Monthly Archives: January 2015

Penny Wise and Pound Foolish

Throughout my travels and meetings with business owners and professionals who provide invaluable business services for privately-held company owners, I hear more and more tales of business woes experienced during business exits and transitions.

Perhaps it’s just easier to talk about but the stories with difficult or unsatisfactory endings. The scenarios that I hear seem to be trending away from amazing success stories with wealth-building outcomes. Few include fantastic stories of retirement and post-company ownership life experiences.

Instead, I hear more about the stories involving missed or lost opportunities and outcomes that the affected business owner never envisioned.

Such is the case of one small business owner who thought he’d hit the jack pot. Right up until he found out he didn’t.

In this case, the small business owner thought he could—and importantly—should handle the entire transaction himself. After all, by doing so, he knew he would be able to save substantial fees that he would have otherwise paid to retain critical advisors to guide and protect his interests throughout the transaction process.   And why should he spend that money? As he saw it, it was an easy, clean deal.

The seller was, in fact, very fortunate. He was able to find a cash buyer who was willing to pay him $1 million for the business. As this situation was reported to me, diligence was relatively easy and completed in short order. Essentially, all he had to do was hand over the keys and move on.

This business owner was, as so many private company owners are, burned out and ready to exit. He thought he’d won the lottery by getting the deal done with limited hassle and no professional fees to speak of. Plus, he closed the deal in a matter of weeks, not months.

It wasn’t until several months later that he learned the unfortunate news. Apparently, he could have doubled his cash on the sale of the business.

14808615_s (2)

As it turns out, much earlier in his business life, he had taken out an insurance policy on himself that had a cash value of $1 million. The buyer later found it in the files, did the research on its value and then cashed it in. The buyer then owned the business for free.

The seller effectively sold his company for 50% of its cash value. A simple mistake that would have easily been avoided with professional support guiding the diligence and exit process.

As is most often the case, it just doesn’t pay to be penny wise and pound foolish.

Note: If you have an interesting and/or educational CEO story of Head Noise caliber, write to me at cbishop@capitusgroup.com. I’d love to speak with you and share your story in my Head Noise blog. You can tell your story either on the record or, without attribution.

Cameron Bishop is a partner with The Capitus Group. The firm provides comprehensive business value enhancement and transition strategy solutions. Partners and Advisory Directors comprise an experienced team of business professionals who have successfully owned, run, grown and sold companies. Capitus utilizes proven value enhancement and risk reduction techniques to enable superior transition options.

 

 

The Value of A Trusted Advisor: A Case Study

Several years ago, an industry business broker gave me one of those calls. He had a potential acquisition for me to consider. We were in the market for strategic tuck-in deals so he immediately had my attention.

As is standard industry practice, he then emailed a management teaser to me for more information. He followed-up a couple of days later to see what I thought.

My curiosity was peaked enough by the executive summary that I asked to see the formal Offering Memorandum on the business.

After negotiating a non-disclosure agreement which included unusually stringent non-compete and no-poach language, we signed and received the Offering Document.

The presentation was limited but contained just enough compelling information that it made sense to learn more. Timing was also in our favor in this case. I was going to be in the home town of the seller and the broker within two weeks so we agreed to meet in person. The owner would be selling his business and retiring. As almost all owners do, he wanted his team of 20 to be in good hands with a new owner.

The meeting went well for all involved. We felt comfortable with each other. He agreed to move forward and we decided to proceed with diligence and, hopefully, a formal offer.

The business owner had no experience buying or selling companies. He’d built his company from scratch over 20 years. It had been his life pretty much 24X7 up to that point. He indicated that it was time to retire. He and his wife wanted to travel and he had a charitable interest he wanted to focus on.

As we began diligence, we were immediately met with unintended barriers. From the beginning, the financials provided were incomplete and, in many cases didn’t track logically. This only served to raise some red flags and cause us to want to dig deeper. Our request to see other commonly reviewed diligence information was flatly denied.

We pursued a normal course of due diligence. Disciplined and thorough and within the normal bounds of diligence review. Our process involved a review of all business disciplines and each department director on our team oversaw their area of diligence. The seller rebelled against this approach.

The owner rapidly began to protest our “invasive” process and resisted providing reasonable access to information that was necessary to complete the deal and finalize a bid. The broker seemed powerless and was viewed by the seller as a biased advisor.

15843032_s (2)

After multiple meetings and conference calls, the barriers to information continued to build. A final heart-to-heart conference call to explain what we needed and why—with assurances that we were sincere in our willingness to buy the business didn’t assuage his fears. We even committed to keep his employees on staff and a divisional office in his city. His lack of trust in a very standard process caused him to add additional roadblocks.

We were finally forced to walk away from the deal.

We were willing to make him a very generous offer that was at or above market. For us, the strategic fit with our business was compelling. And, few other potential buyers would see the business the same way.

He missed his chance.

Out of curiosity, I recently checked on the status of the business. Over five years later, he still hasn’t sold his company. Sale multiples in the industry have declined since we attempted to make the acquisition. His business is worth less and he still hasn’t achieved his stated personal and lifestyle objective to retire, travel with his wife and focus on his stated second career.

Price Waterhouse Cooper research reflects the trend. Something like 80% of businesses listed for sale will never sell. If only my seller had invested in an experienced business advisor to guide him through the process. He would have likely beaten some pretty stiff odds.

Note: If you have an interesting and/or educational CEO story of Head Noise caliber, write to me at cbishop@capitusgroup.com. I’d love to speak with you and share your story in my Head Noise blog. You can tell your story either on the record or, without attribution.

Cameron Bishop is a partner with The Capitus Group. The firm provides comprehensive business value enhancement and transition strategy solutions. Partners and Advisory Directors comprise an experienced team of business professionals who have successfully owned, run, grown and sold companies. Capitus utilizes proven value enhancement and risk reduction techniques to enable superior transition options.

 

 

They didn’t teach me this in college

The recent and tragic killing spree in the offices of Charlie Hebdo magazine in Paris this past week represent far more than an attack on freedom of the press.

It is certainly arguable that every company owner and CEO could lose sleep from the vulnerability that most offices have. Even those buildings with lobby security would most likely be powerless to defend against the type of onslaught that happened in the magazine’s office in Paris.

In fact, for me, this tragic event brings back vivid memories of a building lockdown event that I and all of those in our company at that time experienced.

shutterstock_225465475 (3)--blog

Our office gun scare occurred several years ago and just days after one of those senseless killings at an east coast elementary school. Of course everyone nationwide was on high alert and felt high anxiety from the sense of vulnerability that these situations cause.

In our case, what was in fact a false alarm of a gun sighting, turned into a total multi-story building lockdown and a full-force presence from what appeared to be every department of our local police force. I would estimate that easily 20 police vehicles surrounded the building. Officers of all sizes and shapes piled out of their cars, strapped on vests, helmets and tactical gear. Including a full armament of shot guns, rifles and AK 47s.

Our office manager received an employee tip and astutely and quickly figured out that the situation was a false alarm. Before knowing that, however, we made certain that all of the doors accessing our office space were locked. But, that couldn’t address fire stairwells that were accessible inside our offices. We couldn’t be certain what the entry point would be. And, we worked to get everyone into outside offices with doors that locked.

Assuming (and hoping) then, that anyone would enter through the main lobby entrance of our space, I positioned myself there to greet them, hopefully, before they swarmed our office. Our office manager was gutsy enough to jump on the elevator to ride to the ground floor to explain the situation and the false alarm.

When the elevator door opened on the first floor, she was met by more officers than she could count. Every one of them with drawn weapons.

While this played out downstairs, I waited in our lobby, trying to act calm. Not doing a real good job of it, though.   And, with cell phone in hand in case of a quick call. Then, suddenly, I noticed the barrel of a rifle slowly protrude into view along the outside wall leading into our lobby.

Needless to say, what part of me wasn’t already frozen, froze. In an instant, a young officer jumped into full view and squared up on me. Her AK 47 assault rifle pointed square at the middle of my forehead.

There was clearly a look of fear in her eyes which did not leave me with a great degree of confidence, to say the least.

As calmly as I could, I slowly raised my hands and told her that I was one of the good guys. At that, she relaxed enough that the rifle was no longer pointed at my head. I was then able to explain the situation which was confirmed and resolved within a couple of minutes after that.

Thank heavens that our situation was a false alarm. Even so, I had plenty of head noise for a few nights after that with visions of gun barrels and red laser dots dancing on my head.

Did we handle this situation correctly? Perhaps. Perhaps partially. Maybe we got it right. In any case, they didn’t teach me how to deal with a gun scare and a fully armed tactical assault team in school.

Have you had any similar experience? How would you have handled this scenario? Should executives be taking steps to better secure their offices and facilities?

Note: If you have an interesting and/or educational CEO story of Head Noise caliber, write to me at cbishop@capitusgroup.com. I’d love to speak with you and share your story in my Head Noise blog. You can tell your story either on the record or, without attribution.

Cameron Bishop is a partner with The Capitus Group. The firm provides comprehensive business value enhancement and transition strategy solutions. Partners and Advisory Directors comprise an experienced team of business professionals who have successfully owned, run, grown and sold companies. Capitus utilizes proven value enhancement and risk reduction techniques to enable superior transition options.

 

 

The Hangover

It seems a fitting time of year to write about hangovers. Perhaps a few are still nursing the remains of their holiday hangover as I write this blog.

In this case, however, I am not referring to a hangover of the over-indulgence kind. In this instance, I am referring to the form of hangover that affects many company owners after they sell their company and the check has been wired to the bank account.

Over the years, I’ve been involved in acquiring companies from dozens of small company owners. Many of them, it seems, placed little to no thought what so ever into what they would do after the sale. What life would be like. How they would spend their time. Whether they would continue to work in or for their former company and its new owner and, if so how that would go.

I’ll share a number of post-sale experiences I’ve witnessed over the course of this blog but one in particular comes to mind today that gave me, as the buyer, significant Head Noise. And, clearly the seller had his own share of Head Noise to deal with as well.

shutterstock_149964170 (2)We acquired a company from a very successful and highly creative entrepreneur. As so many entrepreneurs and private company owners do, he built his company from nothing. He ate, slept and breathed it 24/7/365 for years. He built a business with a strong brand and true value. And, it was continuing to grow. He had also attracted and nurtured a very creative team of employees.

But, he was tired. He had other ideas and other things he wanted to do with life or so he said during diligence meetings. So, he decided to sell. The business was a great strategic fit for our company. A deal was struck and the owner was paid a handsome price– well into seven figures. He was rich. Struggles were over. Or, so he thought.

The seller wanted to stay involved in the business as part of the deal but not be saddled with day-to-day responsibility. As buyers, we accommodated him because we liked the idea of knowledge transfer and his ability to nurture key customer relationships through the one-year transition. To reduce his workload, we promoted his number 2 manager to senior manager and went about the business of integrating and standardizing operations and reporting.

Very soon, this entrepreneur began to struggle. He soon realized that he no longer called the daily shots. Someone he had hired who had previously reported to him was now, effectively, his boss. Normal course sign-offs were required to spend money. There were budgets, GAAP accounting, strategic planning and other “corporate stuff” that many private company owners aren’t used to.

The pressure and changes mounted along with, I believe, a deep sense of loss and a new type of pressure involving life changes and the future. The owner became disruptive to the staff which created morale problems. Then suddenly, he reached a breaking point.

Very early one Monday morning, I received an urgent call from the new manager in this regional office. He called to tell me that the former owner had apparently come into the office over the weekend with chains and padlocks. The chains had been threaded through the handles of most file cabinets and locked.

Thus, holding the filing cabinets hostage for the better part of the day.

Difficult negotiations followed. Relationships were damaged and, as owners, we were forced to part ways with the former owner through a negotiated exit from some terms of the asset purchase agreement.

I am certain this business owner didn’t intend for things to end that way. But they did. I would imagine that there were deep regrets as well. And, I believe this series of events played out as they did because so many business owners who sell their company are solely focused on how tired they are at the moment they decide to sell. Then, they focus their entire effort on trying to complete the sale.

They place little to no focus on mental or emotional preparation for life after they sell, not to mention financial, tax or estate planning.

They end up with a post-sale hangover that no amount of headache medicine can cure after the fact. But, all could have been avoided with proper advance planning and support from relevant experts.

Note: If you have an interesting and/or educational CEO story of Head Noise caliber, write to me at cbishop@capitusgroup.com. I’d love to speak with you and share your story in my Head Noise blog. You can tell your story either on the record or, without attribution.

Cameron Bishop is a partner with The Capitus Group. The firm provides comprehensive business value enhancement and transition strategy solutions. Partners and Advisory Directors comprise an experienced team of business professionals who have successfully owned, run, grown and sold companies. Capitus utilizes proven value enhancement and risk reduction techniques to enable superior transition options.

Head Noise with a Terrorist Chaser

When I first began developing the idea for this column, I never considered covering any relevant current topics or news-related events.

With all the controversy surrounding the Sony/North Korea situation, I couldn’t resist addressing the subject in this column. So, here goes.

“Obama Faults Sony Decision to Pull Film”.   “Obama Faults Pulling Movie”.   Front page headlines from the Wall Street Journal and the local city paper this past weekend. Sunday morning, the Sony story was the lead on Meet the Press and every other morning news program. Then again, on the evening news.

For insult to injury, Saturday Night Live did a pretty hard hitting parody with Mike Myers as Dr. Evil. Sony took some pretty hard shots in that sketch. Still, it was pretty funny.

Let’s take inventory of just some of the events that, it’s pretty safe to say, are causing Sony’s CEO some brain-throbbing caliber Head Noise.

  • Hackers break into Sony’s computer system—bad enough in and of itself.
  • Hackers then spread gossip emails that create major headlines and coverage.
  • At least one senior executive is caught in what most construed as a racially derogatory comment about the President of the U.S. Never, ever a good thing.
  • Much coverage is given to Sony exec’s request for the news media to avoid publishing any of the gossip contained in private emails which caused more coverage than would have otherwise been given to the salacious and gossipy emails
  • Word leaks that employee records were compromised. Those records include lots of personal information, SSNs, etc.
  • Lawyers, supposedly representing employees, file at least 2 class action law suits against the company.
  • Computer security experts readily weigh-in with their opinions to anyone who will listen about how weak Sony’s security really is, in their expert opinion.
  • Employees attempt to cash-in or seek revenge with stories of what they did and didn’t do while the systems were down. The news media always loves a good disgruntled employee story.
  • The CEO takes major heat for not communicating often enough or in enough detail with employees. Hmmm, think he might have been just a tad bit busy trying to figure out what kind of crisis he had on his hands before he said something that could become inaccurate and subject him to even greater criticism and, probably, legal liability?
  • Sony USA’s Japanese parent company publicly back pedals from the entire situation to distance itself. My guess is that they were doing anything but backpedaling with the CEO in private. What’s the word in Japanese for reaming?
  • Then, it gets worse. Sony’s entire distribution channel for the movie publicly bails out on them. And, they all do it in a matter of hours.
  • Sony execs announce that they will not release the movie.
  • No one in the Hollywood establishment, besides George Clooney, steps up to support Sony’s position and cyber terrorist experience.
  • First amendment advocates immediately begin to cry foul and hammer Sony for giving in. Ironically, first amendment precedent is being challenged even though the movie is, at best, a grade B comedy.
  • The U.S. President slams Sony for not talking to him before making the decision not to release the movie.
  • Sony’s CEO is forced to tangle with a U.S. President and publicly dispute the President’s claim that no one at Sony talked to him by stating that Sony execs were in contact with a number of staff members in the White House. Did he win or lose on this issue?
  • Sony “clarifies” their original statement about plans for the movie to say that they will release it, they are just not sure where, when or how.
  • Sony has to go on the offensive—probably an extremely carefully crafted legal tactic– and characterizes the hacker attack as a terrorist act.
  • President Obama—in just an equally carefully crafted political tactic– characterizes the hack attack as cyber vandalism.
  • Sony is out maybe $100 million or more.  Negotiations and, probably legal battles, will follow with the insurance carrier that will drag out for the next 2 years.

Wow, that’s a lot of serious stuff crammed into a very short timeline. Compound all of that with the number of internal legal staff and outside counsel that are whispering in the CEO’s ear as to the degree of liability they potentially have on all fronts. Worse, how much more liability they will have if they do release the movie and something bad does happen or at least that could by some stretch by some lawyer or media hack be attributed to the movie’s release.

The precedent, ramifications, liabilities, freedom of the press issues, employee morale impact, security threats and less than harmonious relations with the White House are way, way more than enough to give a guy a blockbuster size case of insomnia via Head Noise.shutterstock_139305425--blog

Would you have handled anything differently during the course of these events? Was the CEO lax in his oversight of company computer system security or was he fed bad information by his own team about how secure the system was? Can you imagine how much of his time he is spending on managing upward with the head honchos at Sony Japan? Finally, what does he need to do to rebuild employee trust and morale beside give them a free subscription to an identity theft and credit protection service?

 If you have an interesting and/or educational CEO story of Head Noise caliber, write to me at cbishop@capitusgroup.com. I’d love to speak with you and share your story in my Head Noise blog. You can tell your story either on the record or, without attribution

Cameron Bishop is a partner with The Capitus Group. The firm provides comprehensive business value enhancement and transition strategy solutions. Partners and Advisory Directors comprise an experienced team of business professionals who have successfully owned, run, grown and sold companies. Capitus utilizes proven value enhancement and risk reduction techniques to enable superior transition options.