Probate/Trust A Timely Business Transition or Transfer

My close call came when a dying entrepreneur wanted to transition his business to his drug using oldest son. His heart was in the right place, but the business decision would have been fatal to the company.

The key employees quickly stepped forward to tell the owner that it would be the end of their employment if this happened.

The son’s behaviors had been onerous – there was no other way to keep the business in the family. It sold quickly, to the benefit of all involved (especially the oldest son).

When a family business suffers the loss of its key entrepreneur, change will happen quickly. If succession planning was done wisely and well the transition can go smoothly and risk is greatly reduced.

Too often, death or disability of the owner is unplanned and human nature and the harsh reality of commerce throw a business into chaos as family members disagree over the critical decisions that must be made for the company to survive.

Success lies in guiding your family business clients to see the importance of timeliness and best practices. Even the best businesses can’t avoid the injury of severe management dysfunction as siblings battle over management and money. Failure is hard to avoid when emotions and disagreement steer a business in the wrong direction.

We counsel our clients to work with a professional family business consultant (yes, they do exist) and recommend a book that advises wise business transition, by Cary Tutelman;

The Balance Point: New ways business owners can use boards (Famille Press, 2008). http://www.famillepress.com/

For those businesses that need to be sold, we recommend time specific marketing, which is an industry specific approach to transferring a business at a fair price in a rapid manner (we offer as part of our profiling and research service).

Timing is important to a business that has lost the glue of its entrepreneur. Having someone on hand to guide the business into the next generation or transfer will greatly lower the risk of failure.

Comment here with your stories of how business transition/transfer have been executed well or poorly.

Your experiences can help others from learning the hard way.

A Most Unproductive Search

About three years ago a CFO talked to me about his company’s acquisition search process. He confided in me that his firm’s president had traveled a great deal to research potential targets with very poor results.

Based on the CFO’s recommendation, the President met with me to discuss our process and tools.

He quickly told me that I could not possibly add to what he knew about his industry or his database for potential candidates and he showed no appreciation for our criteria measurement tools, or the concept of large scale contact and database building & management that our company provides to clients just like his.

He preferred his one-at-a-time trips to visit target companies and sent me on my way.

Two years after our meeting, I checked in again with my CFO contact and asked the direct question, “has your company completed a transaction since we started this discussion (elapsed total time of five years)”? His answer was “no”.

What this company has spent investigating acquisition candidates, one at a time, nationally and internationally over the past five years is many times what they could have ever spent with a professional for profiling and researching target candidates, compiled in an organized fashion to ensure a selection of well chosen candidates.

This is another case of a board hiring an outside president because they recognized the need to grow their company by acquisition.

Companies like this sometimes feel compelled to make transactions that don’t fit.

That’s where data feeding the KPMG study stating that only 17% of acquisitions created a substantial return add value comes from.

Know the acquisition history of the president you hire if you need to have acquisitions done. If you are working with someone with a small history, it is necessary make up for what’s missing. Acquisitions are a complex, costly, and risky process.

Have something to add? Your own business wit?

Got a different point of view, want to play devil’s advocate, or just think we’re all wet? Post your experiences or examples.

Mike Tikkanen
www.PackardAcquisitions.com
952-542-9318

Proper Financial Planning Before the Sale

“Proper financial planning before an equity event pays off.” 

 

 

 

 

In the high-stakes environment of a sale—evaluating offers, trying to close, overseeing the interests of the company and employees—business owners may overlook the impact of deal terms on their own finances, and thus risk leaving very large sums of money on the table.  Our experience has shown that integrating potential deal terms, key tax and estate planning strategies, and the owner’s personal financial goals can allow a business owner and his team of advisors to tailor the transaction most advantageously.

 

In a recent situation, we were able to assist an owner and his deal team in answering three key questions:

1. What is the minimum offer they could accept?
2. How should he invest the proceeds?
3. What is the best strategy for transferring some of the proceeds to the next generation?

 

Understanding the minimum amount he could accept to meet his lifetime spending needs, while still transferring some wealth, was a key to entering negotiations.  Second, the owner had a misconception that he could invest the proceeds conservatively and meet his lifetime spending.  In reality, sustaining spending over the longer term with an all-bond portfolio was surprisingly difficult because of inflation and taxes.  And third, our analytical framework helped the owner and his estate planning attorney quantify the impact on the owner’s lifetime spending by gifting private shares before the transaction or utilizing a GRAT (Grantor Retained Annuity Trust) strategy to transfer wealth to his children.

 

In summary, the sale of a business often allows an owner’s spending, legacy and philanthropic goals to be met, and the likelihood of meeting these goals is much higher if strategies to meet them are mapped out well in advance of the transaction date.

 

Craig W. Kleis

Phone:    (612) 758-5041

Email:      craig.kleis@bernstein.com

www.bernstein.com.  

 

Have something to add?

Got a different point of view, want to play devil’s advocate, or just think we’re all wet? Post your experiences or examples. 

 

 

 

Beyond Financial Due Diligence, By Cary Tutelman

Beyond Financial Due Diligence

By Cary Tutelman

When companies are considering acquiring another company, they do extensive due diligence. They analyze balance sheets, income statements, debt history, customer lists, physical assets and equipment, the product and/or service offerings, etc. This is done to make sure that the buyer knows what they are buying.

However, there is another aspect of due diligence that is typically not done. I call it the non-financial audit. This is an analysis of the organization: its strengths and weaknesses, biggest needs, strength of management, culture, values, work environment and impact of a sale on customers and employees.

Mark’s Story

I was hired by a company to do a non-financial audit. My client was interested in going beyond the financials and getting an analysis of the organization. Here are the highlights of what I found:

- Mark, the owner/entrepreneur/President, maintained all the relationships with the key customers. The customers didn’t know anyone else in the organization except a few customer care employees who they dealt with exclusively by phone. The key customers told me that they trusted the President and if he left, they had no reason to continue buying from the company because their loyalty was to the President, not the company.

 

Mark told me that he was only willing to remain with the company for 30 days after the sale. Then he was retiring. He would not accept any consulting contract beyond the 30 days. My conclusions: the financial health of the company was at stake when the Mark left and the new owners should expect significant drops in revenue right away.

- Mark was a typical entrepreneur with the typical command and control style of management. He made all the critical decisions and everyone else did what they were told. The managers were weak, untrained, underdeveloped, not really involved in management matters and took no initiative to improve the company. The employees were complacent and set in their ways. My conclusions: The new owners couldn’t rely on management for guidance or leadership and it would take a massive effort to change a system and the culture that had been build over 30 years.

My recommendation to the client: Don’t buy this company. Although it looked good financially and the market and products were sound, the overall risk was very high and the probability of failure was too great. My client bought a different company.

Non-financial audits are critical to the due diligence process and provide the buyer with a vivid picture of what “life” would be like if they completed the purchase. Yes, some buyers have told me that they can muscle through any organizational situation as long as the company is financially strong. I think this overconfidence is a mistake. A savvy buyer wants and weighs all pertinent information about a possible acquisition. That way, they will make a well-considered decision.

Cary has been a business consultant and the owner of CJT Company since 1981. He works with closely held and family owned businesses in transition. He guides them through the complicated web of ownership, management, board and family issues that transition brings.

Cary is a co-author of The Balance Point: New Ways Business Owners Can Use Boards, a book written specifically for owners of closely held and family businesses. It clarifies what owners do, what boards do and when they are needed and how owners, boards and managers can work together. Cary is a co-founder of The Board School, which helps business owners understand how to use boards in running and transitioning their company.

Cary J. Tutelman CJT Company Phone: 952-941-8864
Email: cary@cjtco.com
http://www.tutelmanconsulting.com

Have something to add?

Got a different point of view, want to play devil’s advocate, or just think we’re all wet? Post your experiences or examples.

Family M & A Issues

 

 

or, Drugs In The Workplace

 

 

Bob almost gave his entire business and estate to a cocaine addict. 

 

Blood is thicker than water, and this can make us thick in our thinking.  The good news is that dad changed his mind and did not leave his business to his son, mostly because the key employees had the chance to express their views. 

 

Dad was forced to deal with the grim reality that his son had stolen large sums of money from him when dad let the son operate the company during his hospitalization.  Dad also discovered that the smart and loyal long time employees actually hated the drug using son and would quit if he were the CEO/president.  Dad put the company up for sale and died a short time after it sold. 

 

The company was sold to a high bidder, and the owners wife was set for life after the sale. The son was allowed a significant sum to start his own business.  It all worked out in the end.

 

Close call.

 Brought to you by;                                         www.packardacquisitions.com

Two Ways Of Managing Acquisition

   

 

 

Better Prospecting = Better Deals or,

Nightmare on your street:

Aggressive second generation owners determined to grow by acquisition.  A five member internal team that includes two mid thirties family members is chosen to tackle the project.

 The search begins by calling brokers to bring deals which they sort through with a set of criteria that they have determined to be right for the business.  Quickly they have data to sift through on forty or fifty candidates and poor tools for comparison or valuation based on their corporate criteria. 

 The data becomes overwhelming and not much help in decision making.  Much time is spent traveling and investigating.  Team members don’t agree and have no way to accurately compare candidates or make a decision on what should be done.

 If a decision to move ahead is made under these circumstances, the 80/20 rule may well apply: 80% of acquisitions don’t add value.  Over 50% of acquisitions destroy value.

 If the transaction is finalized, it is still critical that audits (financial and non financial) due diligence and integration be handled professionally.  With a corporate team missing significant parts of the acquisition puzzle, it is not hard to understand how companies fail at acquisition.

 A Better Way: 

Aggressive second generation owners determined to grow by acquisition using best practices. 

 They begin by building a smart team that includes the talents they know they will need.  It may include outside advisors.  

Next they determine precisely what fits (challenging assumptions) and create a weighted averages criteria model that measures candidates and allows comparison in ranked order.  Then they, 

* Create a plan for building and contacting a large number of specifically chosen candidates with a well crafted contact letter,

 * Build a system for compiling and managing large quantities of information from the many companies that will be reviewed over the coming months,

 * Plan for audits (financial and non financial), due diligence, integration, transition, and monitoring of all aspects of the transaction.

 Having the tools, systems, and protocols in place to discover and research the best candidates, manage the information, put the right people and procedures in place in a timely fashion (acquisitions are time sensitive) makes all the difference in the world.     

 

 

 

Have something to add? 

Got a different point of view, want to play devil’s advocate, or just think we’re all wet? Post your experiences or examples.                                                                                                                                                                                   Brought to you by;                                         www.packardacquisitions.com