About a year ago now, I flew to a major city to have breakfast with a client and friend of many years who is second generation chairman, CEO, and lead family member of a very successful, third-generation family business.  We have worked for this client for about 30 years.

Prior to that breakfast, my client and I had had two or three significant discussions about ownership and management transitions and shareholder liquidity.  At breakfast, he had important things on his mind about shareholder liquidity for himself and his immediate family, for his second generation siblings, and for other significant shareholders of this successful private company. He was leaving the country that day for some time and faced an important board meeting upon his return.  He wanted to talk, and so we did over a lingering breakfast early on a Sunday morning in a city distant from Memphis.

I had been speaking with his chief internal adviser (and client and friend) about similar things for some time.  But things hadn’t quite clicked at this point for all the parties.   The chairman wanted to talk privately.

What I was recommending was a significant stock repurchase from family members and other significant owners, a special dividend, or a combination of the two strategies for private company liquidity. Because of my familiarity with the company over many years, I knew that the transaction I was suggesting could be financed by the company with reasonable risk.

About mid-year 2019, the company engaged in a substantial share repurchase and special dividend combination transaction.  I should add that the transaction occurred at Mercer Capital’s appraised price, as had all previous transactions in the company’s stock for many years (to the tune of perhaps $200 million or more over the years).  The special dividend benefited all shareholders pro rata.  Combined with the stock repurchase plan, which was available to family and non-family shareholders, the special dividend dampened the dilution  of the buyback for family shareholders who sold shares,  and provided a one-time liquidity event for all shareholders. Existing shareholders and qualifying employees were simultaneously offered the opportunity to purchase shares.  As I said, it was a significant transaction.

Lest anyone think I’m suggesting I did all this, I did not.  The company’s extremely capable financial staff planned the details of the transaction, checked the boxes for any tax-related issues, arranged its financing, and executed its many details flawlessly.  My role was more on the conceptual side and in helping the parties see the near-term and long-term benefits of such a transaction.

Yesterday, I received an email from my friend, literally out of the blue.  The subject of the email was: when is our next turning point breakfast?

The short text touched my heart. I’ve been working with company clients for going on 40 years (ouch!).  I’ve done a great deal of litigation work over the years, but the satisfaction of that cannot compare with helping private company clients achieve their goals and objectives for management and ownership succession, and for liquidity for owners now, before anyone has to sell a company.

The text was very short.

We did everything you said to do at breakfast at the [hotel] —  it changed our lives — when can we do that again? — Name

Well, Name, we can do that as soon as we can make our schedules align.

I have to say, that email yesterday morning , was the most gratifying thank you I have ever received from a client.

If you are at a turning point in your business life, perhaps it is time for a turning point breakfast — or lunch or meeting or dinner.

Give me a call (901-685-2120) or email (mercerc@mercercapital.com) if you are looking at a turning point in your business life and want to talk to someone who might be able to provide perspective for you.  That conversation might actually be a turning point for you, your family, and your other owners.

Until next time, be well!

Chris

The issue of a premium for an S corporation at the enterprise level has been tried in a tax case, and the conclusion is none.

In Kress v. United States (James F. Kress and Julie Ann Kress v. U.S., Case No. 16-C-795, U.S. District Court, E.D. Wisconsin, March 25, 2019). The Kress’ filed suit in Federal District Court (Eastern District of Wisconsin) for a refund after paying taxes on gifts of minority positions in a family-owned company.  The original appraiser tax-affected the earnings of the S corporation in appraisals filed as of December 31, 2006, 2007, and 2008.  The court concluded that fair market value was as filed with the exception of a very modest decrease in the original appraiser’s discounts for lack of marketability (DLOMs).

Background on GBP

The company was GBP (Green Bay Packaging Inc.), a family-owned S corporation with headquarters in Green Bay, Wisconsin. The company experienced substantial growth after its founding in 1933 by George Kress. A current description of the company, consistent with information in the Kress decision, follows.

Green Bay Packaging Inc. is a privately owned, diversified paper and packaging manufacturer. Founded in 1933, this Green Bay WI based company has over 3,400 employees and 32 manufacturing locations, operating in 15 states that serve the corrugated container, folding carton, and coated label markets.

Little actual financial data is provided in the decision, but GBP is a large, family-owned business. Facts provided include:

• Although GBP has the size to be a public company, it has remained a family-owned business as envisioned by its founder.
• About 90% of the shares are held by members of the Kress family (a Kress descendant is the current CEO), with the remaining 10% owned by employees and directors.
• The company paid annual dividends (distributions) ranging from $15.6 million to $74.5 million per year between 1990 and 2009. While historical profitability information is not available, the distribution history suggests that the company has been profitable.
• Net sales increased during the period 2002 to 2008.

Hoovers provides the following (current) information, along with a sales estimate of $1.3 billion:

Green Bay Packaging is the other Green Bay packers’ enterprise. The diversified yet integrated paperboard packaging manufacturer operates through 30 locations. In addition to corrugated containers, the company makes pressure-sensitive label stock, folding cartons, recycled container board, white and kraft linerboards, and lumber products. Its Fiber Resources division in Arkansas manages more than 210,000 acres of company-owned timberland and produces lumber used by contractors like woodworkingquestions.com, woodchips, recycled paper, and wood fuel. Green Bay Packaging also offers fiber procurement, wastepaper brokerage, and paper-slitting services. (emphasis added)

The court’s decision states that the company’s balance sheet is strong. The company apparently owns some 210 thousand acres of timberland, which would be a substantial asset. GBP also has certain considerable non-operating assets including:

• Hanging Valley Investments (assets ranging from $65 – $77 million in the 2006 to 2008 time frame).
• Group life insurance policies with cash surrender values ranging from $142 million to $158 million during this relevant period and $86 million to $111 million net of corresponding liabilities.
• Two private aircraft, which on average, were used about 50% for Kress family use and about 50% for business travel.

GBP was a substantial company at the time of the gifts in 2006, 2007, and 2008. We have no information regarding what portion of the company the gifts represented, or how many shares were outstanding, so we cannot extrapolate from the minority values to an implied equity value.

The Gifts and the IRS Response

Plaintiffs James F. Kress and Julie Ann Kress gifted minority shares of GBP to their children and grandchildren at year-end 2006, 2007, and 2008. They each filed gift tax returns for tax years 2007, 2008 and 2009 basing the fair market value of the gifted shares on appraisals prepared in the ordinary course of business for the company and its shareholders. Based on these appraisals, plaintiffs each paid $1.2 million in taxes on the gifted shares, for a combined total tax of $2.4 million. We will examine the appraised values below.

The IRS challenged the gifting valuations in late 2010. Nearly four years later, in August 2014, the IRS sent Statutory Notices of Deficiency to the plaintiffs based on per share values about double those of the original appraisals (see below). Plaintiffs paid (in addition to taxes already paid) a total of $2.2 million in gift tax deficiencies and accrued interest in December 2014. It is nice to have liquidity!

Plaintiffs then filed amended gift tax returns for the relevant years seeking a refund for the additional taxes and interest. With no response from the IRS, Plaintiffs initiated the lawsuit in Federal District Court to recover the gift tax and interest they were assessed. A trial on the matter was held on August 3-4, 2017.

The Appraisers

The first appraiser was John Emory of Emory & Co. LLC (since 1999) and formerly of Robert W. Baird & Co. I first met John in 1987 at an American Society of Appraisers conference in St. Thomas. He is a very experienced appraiser, and was the originator of the first pre-IPO studies. Emory had prepared annual valuation reports for GBP since 1999, and his appraisals were used by the plaintiffs for their gifts in 2006, 2007, and 2008.

The Emory appraisals had been prepared in the ordinary course of business for many years. They were relied upon both by shareholders like the plaintiffs as well as the company itself.

The next “appraiser” was the Internal Revenue Service, where someone apparently provided the numbers that were used in establishing the statutory deficiency amounts. The court’s decision provides no name.

The third appraiser was Francis X. Burns of Global Economics Group. He was retained by the IRS to provide its independent appraisal at trial. As will be seen, while his conclusions were a good deal higher than those of Emory (and Czaplinski below), they were substantially lower than the conclusions of the unknown IRS appraiser. The IRS went into court already giving up a substantial portion of their collected gift taxes and interest.

The fourth appraiser was hired by the plaintiffs, apparently to shore up an IRS criticism of the Emory appraisals. Nancy Czaplinski from Duff & Phelps also provided an expert report and testimony at trial. Emory’s report had been criticized because he employed only the market approach and did not use an income approach method directly. Czaplinski used both methods. It is not clear from the decision, but it is likely that Czaplinski was not informed regarding the conclusions in the Emory reports prior to her providing her conclusions to counsel for plaintiffs.

While the court did not agree with all aspects of the work of any of the appraisers, the appraisers were treated with respect in the opinion based on my review. That was refreshing.

The Court’s Approach

The court named all the appraisers, and began with an analysis of the Burns appraisals (for the IRS). In the end, after a thoughtful review, the court did not rely on the Burns appraisals in reaching its conclusion.

After reviewing the essential elements of the Burns appraisals, the court provided a similar analysis of the Emory appraisals. The court was impressed with Emory’s appraisals, and appeared to be influenced by the fact that the appraisals were done in the ordinary course of business for GBP and its shareholders. The court surely noticed that the IRS must have accepted the appraisals in the past since Emory had been providing these appraisals for many years. Other Kress family members had undoubtedly engaged in gifting transactions in prior years.

The court then reviewed the Czaplinski appraisal. While the court was light on criticisms of the Czaplinski appraisals, it preferred the methodologies and approaches in the Emory appraisals.

Interestingly, the entire analysis in the decision was conducted on a per share basis, so there was virtually no information about the actual size or performance or market capitalization of GBP in the opinion. We deal with the cards that are dealt.

Summary of the Court’s Discussion

As I read the court’s decision, there were ten items that were important in all three appraisals, and an additional item that was important in the December 31, 2008 appraisal. Readers will remember the Great Recession of 2008. It was important to the court that the appraisers consider the impact of the recession on the outlook for 2009 and beyond in their appraisals for the December 31, 2008 date.

In the interest of time and space, we will focus on the appraisals as of December 31, 2008 in the following discussion. The summaries of the other appraisals are provided without comment at the end of this post. The December 31, 2008 summary follows. We deal with the eleven items that were discussed or implied in the subsections below.

There are six columns above. The first provides the issue summary statements. The next four columns show the court’s reporting regarding the eleven items found in the 2008 appraisal based on its review of the reports of the appraisers. Note that there is no detail whatsoever for the rationale underlying the IRS conclusion for the Statements of Deficiency. The final column provides the court’s conclusion. To the extent that items need to be discussed together, we will do so.

Items 1 and 2: The Market Approach and the Income Approach

All the appraisers employed the market approach in the appraisals as of December 31, 2008 (and at the other dates). They looked at the same basic pool of potential guideline companies but used different companies and different numbers of companies in their respective appraisals.

The court was concerned that the use of only two comparable companies in the Burns report was inadequate to capture the dynamics of valuation. In fact, Burns used the same two guideline companies for all three appraisals, and the court felt that this selective use did not capture the impact of the 2008 recession on valuation (Item 7). He weighted the market approach at 60% and the income approach at 40% in all three appraisals.

Czaplinski used four comparable companies in her 2008 appraisal and weighted the market approach 14% (same in her other appraisals). Her income approach was weighted at 86%.

Emory used six guideline companies in the 2008 appraisal. While he used the market approach only, the court was impressed that “he incorporated concepts of the income approach into his overall analysis.” This comment was apparently addressing the IRS criticism that the Emory appraisals did not employ the income approach.

Items 3 and 4: The S-Corp Premium/Treatment

The case gets interesting at this point, and many readers and commentators will talk about its implications.

At the enterprise level, both Burns and Emory tax-affected GBP’s S corporation earnings as if it were a C corporation. This is notable for at least two reasons:

• Emory’s appraisals were prepared a decade or so ago. That was the treatment advocated by many appraisers at the time (and still), including me.  See Chapter 10 in Business Valuation: An Integrated Theory, Second Edition, (Peabody Publishing, 2007) and the first edition published in 2004. The economic effect of treatment in the Emory appraisals was that there was no differential in value for GBP because of its S corporation status.
• The Burns appraisals also tax-affected GBP’s earnings as if it were a C corporation. This is significant because the IRS’ position in recent years has been that pass-through entity earnings (like S corporations) should not be tax-affected because they do not pay corporate level of taxes. Never mind that they do distribute sufficient earnings to their holders so they can pay their pass-through taxes. There was therefore no differential in GBP’s value because of tax-affecting.

The Czaplinski report avoided the S corp valuation differential issue by using pre-tax multiples (without tax-affecting, of course). Since the Czaplinski report used pre-tax multiples, there was no differential in value because of the company’s S corporation status.

The Burns report, however, did apply an S corporation premium to his capitalized earnings value of GBP. The decision reports neither the model used in the Burns report nor the amount of the premium.  Let me speculate. The premium was likely based on the SEAM Model (see page 35 of linked material), published by Dan Van Vleet, who was also at Duff & Phelps at the time (like Czaplinski). I speculate this because it is the best known model of its kind.

If my speculation is correct, based on tax rates at the time and my understanding of the SEAM Model, it was likely in the range of 15% – 18% of equity value (100%), or a pretty hefty premium in the valuation. Nevertheless, Burns testified to the use of a specific S corporation premium at trial.

Again, if my speculation is correct, the facts that Czaplinski and Van Vleet were both from Duff & Phelps and that Czaplinki did not employ the SEAM Model likely provided for some colorful cross-examination for Czaplinki. If so, she seems to have survived well based on the court’s review.

The court accepted the tax-affected treatment of earnings of both Burns and Emory, and noted that Czaplinski’s treatment had dealt with the issue satisfactorily. The court did not accept the S corporation premium in the Burns Report.

What do these conclusions regarding tax-affecting and no S corporation premium mean to appraisers and taxpayers?

• The court accepted tax-affecting of S corporation income on an as-if C corporation basis in appraising 100% of the equity of an S corporation. This is good news for those who have long believed that an S corporation, at the level of the enterprise, is worth no more than an otherwise identical C corporation. It should pour water on the IRS flame of arguing that there should be no tax-affecting “because pass-through entities do not pay corporate level taxes.”
• The court did not accept the specific S corporation premium advanced by Burns. This is a second recognition that there is no value differential between S and C corporations that are otherwise identical. After all, the election of S corporation status is a virtually costless event. The fact that the court considered testimony regarding an S corporation premium model and did not agree with its use is a very significant aspect of this case.

Kress v. U.S. will be quoted by many attorneys and appraisers as standing for the appropriateness of tax-affecting of pass-through entities and for the elimination of a specific premium in value for S corporation status.

Item 5: Non-Operating Assets

The treatment of non-operating assets by the appraisers is less than clear from the decision. What we know is the following regarding the substantial non-operating assets in the appraisals:

• The Burns report treated the non-operating assets at “almost full value.” This treatment was disregarded by the court.
• The Emory report did not provide for separate treatment of non-operating assets, noting that it considered them in the book value of the business. Since book value was not provided or weighted in the Emory report (or any of the others), it would appear that the court was satisfied that the non-operating assets had little value, since minority shareholders could not gain access to their value until the company was sold. That could be a long time given the desire of the Kress family to maintain family control over the company.
• The Czaplinski report provided for some discounting of the non-operating assets in the marketable minority valuation, and then allowed for further discounting through the marketability discount. Details of her treatment were not provided in the opinion.

Since the court sided primarily with the overall thrust of the Emory report, we see little guidance for future appraisals in the treatment of non-operating assets in this decision.

Item 6: Management Interviews

The court noted that Burns had not visited with management, but had attended a deposition of GBP’s CFO. The court was impressed that Emory had interviewed management in the course of developing his appraisals, and had done so at the time, asking them about the outlook for the future each year. It is not clear from the decision whether Czaplinski interviewed management.

Item 7: Consideration of the 2008 Recession (in the December 31, 2008 Appraisal)

The Burns report was criticized for employing a mechanical methodology that, over the three years in question, did not account for changes in the markets (and values) brought about by the Great Recession of 2008. Specifically, it did not consider the future impact in the year-end 2008 appraisal of the recession’s impact on expectations and value at that date.

Both the Emory and Czaplinski reports were noted as having employed methods that did consider this landmark event and its potential impact on GBP’s value.

Item 8: Impact of Family Transfer Restrictions on Value

The court’s opinion in Kress provided more than four pages of discussion on the question of whether the Family Transfer Restriction in GBP’s Bylaws should have been considered in the determination of the discount for lack of marketability. This is a Section 2703(a) issue. Ultimately, the court found that the plaintiffs had not met their burden of proof to show that the restrictions were not a device to diminish the value of transferred assets, failing to pass one of the three prongs of the established test on this issue.

Neither the Burns report nor the Czaplinski report considered family restrictions in their determinations of marketability discounts. The Emory report considered family restrictions in a “small amount” in its overall marketability discount determination.

In spite of the lengthy treatment, the court found that the issue was not a big one. In the final analysis, the court deducted 3% points from the marketability discounts in the Emory reports as its conclusions for these discounts.

Item 9: Marketable Minority Value per Share

With this background, we can look at the various value indications before and after marketability discounts. First, we look at the actual or implied marketable minority values of the appraisers. For the December 31, 2008 appraisals, the Emory report concluded a marketable minority value of $30.00 per share. Czaplinski concluded that the marketable minority value was similar, at $31.33 per share. The Burns Report’s marketable minority value was 50% higher than Emory’s conclusion, at $45.10 per share.

The Court concluded that marketable minority value was $30.00 per share, as found in the Emory Report.  That was an affirmation of the work done by John Emory more than a decade ago at the time the gifts were made.

Item 10: Marketability Discounts

The Emory report concluded that the marketability discount should be 28% for the December 31, 2008 appraisal (where previously, it had been 30%). The discount in the Czaplinski report was 20%. The marketability discount in the Burns report (for the IRS) was 11.2%.

There were general comments regarding the type of evidence that was relied upon by the appraisers (restricted stock studies and pre-IPO studies that were not named, consideration of the costs of an initial public offering, etc.). Apparently, none of the appraisers used quantitative methods  in developing their marketability discounts. The court criticized the cost of going public analysis in the Burns report because of the low likelihood of GBP going public.

Based on the issue regarding family transfer restrictions, the court adjusted the marketability discounts in each of Emory’s three appraisals by 3% – a small amount.  Emory concluded a 28% marketability discount for 2008. The court’s conclusion was 25%.

Item 11: Conclusions of Fair Market Value per Share

At this point, we can look at the entire picture from the figure above. We replicate a part of the chart to make observation a bit easier.

It is now possible to see the range of values in Kress. The plaintiffs filed their original gift tax returns based on a fair market value of $21.60 per share for the appraisal rendered December 31, 2008 (Emory). The IRS argued, years later (2014), for a value of $50.85 per share – a huge differential. The plaintiffs paid the implied extra taxes and interest and filed in Federal District Court for a refund.

The expert retained by the IRS, Francis Burns, was apparently not comfortable with the original figure advanced by the IRS of $50.85 per share. The Burns report concluded that the 2008 valuation should be $40.05 per share, or more than 21% lower. Plaintiffs went into court knowing that they would receive a substantial refund based on that difference.

Plaintiffs retained Nancy Czaplinski of Duff & Phelps to provide a second opinion in support of the opinions of Emory. Her year-end 2008 conclusion of $25.06 per share, although higher than the Emory conclusion of $21.60 per share, was substantially lower than the Burns conclusion of $40.05 per share.

The court went through the analysis as outlined, noting the treatment of the experts on the items above. In the final analysis, the court adopted the conclusions of John Emory with the sole exception that it lowered the marketability discount from 28% to 25% (and a corresponding 3% in the prior two appraisals).

The court’s concluded fair market value was $22.50 per share, only 4.2% higher than Emory’s conclusion of $21.60 per share.

Based on this review of Kress, it is clear that Emory appraisals were considered as credible and timely rendered. Kress marks a virtually complete valuation victory for the taxpayer. It also marks a threshold in the exhausting controversy over tax-affecting tax pass-through entities and applying artificial S corporation premiums when appraising S corporations (or other pass-through entities).

Kress will be an important reference for all gift and estate tax appraisals that are in the current pipeline where the IRS is arguing for no tax affecting of S corporation earnings and for a premium in the valuation of S corporations relative to otherwise identical C corporations.

When all is said and done, a great deal more will be written about Kress than we have shared today, and it will be discussed at conferences of attorneys, accountants and business appraisers. Some will want to focus on the family attribution aspect of the case, but, as the court made clear, this is a small issue in the broad scheme of things.

Summary of Other Appraisal Dates

For information, below is a summary of the appraisals as of December 31, 2006 and December 31, 2007.

Be well until next time,

Chris

Fixed price buy-sell agreements are seemingly simple from a valuation viewpoint.  All the owners and a company have to do are agree on a value for the business and record that value in their buy-sell agreement.  Most of the time, the owners do agree on a fixed price when agreements are initially signed.

The problem lies in the fact, that in most cases, the initial fixed prices are seldom updated.

Time passes and value changes.  Time passes and owner situations change.  Time passes and it just gets more difficult to sit down and talk about value to update fixed price agreements.  And so, the owners don’t do it.

Time passes and there is a trigger event.  If my experience is indicative, the initial fixed price has never been updated.  With changing value, there is likely a large discrepancy between the initial fixed price and the current “fair market value” of the business.

If the current value is higher than the original fixed price, the company and remaining shareholders would achieve a windfall with the bargain purchase from a triggered shareholder.  However, if the current value is lower than the original fixed price, the selling shareholder would achieve a windfall.

What’s a windfall among friends whose interests have diverged?  It is likely expensive litigation unless there is a solution to the problem in the buy-sell agreement.  If you think that is a good idea, read this post.

A Bad Solution

We’ve seen a number of fixed price buy-sell agreements with a provision calling for an appraisal process if the fixed price is more than a certain period old (like two years or more).  Those processes are generally about 150 words in length, plus or minus, and came from a template somewhere.

The problem is that they do not describe workable valuation processes, so when they bust, litigation and a contentious valuation process ensue.  A bad solution, despite seeming okay when an agreement is signed, is not a good idea.

A Better Solution

As I’ve said in my books, blog posts, and speeches, the best solution for “fixing” a fixed price buy-sell agreement is to get rid of the fixed price and replace it with a valuation process.  I recommend the Single Appraiser, Select Now and Value Now process that is described in Buy-Sell Agreements for Closely Held and Family Business Owners.  After an initial appraisal, the selected appraiser provides reappraisals each year to update the price.  Everyone knows what will happen and has an evolving knowledge about the expected buy-sell agreement price.

The next best solution is to add a single appraiser valuation process as the “fix” in the event that a fixed price is out of date when a trigger event occurs.

That process is called the Single Appraiser, Select Now and Value Later valuation process.  The appraiser is selected and written into the fixed price agreement.  If the buy-sell agreement is triggered and the fixed price is outdated, the selected appraiser is called upon to provide the (binding) valuation for purposes of the agreement.

In both of the single appraiser processes noted above, the standard of value, level of value, and all other aspects of defining an appraisal are detailed in the agreements.  Then, there is little likelihood for problems with these matters.

Conclusion and Coming

Fixed price buy-sell agreement pricing mechanisms are not good and seldom work.  The problems with these agreements can be “fixed” if the parties focus on the future and take steps today to solve future problems before they occur.

To help solve these problems, I have drafted a new book on buy-sell agreements.  It will be of great interest to attorneys because, in addition to providing descriptions of valuation processes like mentioned above, there is template language for drafting the valuation portions of buy-sell agreements.

If you would like to be on the list to receive notification upon this new book’s publication, just send me an email and we’ll let you know the minute the book is available.  The working title is Buy-Sell Agreement Handbook for Attorneys.  It will, of course, be of interest to business appraisers and business owners, as well.

Let us know:

mercerc@mercercapital.com

If you would like me to review a buy-sell agreement from business and valuation perspectives, call me (901-685-2120) or email me and we can work out the details.

It is time to fix busted fixed price buy-sell agreements.  So let’s work together to do just that.

In the meantime, be well!

Chris

My topic at the annual conference of the Institute for Extraordinary Banking in Minneapolis (September 10-12) relates to the softer side of what I normally talk about.  Roxanne Emmerich of the Institute and the Emmerich Group interviews me as we warm up for the conference.

“Succession” and “Transition” Planning – More Than Notebooks on Your Shelf is the topic I will be discussing.  It will be interesting.

If you can’t attend the conference, then take a few minutes to listen to this interview, which touches on a number of the issues I’ll cover.

A good deal of what I’ll be talking about will be from my book Unlocking Private Company Wealth.  It is available here.

Until next time, be well!

Chris

New Book on Buy-Sell Agreements

The drafting of a new book on buy-sell agreements is almost complete.  The working title is Buy-Sell Agreement Handbook for Attorneys.  I am not an attorney.  As always, I write based on my experience as a businessman and valuation guy.

My previous books on buy-sell agreements have been written from the perspective of business owners as in the title of the most recent book: Buy-Sell Agreements for Closely Held and Family Business Owners.  Attorneys were, thankfully, one of the bigger markets for this book.

Many times, however, attorneys have said to me, in effect, “Chris, we like the ideas in your book.  Do you have some template language to help us implement them?”

Until now, unfortunately, the answer was a “Not yet.”  Now, this new book will contain detailed template language for several valuation processes for buy-sell agreements. I’m excited to get it to the point of making it available to attorneys, business appraisers, financial planners and, yes, business owners.

If you want to be notified when Buy-Sell Agreement Handbook for Attorneys becomes available, give me a quick email and we will put you on the list at  mercerc@mercercapital.com.

Do business owners “know” the values of their businesses? And do they need help if and when they think about selling, either unexpectedly or as part of a plan?

Questions at a Seminar

Let me set the stage for a most interesting and important question raised to me during a recent seminar at which I was a speaker.  The audience was made up of closely held and family business owners.  The panelists included an investment banker, a business attorney, a financial planner and myself as the token representative of the business appraisal world.

The panel was asked by the moderator to address each of the following questions:

• Why are business owners you’re working with considering selling their business?
• How do business owners go about gaining a real understanding of the value of their business?
• When should a business owner consider or at least begin thinking about selling?
• What are the two or three things a business owner should do first once they decide they want to seriously pursue the possible sale of their business?

I addressed the question of the value of businesses during the seminar and contributed responses to other questions.  I prefaced my comments about value in that session:

What you as a business owner think about the value of your business is irrelevant.

• If you think you have a number in your head, that’s what you have, an irrelevant number in your head.  It cannot help you in any way [see below].
• If you want to make gifts to your family or to a charity, to establish an ESOP, or to engage in transactions with your buy-sell agreement, the only opinion of value that will matter is mine or that of another qualified and experienced business appraiser.
• If you want to sell your business, the only opinions of value that matter are those of buyers of capacity.

So what you think about the value of your business doesn’t matter.

The Most Important Question Asked

There was an active Q&A session following our comments and I was asked a number of questions directly.  The most memorable question from a business owner went like this:

Chris, business owners are pretty smart, and we know more about our businesses than anyone else.  We know about valuation multiples because we talk to our friends who have sold their businesses.

And I have a walk-away number in my mind for my business.  That number is, literally, what I would walk away with after paying all deal expenses and taxes and everything else.  So if someone comes to me and offers me my walk-away number, why shouldn’t I take it?  Isn’t all this stuff you guys have been talking about this morning just superfluous?

Wow!  What a question!  It is, after all, one of the top questions in the minds of most business owners.  I wanted to respond thoughtfully.  I said, with a couple of parenthetical comments:

First, let me agree with you that most business owners know more about their businesses than anyone else outside of the businesses.  But let’s talk briefly about your idea of a ‘walk-away number.’

This gentleman’s walk-away number would apparently enable him to do whatever he wanted to do in life, and it was something he had thought about.  But I went on.

Market multiples are always talked about in ranges, like 5x to 7x EBITDA, but we almost never know what EBITDA is being multiplied.

And there are always transactions above and below the so-called ‘country club’ multiple ranges.  It is useful to know more specifically what a business might be worth than some generic range.

What if your business is worth more, and perhaps a good bit more, than your walk-away number?  Wouldn’t you rather give the rest to your family, or to your favorite charities, or to something else?  Or would you rather make that gift to your buyer, a total stranger?

So I think that business owners need to think about the things we have been talking about and they need to get help when an unexpected offer comes along or when they think they are ready to sell their businesses.

There was, of course, a big round of applause following my answer!  Well, not really, but I do believe that it caused the owners present to think about the question.

The Hidden Danger of a “Walk-Away Number”

There is another, not so obvious danger with a so-called walk-away number in a business owner’s mind.  An unexpected contact or approach from a prospective buyer often creates the potential for pursuing a transaction.

What if the walk-away number in a business owner’s mind is simply too high and is unrealistic?  What if the finally offered price was actually a very good price for the company, regardless of the owner’s walk-away number?  In all likelihood, there will be no transaction.

But that very good price might not be available again or in the foreseeable future. If you need help growing your online store, check out eCom babes review.

As I see it, there are upside and downside dangers to setting  firm walk-away numbers for business owners:

• Upside:  If an owner sells at a walk-away number that is low in the then-current market for his company, he is making a gift of the excess value to the likely unknown purchaser, rather than to his family, favorite charities, or other beneficial uses of that value.
• Downside:  Firm walk-away numbers may blind business owners to realistic, even very good values for their businesses, and preclude transactions that likely should occur.

Concluding Thoughts

In conclusion, business owners should consider the answers to the questions posed at the outset of this post.

• Do business owners “know” the values of their businesses?  In my experience, the answer is no, and even if they do, their answers are irrelevant.
• Do business owners need help if and when they think about selling, either unexpectedly or as part of a plan?  Yes.

They should get appropriate help along the way as they work to manage the wealth in their businesses.  This is a major thesis of my book, Unlocking Private Company Wealth.

Critically, when an unexpected offer comes along that could put their companies into play, business owners should enlist knowledgeable transactional assistance.  There is simply too much at stake not to have the best possible team working for you when you sell your most important and most valuable asset.

As always, please give me a call (901-685-2120) or email if you have questions or would like to address any valuation-related issue in confidence.

In the meantime, be well!

Chris

Reminder

Valuation is important for business owners for many reasons.  One of these reasons is for the operation of buy-sell agreements.  If you are thinking about your buy-sell agreement (and you should be), then take a look at Buy-Sell Agreements for Baby Boomer Business Owners, my Kindle book on the topic.

I’ve priced it at $2.99 so you won’t have to think about the expense.  So click on the image of the book.  You will be taken to Amazon.  Then buy the book.  Don’t be mislead by the price.  It is a full-length book.  If you like it, as most readers have, please take a few minutes and review the book on Amazon!

Additionally, my two most recent books are available in an Ownership Transition Bundle.  The bundle, priced at $35 plus s/h, has been attractive to many business owners, appraisers, and attorneys.

Last week we wrote about SoftBank’s effort to invest up to $10 billion in Uber.  However, there was a catch.  Uber’s most recent financing round valued the unicorn at $68 billion, and Softbank wanted to purchase existing shares at a price of $50 billion, or a 26% discount to the most recent pricing.  We asked what would happen to the deal.

Key Uber Investor Resists Softbank Offer

Today’s Wall Street Journal provides an update.  Uber’s top investor, Benchmark, is resisting the deal.  The catch appears to be the price, at least in part.  Benchmark owns about 13% of Uber per the WSJ, so its state (for which it paid $27 million) is worth about $6.5 billion at Softbank’s offer price of $50 billion, and about $8.4 billion at the $68 billion valuation.

And Benchmark believes that the Uber valuation is headed towards $100 billion, so there’s some reluctance on their part.  Benchmark’s director on Uber’s board was the only director voting against the Softbank offer sheet.

Softbank also wants to rationalize Uber’s board (and wants two seats), an effort that is being resisted by ousted CEO, Travis Kalanick, who owns about a 10% share, controls three board seats, and also says he does not want to sell any stock.

Uber’s new CEO, Dara Khosrowshahi, is said to be in favor of the Softbank deal.

Some Uber investors are likely excited about the prospects of liquidity at a $50 billion valuation.  I’ve emphasized the word liquidity because Softbank wants to invest cash for existing Uber shares.  And some investors are expected to sell some of their shares.

Assume an early investor bought in on the same terms as Benchmark, which reflected a valuation just north of $200 million.  If that investor bought just 2% of Uber at that price, they would have paid just over $4 million.  At the $50 billion valuation being offered by Softbank, that investment would now be worth about $1 billion.

This is a heady valuation to say the least.

What Else is Going On With Uber?

In the same issue of the WSJ, it was reported that, according to London authorities, Uber “is not fit to hold onto its private-car license in the city.”

While Uber will be allowed to continue to operate in London during what may be a lengthy appeal process, the announcement cannot be good news for Uber management and shareholders.  London accounts for:

• 5% of Uber’s active customer base (about 3.5 million) of 65 million worldwide, and,
• About one-third of its active user base of 11 million in Europe.

In other words, today’s London announcement cannot be viewed as good news for Uber.  Based on the routine, knee-jerk reactions of many public stocks to adverse news, the London announcement almost certainly would have generated a drop in Uber’s stock price if it had been public.

Will the loss of the London private-car for hire permit help the Softbank deal we discussed above?  Who knows?

Like last week, let’s wait and see…

In the meantime, be well!

Chris

Reminder

Valuation is important for business owners for many reasons.  One of these reasons is for the operation of buy-sell agreements.  If you are thinking about your buy-sell agreement (and you should be), then take a look at Buy-Sell Agreements for Baby Boomer Business Owners, my Kindle book on the topic.

I’ve priced it at $2.99 so you won’t have to think about the expense.  So click on the image of the book.  You will be taken to Amazon.  Then buy the book.  Don’t be mislead by the price.  It is a full length book.  If you like it, as most readers have, please take a few minutes and review the book on Amazon!

Additionally, my two most recent books are available in an Ownership Transition Bundle.  The bundle, priced at $35 plus s/h, has been attractive for many business owners, appraisers, and attorneys.

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I spoke to the North Texas Chapter of the Exit Planning Institute on September 8, 2017 on the topic of Business Valuation for Exit Planning. I appreciated the opportunity to address the group. You can find a link to my handouts below if you are interested.

Business Valuation for Exit Planning – NTXEPI – 9-8-2017 – ZCM

In addition, Mark Winger, CFA, CPA/ABV, ASA of Gordon Brothers-AccuVal, who invited me to speak, was nice enough to record a short video.

I was grateful to receive emails from a few of the attendees:

Thank you for your interesting presentation to the North Texas EPI Chapter last Friday morning.  I have found that many clients don’t know what their financial needs will be post exit and so don’t have a grasp on where the value of their company needs to be.  This was good information, and I enjoyed the humor that was interjected as well. – Betty Schnaufer, CMAI

Chris, Sorry I didn’t get to shake your hand – your presentation was not only packed with great content, it was extremely entertaining. – Patrick K. Doyle

I always enjoy speaking to different groups around the country on business valuation and ownership transition issues. Check out the “Speaking” menu item for more information.

Be well,

Chris

Reminder

Valuation is important for business owners for many reasons.  One of these reasons is for the operation of buy-sell agreements.  If you are thinking about your buy-sell agreement (and you should be), then take a look at Buy-Sell Agreements for Baby Boomer Business Owners, my Kindle book on the topic.

I’ve priced it at $2.99 so you won’t have to think about the expense.  So click on the image of the book.  You will be taken to Amazon.  Then buy the book.  Don’t be mislead by the price.  It is a full length book.  If you like it, as most readers have, please take a few minutes and review the book on Amazon!

Additionally, my two most recent books are available in an Ownership Transition Bundle.  The bundle, priced at $35 plus s/h, has been attractive for many business owners, appraisers, and attorneys.

More than a decade ago, Richard Jackim and Peter Christman wrote a book called The $10 Trillion Opportunity.  In the book, the authors forecasted massive future sales of private businesses because of the aging of baby boomer business owners.  They were right in that there were millions of aging business owners.  However, they were early in their prediction of a tsunami of private company sales by those baby boomer owners.

The Age of Aquarius?

The population of baby boomer business owners continues to age. I don’t have to cite a statistic for this. All I have to do is calculate the average age of business owners I meet and look at myself.  Baby boomers are reaching the magic age of 65 at the rate of ten thousand per day, and that will continue for more than 15 years.  Many business owners are perhaps waiting for that elusive perfect time.

The absolute perfect time to sell a business is when the stock market is hot, when the economy is good, when industry conditions are favorable, when financing is readily available and cheap, when conditions at a company are on the upswing or perking along with good margins and growth,  when management is ready and has plans for what follows and ….  It reminds me of a song by the 5th Dimension, Age of Aquarius, which states, in part:

When the moon is in the Seventh House
And Jupiter aligns with Mars
Then peace will guide the planets
And love will steer the stars

This is the dawning of the Age of Aquarius
Age of Aquarius
Aquarius! Aquarius!

I’m not sure if the Age of Aquarius, or the perfect time to sell a business, will ever come. I wrote about this in February 2011.

A Perspective on the Baby Boomers

To touch on the baby boomers once again, many baby boomer business owners missed the surge in mergers & acquisitions activity that preceded the crash in 2008.  There was pent-up demand for selling businesses in 2008. Now that we are in 2017, that pent-up demand is causing unknown pressures for business owners, their families, and their employees, who are uncertain about the necessary transitions that await.  One M&A adviser told the story this way in 2014:

What happened between 2008-2011?
The answer, from a business transition viewpoint, is very little. Businesses generally suffered a decline in revenue, profitability and cash flow, making them less valuable to buyers. It became very difficult to finance the purchase of a business as credit became tight and de-leveraging began to occur. Transactions were difficult to close. Sellers sought a return to the prices that were paid in 2005-7 which was not realistic given the reductions in value. Companies that performed well during the downturn achieved greater multiples of value as there was a shortage of supply of quality sellers.

Baby boomer transition bubble just got kicked down the road?

In essence, the bubble is still there – it just got kicked down the road. Now, the backlog of sellers is bigger and the situation may become more urgent.  It is true that most business owners have adjusted their retirement expectations and it has been estimated that retirement ages have been pushed out about 3 years on average. Since very few businesses sold during the 2008-2011 timeframe, there is an enormous backlog of business owners who would sell given the right circumstances. Our best estimates are that between 1.2 million and 1.5 million business owners are in that backlog.

The situation has not changed much since 2014 from a broad perspective.

Pent-up Demand for Sales by Business Owners

Pent-up demand for business transactions is a fact of life.  We know from history that transactions tend to come in waves.  When will the long-awaited wave of transactions involving baby boomer business owners arrive?  I don’t know, but it almost has to come soon.  In terms of age, the leading edge of the baby boomers turns 71 this year.  The lagging edge turns 53.  There are 76-77 million boomers.

Many of the baby boomer businesses are small firms with limited potential in the M&A markets.  However, much of successful, private corporate America is owned by and led by boomers.  We won’t live forever.

I spoke recently with a business owner.  He is 75 years old and still working.  His business needs to transition to the next generation of owners (not his family).  And yet he waits.  The longer he waits, the less ability he will have to negotiate a favorable transition.  The situation is even more dire if he becomes disabled or dies and his family is left to handle the transition. This is, perhaps, an extreme situation, but it is not uncommon.

Owners should, as always, be running their businesses as if they were in the market to sell. I have said many times that a business that is ready for sale is, well, ready for sale. Investing in ongoing training will ensure your sales team can shine as confident skilled professionals who close deals, visit https://www.challengerinc.com/training/ to start your employees’ sales training today.

So business owners should be preparing themselves and their businesses for the next transaction wave. Business advisers should be encouraging their clients to get ready, as well. I’ve written about being READY for Sale before.  Is your business ready for sale? This is an important question for baby boomer business owners. They should also consider seeking business transaction law services to help them ensure that the transactions are done properly. 

The tsunami is coming.  We may not see the Age of Aquarius, but we will see more deals in the future.  Will you be ready?  Will your clients be ready?

What is Your Business Worth?

One of the things business owners can do is retain a competent business appraisal firm with transaction experience to provide a range of values for your business.  Try Mercer Capital, my firm.  We provide a growing number of value estimates each year.  Why are business owners requesting this service?  Many owners know that a sale is in their futures.  They want to become informed about the potential range of pricing that they might see if they engage in a sale process.  I recommend that business owners obtain valuation calculations that provide a range of values based on an assumed transaction with financial buyers.  At the same time, the appraisal firm can provide a range of values based on assumed transactions with strategic buyers.

In an engagement like outlined above, the appraiser will provide a value or a range of values at both the financial control and strategic control levels.  In a coming post, we will talk about what adjustments are appropriate to reach values at each of these levels.  However, note that potential buyers know what adjustments they think are appropriate, and those adjustments might not be in your favor.

Everyone, of course wants to sell to a strategic buyer.  However, they can be hard to find when you really want them.  Most transactions occur at financial levels because many private companies are simply not big enough or unique enough to warrant the interest of larger, strategic buyers.

Regardless of the nature of buyers who you may come into contact with, it is best if you have a good idea of what your business is worth and why.  And it is good to have someone you can call to talk to who will have your interests at heart when you first receive that “unexpected” call.

The wave is coming.  Is your business READY for sale?  As I noted above, this is an important question for every business owner.  Do you have the answer?  If not, now is the time to get focused.

Be well,

Chris

Reminder

Valuation is important for business owners for many reasons.  One of these reasons is for the operation of buy-sell agreements.  If you are thinking about your buy-sell agreement (and you should be), then take a look at Buy-Sell Agreements for Baby Boomer Business Owners, my Kindle book on the topic.

I’ve priced it at $2.99 so you won’t have to think about the expense.  So click on the image of the book.  You will be taken to Amazon.  Then buy the book.  Don’t be mislead by the price.  It is a full length book.  If you like it, as most readers have, please take a few minutes and review the book on Amazon!

Is business ownership a binary thing?  Do we either own our businesses or not?  I’ve mentioned this concept before.  The binary notion leads business owners to think either in terms of the status quo or of an eventual sale of the business.

The truth is that between the two bookends of status quo and an eventual third-party sale are many possibilities for creating shareholder liquidity and diversification and facilitating both ownership and management transitions.  I call this time interim time.  The literal translation of “interim” from the original Latin means, “the time between.”  Interim time, then, is the time between now, or the current status quo of a business, and an ultimate sale of that business.  Let’s look at the bookends:

• Status Quo. First, let’s talk about the either.  The status quo may be an excellent strategy.  If sales and earnings are rising, existing owners can benefit from the growth and expected appreciation in value and maintain control of the business.  However, the status quo, in many instances, does not provide liquidity and diversification opportunities for owners and places all execution risk on them.  A decision to maintain the status quo for your business may not do much to advance necessary ownership and management transitions, as well.  A decision to maintain the status quo should be based on conscious decision making and not on procrastination.  And the status quo has an insidious side to it – unless you and the other owners do something, you will stay in the status quo for a long, long time; therefore, you have to question the status quo on an ongoing basis.
• Ultimate Third-Party Sale. Now, let’s talk about the or.  If your business is continuing in a status quo mode, chances are you are not preparing it for an eventual sale.  After all, it will happen someday, but not in the foreseeable future.  Chances are also that you and the other owners may not be preparing yourselves for an eventual sale.  And if you are maintaining a status quo status, you may not be able to influence the timing of an eventual sale.  The ideal time to sell a business is when the markets are hot, when financing is readily available, when your business is tracking upward and has a good outlook, and when the owners are ready.  In reality, what you can hope to achieve in a sale of your business is the best pricing available in the market at the time of the sale.  If you remain in the status quo, you may not get to choose the timing of the eventual sale.

If it seems like I am painting an eventual third party sale as an unfavorable outcome, I am not.  It can result in an unfavorable outcome, however, if your business is not ready for sale at the given time and if you and your other owners are not ready, personally, for that eventual sale.

What to Do in Interim Time

Managing illiquid, private wealth in private businesses is far more than running the businesses themselves.  We all have to manage our businesses.  Managing the wealth in our businesses requires a much more active role for business owners and often a different level of attention on the business itself.

The status quo and an eventual third-party sale are, indeed, bookends.  Consider the table below.

If we are managing the wealth in our closely held and family businesses, we will be focused on creating liquidity opportunities over time and on achieving reasonable returns from our companies on a risk-adjusted basis.  We will be using our companies as vehicles to generate liquid wealth and diversification opportunities over time.

The table above shows the bookends of status quo and third-party sale options.  In between are a number of options that owners of successful private companies can use to manage the wealth tied up in them and to create ongoing opportunities for liquidity and diversification.  At the far right, after the sale of a business, its owners must, in many cases, be prepared for the rest of their lives.  So it is important to run a business in such a way that its owners develop liquidity and diversification to create options for the rest of their lives.

The table is certainly not all inclusive, but it does include some easily implementable options like establishing a dividend/distribution policy or making occasional share repurchases as owners need some liquidity or, for example, when an owner leaves the company.  This purchase might be pursuant to the terms of a buy-sell agreement.  If your company has significant excess assets, it is probably a good idea to clean up your balance sheet and declare a special dividend.  And it may be appropriate to have one or more key managers acquire small stakes in the company to facilitate alignment and future management transitions.

I call these options “easily implementable,” but they won’t happen unless someone does something.

The next category of options in the table above are termed “significant and realistic minority options.”  We will address them in more detail in other discussions, but they include relatively small leveraged dividend recapitalizations or share repurchases.  The options also might include the creation of a 30% or less ESOP in appropriate circumstances.  These transactions certainly won’t happen without someone doing something.  They will likely require the assistance of outside expertise, and there will be certain transaction costs.  Transaction costs should be considered in the context of investments and The One Percent Solution. See also here.

The third category after the status quo is called “control level options.”  For some successful private companies, it may be appropriate to engage in substantial transactions to create liquidity opportunities and to retain ownership in expected future growth and appreciation. Options here include:

• Leveraged share repurchases
• Leveraged dividend recapitalizations
• Employee Stock Ownership Plans

The final category is the bookend of third-party sale transactions.  It should now be clear that there are options other than selling a business today, or simply maintaining the status quo, for managing the illiquid wealth in your private company.

Benefits of Focusing on Interim Time

The shareholder benefits of employing one or more of the above strategies over time include the following:

• Acceleration of cash returns, liquidity opportunities, and opportunities for diversification and creating liquidity independent of your company
• Ability for your owners to diversify their portfolios
• Optimization of your company’s capital structure with reasonable leverage
• Enhanced return on equity with reasonable leverage
• Enhanced earnings per share for some options
• Planned changes in ownership structure with shareholder redemptions, with remaining owners achieving pickups in their relative ownership of the company
• Enhanced performance and reduced business risk with focus on the business

Employing one or more of the above The One Percent Solution strategies is tantamount to using modern investment theory concepts and basic corporate finance tools in the management of illiquid private company wealth.  We will examine a number of the strategies outlined above in the future discussions to illustrate their availability to many successful private companies in America.

These techniques work for others, including many private equity firms that engage in leveraged dividend recapitalizations and leveraged share repurchases to maximize shareholder returns and to facilitate future growth in value for their investments.  These basic options can also work for you.

Concluding Thoughts

To read about the ideas in this post in more detail, see Chapter 7 of my book, Unlocking Private Company Wealth.  Better yet, get this book and my other recent book, Buy-Sell Agreements for Closely Held and Family Business Owners, in a bargain package, the Ownership Transition Bundle.

In the meantime, feel free to give me a call to talk about any of these interim time concepts in complete confidence.  Interim time is passing for you, and there are no automatic triggers to cause you to take action.  Consider this post as one such trigger.

In the meantime, be well!

Chris

Reminder

My two most recent books are available in an Ownership Transition Bundle.  The bundle, priced at $35 plus s/h, has been attractive for many business owners, appraisers and attorneys.

Planning for management succession has been a recurring topic on this blog.  Three years ago, we wrote about succession at Berkshire Hathaway and Microsoft. In early 2014, Microsoft named a new CEO (Satya Nadella, a Microsoft insider).  Berkshire Hathaway now has a plan, but Mr. Buffet isn’t telling exactly what that plan is, although it does, apparently, involve transition of his roles to perhaps three insiders.

This week, the succession news at Disney (subscription required) (DIS) is that Robert Iger, chairman and CEO, will stay on for at least an additional year while the Company seeks a replacement.  His new contract runs through mid-2019.  However, the process of selecting a successor began at least in 2015, when an internal candidate was advanced.  This step was a misstep, and the internal candidate departed in April 2016:

Thomas O. Staggs, the favored contender to lead Disney after Robert A. Iger’s retirement, unexpectedly announced his departure on Monday, throwing succession at the world’s largest entertainment company into disarray.

Mr. Staggs, who became the Walt Disney Company’s No. 2 executive last year, beating out another candidate, will step down as chief operating officer on May 6. Disney said that Mr. Staggs, 55, would remain an employee until the fall, serving as “special adviser” to Mr. Iger, who is the company’s chief executive and chairman. In a statement, Mr. Iger called Mr. Staggs “a great friend and trusted colleague.”

Disney has a history of bumpy transitions of power…

The search at Disney is now focused on external candidates for succession to Mr. Iger.

Private Company Management Succession

The point of the introduction is to highlight the critical management succession issue for all companies, both public and private.  Succession is difficult in private companies for a number of reasons, including:

• The current CEO simply does not want to step down.  This may be because he or she loves the job, because he or she does not have a clue what to do next, is afraid of the unknown, or for a variety of other reasons.
• There has been no focus on grooming internal successors.
• Dad (or Mom) doesn’t think that their kid(s) can measure up.
• Of course, one of the main reasons that private company CEOs resist thinking about transitioning their positions is that they are planning to live forever (not!).

Many years ago, I valued what was then a somewhat tired, but nevertheless, successful business.  The CEO, call him Mr. Never-Let-Go, was well into his 80s when I visited him.  We first met at his home, where we talked about the business while he was attached to his oxygen machine.

After some time, we moved to his office at the business.  Or rather, his driver assisted him to his car and drove him to the office while I drove separately.  We got to the office and Mr. Never-Let-Go sat at his desk, which he did for two or three hours each work day.  During that time, he made every significant decision that was made at the company.

All of the key people in the office were in a bull-pen area, except for his son, who at the time was about 65 years old.  The son, who had the title of president, had an office of his own.  I spent a bit of time with him and his dissatisfaction at the current situation was apparent.

We valued the company according to our engagement letter and issued a final report.  I moved on to other engagements, and Mr. Never-Let-Go faded from my mind.  However, less than a year after I was there, Mr. Never-Let-Go’s son committed suicide, at least in part as result of his dissatisfaction with his life at work.

Within three months, I read of Mr. Never-Let-Go’s death.  Less than six months after his death, the company was sold in a public liquidation.  Any semblance of goodwill was gone.  It didn’t have to be that way…

Concluding Thoughts

Mr. Never-Let-Go was an extreme example of an owner hanging on beyond his useful time for himself or for his business.  However, he is a reminder to us all of the importance of timely management succession.

As baby boomers continue to age, the issue of succession will continue to rise in importance for their companies.

If you want to talk about succession at your business in complete confidence, feel free to give me a call.  I’m not a psychologist, nor am I a management succession expert, whatever that is.  However, I’ve seen a lot of businesses go through management transitions.  And I can provide important perspective for you or your clients.

Be well,

Chris

Reminder

My two most recent books are available in an Ownership Transition Bundle.  The bundle, priced at $35 plus s/h, has been attractive for many business owners, appraisers and attorneys.