Firm Sells Itself To Let Patriarch Cash Out
By SIMONA COVEL
October 21, 2007
Like many parents, Anthony Carnevale didn’t want to be a burden on his children—although his situation was somewhat unusual. About five years ago, when he hit his early 60s, Mr. Carnevale knew it was time to start scaling back at work—and his wife was urging him to retire. But it wouldn’t be as easy as tendering his resignation. He owned a 26% share in his family’s benefits and money-management firm, Sentinel Benefits Group, Inc. Mr. Carnevale and his two sons had built the Wakefield, MA, company to 160 employees and $2.5 billion under management. Buying him out would be a multimillion-dollar proposition. “Yes, I would like to retire, and yes, I would like to be paid out,” says Mr. Carnevale, now 67. “But I’m a parent. As a parent, I didn’t want to put my family in that situation.”
Finding the ‘Medium Ground’
So in January Sentinel sold itself for an undisclosed sum to Focus Financial Partners LLC, a partnership that buys small money-management firms and lets them operate for the most part independently.
It’s an increasingly common arrangement for small financial firms, says Chip Roame, managing principal at Tiburon Strategic Advisors, a Tiburon, CA-based management-consulting firm for financial services companies. For the acquired companies, an arrangement like Sentinel’s is a “medium ground,” he says. Sellers may give up ownership of their company, but they get to stay at the helm. But before signing on the dotted line, these managers should consider what’s important to them—issues like keeping the name of the firm, maintaining prices for clients, and whether the acquirer plans to make any staff reductions. If something is important, “put it in the contract,” Mr. Roame says. “If not, good luck getting it done later.”
Liquidity Problems
Selling the family business wasn’t what the family thought would happen when Mr. Carnevale retired. Like many small companies, Sentinel found itself at a succession-planning crossroads. If the sons and the company’s two other nonfamily partners bought Mr. Carnevale’s shares outright, the company would have little cash left for growth. Liquidation “was becoming an impossible dream,” says John Carnevale, 44, Sentinel’s president and chief executive officer. “It was a constant concern that any deal would underpay my dad and overburden the partnership. Deep down, I didn’t think we had the money to make it work.” The Carnevales visited a bank, looking for a $5 million loan. The bank wouldn’t approve it. Even if it had, John Carnevale says, paying the loan back with interest would have strained the company and probably meant less income for the partners.
Over the years, John Carnevale had fielded inquiries from a handful of competitors who said they might be interested in buying the company. One by one, he revisited and dismissed the offers. In one case, he backed out after signing a letter of intent. “We were in the final meetings… I thought, ‘This doesn’t feel right,’” he says. He wanted to maintain control over his company’s operations, not move into a high-level sales role at a bigger firm. With that in mind, John Carnevale called Focus Financial’s founder, Rudy Adolf, whose inquiry he had walked away from in the past. Over the course of three meetings with Focus to better understand its model, Sentinel hashed out a deal.
The agreement: Focus owns 100% of Sentinel. Each of the five partners—the father, two sons, and the two nonfamily partners—was bought out for an undisclosed sum as well as Focus stock. A four-person Sentinel management team is now paid based on the company’s revenue as well as its growth.
