Monthly Archives: March 2015

Thinking about transitioning from your business?

 

The following is a guest blog written by David Raden, founding partner of the Capitus Group.  The Capitus Group specializes in working with business owners to help them through both the technical and intangible challenges involved during a transition or sale of a business.  In the case of a sale, the team works with owners to maximize valuation prior to any transaction.

Do you understand how to plan for this critical life change?

In a recent article, I provided an overview of a 4-Step Transition Plan for your business:

    • Discovery

  • Options Assessment

    • Strategy Selection
    • Plan Execution
    Based on an overwhelming and growing amount of compelling research and statistics, as well as my personal experience, it is my opinion that business owners need a Transition Plan. They need to plan whether or not they are currently interested in some form of transition, business exit or sale. There is an extraordinary level of risk in not addressing this process well in advance of any action!

 

According to the Mass Mutual American Family Business Survey 2007/2012:

  • By 2017, it is estimated that up to 40% of family business owners expect to retire. This trend will create a significant transition of business ownership in the US.
  • Less than half of business owners who expect to retire in the next five years have selected a successor.
  • Nearly a third of family business owners (31.4%) have no estate plan beyond a will.

At Capitus Group, the first step we use to develop a business Transition Plan is Discovery. This initial step addresses both personal and corporate goal delineation.

Many times, owners fail to examine how selling or transitioning out of their company can impact personal emotions along with issues related to identity, meaning and purpose for life after leaving their company. So, in this post, I will focus only on personal goal delineation and execution post transition.

 

Perspective and Tales from the Executive Trenches

Head Noise

The Successful Transition Planning Institute in 2011 stated that “Owners who do not create a transition plan for their lives after they leave their companies often fall into a void, become bored, depressed, get divorced and die prematurely.” As someone who has sold companies and tried unsuccessfully to retire twice, I think there is a lot of truth in this statement.

Jack Beauregard in his book, Finding Your new Owner-STPI Press 2011 believes that truly understanding what makes up your identity is a good place to start to plan for life after a transition. He suggests that business owners formally answer questions about yourself like some of the following:

  • What do I like about myself?
  • What gives my life meaning?
  • What are my shortcomings?
  • What good (& bad) things have other people said to me over the years?
  • What will people think about my value after I transition out of my company?
  • What do I like doing?
  • What am I good at both in and out of work?

I might add that asking spouses or significant others some of these questions about you may also give clarity.

These are just a few issues to consider regarding your new Post-Ownership identity.

The next step in this journey is to develop a Vision of your personal future. Mr. Beauregard offers some very revealing questions. Those answers are critical in a business owner’s personal goal delineation and execution in order to successfully transition to their “new life”.

I propose that working on this before an exit is extremely important. Examples can include your view of the future in the following areas:

  • Physical Health & Activity Levels
  • Intellectual Stimulation
  • Recreational/Creative Activity
  • Activity with Your Spouse
  • Activity with your Family
  • Physical Residence
  • Social Connections
  • Other Income Producing Work
  • Volunteer/Philanthropic Activity

Most business owners have dedicated their life’s work and poured their heart and soul into their companies. Most, hopefully, have taken the time to develop and execute a strategic business plan. However many surveys have shown that they haven’t spent much, if any, time formally developing a plan for life after their company.

One of my clients, after true introspection, realized that he didn’t really want to sell but rather just needed a little more time away from the day-to-day hassles. He wasn’t emotionally ready to leave. After formalizing his personal Vision, he pulled the plug on his divestiture path and began to re-organize his corporate organization chart. He made the decision to invest in his future by adding a management position and hiring a COO.

In conclusion, the most important first step of any transition plan process is (1) understanding ownership’s underlying emotions (& potentially fears) (2) development of clear personal goals and a vision for your future life and (3) willingness to formalize and implement a plan to get there. Be honest with yourself and get help from professional advisors experienced in business transition to help objectively guide you to successfully reach your goals.

David T. Raden

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.

 

 

3 Theories of Board Management in Privately Held Companies

During most meetings with clients and prospective clients, the topic of board meetings comes up. It happened this morning during a breakfast meeting.

It’s really rather interesting, what CEOs have to say about their philosophy of dealing with boards. They seem to fall into 3 camps.

This camp is probably the least controversial. These CEOs own their company outright. There’s no question who is in control. At most, they may have a handful of minor investors. These executives have the self-confidence and vision to know that a group of expert advisors can be a tremendous asset. Experts can offer perspective, a dissenting opinion to force the CEO to think through his/her decisions. Or, they can bring skills and expertise to the table that compliment and bolster the CEOs own skills. The end result is a better run and more successful company.

The second camp are those CEOs who run companies owned by either outside investors or a large contingent of internal and external shareholders. They generally own a sizeable chunk of the business but may not be majority owner. Their board is generally not hostile but not always made up of members with significant business skills or special expertise. They are mostly friends or family. These board members strive to over communicate. A significant percentage of their time is spent simply schmoozing board members, making phone calls and sending emails with updates. The end result is that by the time the quarterly board meetings roll around, there is little new to say. Meetings rarely seem to last very long.

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The final camp is really split into two sub camps. In either case, the CEO is a shareholder but the majority of the business is owned by outside interests and the environment is often confrontational or even caustic. Within this stressed environment, one type of CEO most often mirrors the CEO in Camp 2. He/she strives to communicate on a regular basis and spends massive amounts of time preparing and documenting facts and trends prior to board meetings. The second sub camp is run by CEOs who are total control freaks. They communicate with board members infrequently, if at all in between board meetings. During board meetings, they provide cursory information and present financials and other business details at only the highest level. They are not above something close to bullying board members to avoid protracted discussions. They believe the less the board knows, the better.

This last style has always fascinated me. I am surprised that any board would tolerate that commandeering style with limited presentations and receive even less information about the business, especially the financials.

In all cases, I often ask how long board meetings run. The usual answer is about 90 minutes to 4 hours.

When I hear that, I am envious. It reminds me of the Head Noise that I experienced years ago chairing a board that was comprised of partners from two private equity firms. These guys had radically different styles, philosophies and expectations as to what should be presented in a board meeting. The two firms often clashed during our meetings. One firm was filled with micro managers. The other firm was filled with big picture people. They drove each other crazy. Consequently, it made for a high-stress and exhausting preparation process and experience. We ran as organized and disciplined a meeting as possible. But often, I found myself in referee mode. Other times, I was the punching bag.

My management team and I devoted at least one solid week to preparation of board materials. Our board books would range from 75 pages to probably 200 pages on a regular basis. We’d rehearse, play devil’s advocate and have back up charts behind back up charts. We could have dozens and dozens of back up charts waiting in the wings to answer some question coming from some board members. Heaven forbid when we didn’t have an answer on the spot.

Consequently, our board meetings were all consuming. On a good day, they’d last 6 hours non-stop with no official breaks and an eat-while-you-work lunch. On a bad day, they’d easily run 8 hours and were known to go as long as 10. We were thankful for inflexible airline schedules. That hard stop was usually the one thing that would force the end of a meeting. People had to make flights.

In my opinion, there was virtually no value in these time consuming, demanding and high stress meetings. It forced us to spend our time in non-productive ways. The only possible benefit is that we did know our business inside and out.  If it’s important to know why someone was $500 overspent on T&E this month.

What is your experience with board meetings? Which style of board management is best? How long should meetings last?

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 most recent edition of a local business newspaper contained a full-page ad about how business owners can achieve a smooth ownership transition. The ad was placed by a bank and featured their expert who helps owners plan for transition.

There’s only one problem. This article, like a countless number of virtually identical articles before it don’t give the owner one single piece of advice about how to actually plan for and execute a transition.

Instead, every one of these articles recite the obvious. They list the options for what an owner can do with his/her business when it’s time to leave. They can…

  • Sell the business outright in either an auction or a private sale to another company or senior managers
  • Transition the company to next generation family members
  • Set up an employee ESOP
  • Close the business and liquidate the assets (most “experts” don’t list this option because they derive no benefit)When the owner wants to retire/quit/get out, these are the only options. However, many experts also count two additional options in this group which really aren’t options for the owner who wants to be done with the business. More and more, that’s what we at Capitus hear that owners want to do. So many owners state that they are tired and/or burnt out and they simply want out.The other two options often counted as exit strategies include:
  • Recapitalize the business. This is bank-speak for loading debt on the business and taking that cash out of the business. But, the owner still has to run the business, now with more stress to cover the bank debt payments.
  • Partner with private equity. For the owner who wants to sweep cash off the table and stay in the game or who has a longer time horizon for retirement (usually 5 years or so), this can be a great option. This is not, however, an option for the owner who wants to exit ASAP. PE guys will want the owner to stay as a key condition for doing the deal. This is also rarely an option for companies with under at least $1 million in EBITDA, usually more.

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Now, what the experts don’t tell you but should:

  • They actually won’t help you. 99% of bankers have zero, zip, zilch, nadda experience actually running companies. They’ve never been a CEO. Never scrapped and clawed to make payroll. Never laid awake at night worrying about cash flow or inventory levels. They don’t dig in and get their hands dirty working side-by-side with you to figure out how to prepare the business for sale.
  • Selling or transitioning a company is an immensely time-consuming and stressful job. In fact, it is a full-time job in and of itself. Since most small companies are strapped for manpower, this job falls almost solely on the owner.
  • Selling a company is entirely different from selling the products created by the company and this job requires a very different skill set.
  • It takes a village. So many owners want to be penny-wise and pound foolish by managing the entire process rather than invest in the use of experts. By doing so, they almost always leave money on the table. We’ve seen cases where the owner/seller could have reaped a 10 to 20 time ROI on the cost of hiring experts and realizing a higher valuation. Equally as important, someone needs to quarterback this group of experts to keep them all on the same track and timetable. Most owners don’t have the time or experience to do this.
  • It takes at least a year and, ideally, several years to properly prepare a company for sale or transition in order to maximize value or optimize the transition process.
  • There are experts who are ready, willing and able to literally roll up their sleeves and work side-by-side in the business on a regular basis –even a daily basis if necessary– to help a business owner achieve his/her goals. This also allows the owner to continue to focus on running and growing the core business. Too many times, the owner who is trying to sell his/her company is forced to take his/her eye off the ball at a critical time. They can easily end up seeing a business decline resulting in reduced value.Selling a company is a demanding and emotional process.

Owners deserve to take that exit or transition journey with trusted advisors who can work side-by-side with the owner, relieve the workload and stress and provide an objective sounding board.

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.