trip to Bali for 10 days. She had lunch and went shopping, but realized most of her closest friends had jobs and could not join her. After eight weeks, she realized she wanted to get back into the family business.
“For every entrepreneur who sells a business there is a period of mourning,” Ms. Lebenthal said. “I don’t care how big the check is.”
So in 2006, she restarted her family firm. But Ms. Lebenthal could not legally call the firm by her last name, a brand that stretched back to 1925 when her grandparents started the company. She opted for Alexandra & James, her first name and her father’s.
She remained intent on buying back her name. In October 2007, on her third try, she succeeded, paying $1,000 to be able to call her firm Lebenthal & Company again.
By that point, Alexandra & James had been operating as a stand-alone business and was doing well.
What to do? She decided to use Lebenthal for the firm’s capital markets business — including the old municipal bond business — and reserve Alexandra & James for the wealth management arm.
And she has no regrets. “I remember someone at Merrill telling me that Lebenthal is a good name, but Merrill Lynch is a great one,” she said. “I just believed there would come a time when I would get that name back.”