MARCH 2012

STPI's Year of Transformation

by Paul Cronin, partner STPI

After recently wrapping up a training session with our latest Transition Planning Consultants (TPC), it occurred to me that the past 12 months have not only flown by, but have been incredibly transforming.

This time last year, we were struggling to finish the training of our first TPC, Harvey Wigder; he in turn was transitioning from Boston to Maryland.  I was balancing my time between growing this business, and winding down my management consulting practice of many years.  My business partner, Jack Beauregard, was likewise engrossed in growing the business, but was also dealing with the loss of his mother, and his father's health challenges.  Life was stressful personally and professionally for both us.

So naturally, we decided to publish a book, "Finding Your New Owner:  For Your Business, For Your Life" by Jack Beauregard....  We thought we might be done in 3-4 months - WRONG!  It took us 7 months, finally releasing in September 2011.

We learned a lot about self-publishing and our business.  However, our greatest lesson was the incredible support we got from people who have come to know us, some only in the past few years.  If I had a dollar for every time someone told me, "we like you guys and what you are doing; we want to see you succeed" - while we wouldn't have millions, it would certainly feel that we did.

So, where are we today?:

• 900 professionals on our mailing list (you are one, by the way)

• 400 members in our LinkedIn Group from five continents (please join us)

• multiple radio interviews

• a growing blog (The Next Transition)

• joint presentations with Pinnacle Equity Solutions, a leader in Exit Planning

• invitations to speak at financial services firms

• Voted Top Ten in Management books by Small Business Book Awards

• fabulous reviews and testimonials for our book

• a growing strategic alliances with the Purposeful Planning Institute

• a growing list of advisors in our Advisors Network

• Six Transition Planning Consultants, out spreading the word and serving clients

• Our amazing support partners web guru Susan Dore, editor Barabra Brandt, and video guru Mark O'Brien.

The list could go on and on.  The truly exciting part is that we have multiple product launches happening this year to help more advisors guide their clients through change - Stay tuned....

Last but not least - THANKS TO ALL OF YOU for listening, reading, tweeting, "Liking" and linking to us.  Even your simplest efforts make us grow and give us strength.  We are blessed to have you.

About the Author

Paul Cronin is partner and Director of Business Development at STPI, the Successful Transition Planning Institute of Cambridge, MA.  STPI trains advisors to show business owners and executives how to "Think", "Live" and "Decide" what to do with their companies and plan for a dynamic, new life.  Paul can be reached at 978-749-9546, Facebook, Linkedin, Twitter, Google+, or at Contact Us.

For more information, visit STPI, or see this video.

FEB 2012

Defense Wins Championships: In Football and Business Transtion

by Paul Cronin, partner STPI

OK, I am a New England Patriot's fan, but I have to give the New York Giants credit: their defense stood up to Tom Brady and the Pats in Super Bowl XLVI (46).  The Pats had a stellar offense all year, but a mediocre defense.  In the Super Bowl you need greatness on both sides; the Giants had it, the Pats did not.

As I looked at the players and coaches walking off the field, I began to wonder, what impact does an imbalanced team have on business owners?

Owners are supposed to balance sales, marketing, finance, operations, etc.,.  But do owners really do so?  As an owner myself, I can often feel pulled in many directions, but I love to present and to sell.  If I (and other owners) neglect other, less interesting parts of the business, do we weaken ourselves?  Do we allow competitors to slowly eat away at us?  Even to overtake our lead?

So what is a strong "business defense"? - operational systems, marketing systems, sales systems, HR systems, strategic planning and finance systems.
These are hard to design, and harder to keep up, but systems are the "best defense" of a successful business.  So what is the Offense? too often it's the "stars" or rainmakers, who sometimes shine brightly, then melt under the pressure of endlessly high standards.  Owners may fall into the trap of letting the stars run things their way, or bypass systems, but without a strong defense, stars can bring a company down. 

Other signs of a weak defense: "C" players who are kept on by owners for familial or personal reasons, as well as modest retirement savings.  For owners who have run a business for a long time, thinking that selling will suddenly fund your retirement, you should check on your business defense before you buy that lakeside villa.
 
In sports, there's "always next year", but business can be less forgiving: you may not end up with a business championship (IPO, Sale, or Succession), but rather liquidation.

So what are a few things any business owner can do to beef up their defense?

1. Look at your systems and see how tough they are:  written down, understood and regularly implemented by employees
2. Look at your staff to plan for weeding out the C players
3. Keep resumes of potential replacements of stars - they always leave
4. Make a personal financial plan with an advisor to increase your tax-deferred income
5. Research competitors, both for defense and for potential sale options
6. Spend some time figuring out what you want to do outside of the business  - Plan for some fun, for some work and set some goals.

Otherwise, you may end up crying in your beer (like Pat's fans).
 
About the Author
Paul Cronin is partner and Director of Business Development at STPI, the Successful Transition Planning Institute of Cambridge, MA.  STPI trains advisors to show owners and executives how to "Think", "Live" and "Decide" what to do with their companies and plan for a dynamic, new life.  Paul can be reached at 978-749-9546, Facebook, Linkedin, Twitter, Google+, or at Contact Us.
For more information, visit STPI, or see this video.

Jan 2012

Don't Let the Process Derail Your Business Sale

by Dave Kauppi, The Exit Strategist

Most business owners sell only one business in their lifetime. It is complex, emotional and pressure packed. Given this backdrop, the odds of a great outcome are, well, not that great. As Merger and Acquisition advisors, one of our most important functions is to prepare our client for the bumpy road of sellgin a busienss ahead. The worst outcome is to go through the exhaustive process of marketing the business, corporate visits, and due diligence, only to have the deal crater in month eight because of some ruffled feathers or perceived bad faith dealings.

First we try to make the seller understand that as the process unfolds and as the buyer tries to memorialize the parties' understanding in documents, new elements are added. For example, taking a discussion between buyer and seller on value may be followed with a "non-binding" letter of intent where for the first time, the structure is described. The seller may react very negatively if he was thinking of a $7 million wire transfer at closing and the written document combines $4 million cash at close with a $1 million seller note and an earn out that caps out at $2 million. If we had not earlier forced the issue or warned our seller that this was a possibility, then maybe we deserved to have an unhappy client. Our goal is to turn this from a "he changed the transaction" deal breaker to a couple of deal points that we negotiate.

Another sticky point if the seller is not prepared is the concept of the net working capital adjustment. This is a customary deal approach from experienced buyers that is fair. Trying to explain it to the seller for the first time during the heat of battle can be problematic. In advance we tell our seller that the buyer is going to want a measuring point based on the latest financials he receives in order to make his offer. If, at that point, the current assets are $350 K and the current liabilities are $300 K then the company has net working capital of $50 K. If that level changes then at the post closing true-up, an adjustment will be made to account for the change.

If a seller is not prepared for the pages of reps and warranties that are a standard part of most Definitive Purchase Agreements, the initial reaction is often, "no way." It is, however, a deal breaker for buyers, especially if they are public companies. With the new corporate governance scrutiny, these companies are very meticulous about protecting themselves.

The next potential stumbling block is when the buyer's corporate attorney gets involved to make sure that the mother ship is protected. It happened at the 11th hour and the way it was handled by the buyer almost blew up the deal. We had settled on the terms and conditions of the transaction and had worked out a 12-month consulting contract with the founder of the selling company. The senior management of the buyer detailed the duties and responsibilities in a "consulting agreement."

When their corporate attorney received this document, he said that it is not a consulting agreement, but an employment agreement. Our client did not want to go from being a CEO to now being a VP. It was a drop in prestige for her and did not fit the image she had created for herself post acquisition. We had to talk her off the ledge and had to convince her that this should not be a deal breaker. We had to remind her that this buyer was the best fit for her company and she had the best opportunity of maximizing her earn out portion of the transaction with this buyer.

We convinced her to sleep on it. We also enlisted the support of her CFO, husband and dear friend (all the same person). We were able to enlist his calm logical thought process and convince his wife that this was a relatively small impact, all things considered. She agreed.

Wait, you thought this was settled. Not so fast. Enter the Business Development/ Merger and Acquisition person from the buyer (BD). He attempts to push the deal through without adding employee benefits to the employment agreement because those benefits were not figured into his original financial analysis. He got very protective of his turf and made this counter proposal without consulting his President and EVP. Our client went ballistic. We literally had to walk her out of the conference room and cancelled the closing meeting until the next day.

We had already done two end runs around BD and we were worried that if we did a third we may cause doubt about the post acquisition behavior of our client in the eyes of the buyer president, or worse, cause BD to blow the deal up because we bruised his ego.

Well, we got lucky. The next day, before our meeting was due to begin, we ran into an individual doing a walk through at our client's offices. We introduced ourselves and asked her who she was. She replied that she was the head of HR for the buying company. We asked her if they typically had two classes of employees, one with benefits and one without. She looked at us incredulously and asked us what we were talking about. We explained and she said she would have it cleared up by the end of the day. She also gave our client her card and scheduled a call with her so she could implement the full package of employee benefits. Fast forward - BD has been moved out of the M&A position.

We had spent a tremendous amount of our client's time, the buying executives' time and our time and everyone involved knew that this was a good and fair transaction. With all of the pressure, emotion, and egos involved, sometimes even good deals do not get completed. You need experienced advisors that operate in the role of "shepherd of the deal" to guide the transaction through closing.

About the Author

Dave Kauppi, The Exit Strategist

Dave Kauppi is the editor of The Exit Strategist Newsletter, a Merger and Acquisition Advisor and Managing Partner of MidMarket Capital Advisors, LLC. MMCA is a private investment banking and business broker firm specializing in providing corporate finance and business intermediary services to entrepreneurs and middle market corporate clients in a variety of industries....

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Dec 2011

The Four Steps to Leaving Your Business Successfully

By Paul Cronin, partner, STPI

For business owners and their advisors, there are four steps to successful transition planning or transferring of the business.

Most people can think of the practical, financial and technical ("wallet") aspects of a transfer, but what can derail even a "good" deal are the emotional and intellectual ("head and heart") aspects. Unfortunately, most advisors are not trained to help their clients with "head and heart" issues

So here is a 4-Step process to follow, to ensure that all of the aspects and issues are addressed:

1. Make it Better:

Owners who document their systems and processes will make their business more valuable and easier to run.  Operations, HR, Sales & Marketing, Finance, all have processes, some formal, some less so.  Building a plan with a consultant to make all of these processes work better and put the company on a strong growth track will make the business better and more sell-able.

2. Make it Matter:

Owners who spend some time reflecting on who they are and what they want to accomplish in the future, will enjoy the transition process far more than those who don't.  Simply put, the transfer process will matter more to owners who see it as PART OF their personal transition.  Such Personal Transition Planning, is at the heart of STPI's programs and often takes several months.  This planning will help owners financially as well, since it will show their other advisors that they are "serious sellers".  "Owner's Indecision" and "Seller's Remorse" are deadly.  Owners who suffer from these issues can kill any chance of selling their business, other than liquidation.

3. Make it Last:

Many owners will depend on the monetary proceeds of a business transfer for some or even a large portion of their retirement funds.  As such, the managment of these funds must be geared to last for the balance of their lives (20 - 30 years).  This requires financial planning, estate planning and wealth management, and regular meetings with such advisors.  "One and Done" is not going to cut it.

4. Make it Happen:

Owners need advice from specialists such as M&A Advisors, Business Brokers, CPAs, and M&A Lawyers who have a solid track record and understand the nuances of business transfers.  This process usually takes many months and often years. Owners need to be patient and understand that unless they have transferred a business before, they need to do a lot of listening.

Building a collabortive team of advisors is the key to making these four steps be effective.  An owner can try to do so alone, but we recommend that they designate one key advisor (who has shown the ability to help a group of people collaborate) become their "Chief Transition Officer".  Owners are running businesses, and will find the process of "coralling the cats" very time consuming.  Designating one person to be their CTrO, will make both Life and the transition planning process, easier and more profitable.

About the Author

Paul Cronin, partner, Successful Transtion Planning Institute (STPI)

Paul Cronin is partner and Director of Business Development at STPI.  He leads the strategic direction, sales and marketing efforts of the business.  With over 25 years experience in sales, management, consulting and entrepreneurship, Paul brings a broad spectrum of professional experience to the Institute.

Read more>>

Nov 2011

SELLING YOUR BUSINESS - The Eleventh Hour Contract Change

By Dave Kauppi, managing partner, Midmarket Capital, LLC

The next line could be, "Will it Derail Your Sale?"  We have seen it go both ways, unfortunately. If a deal does blow up, everybody loses. The seller has spent six months of divided focus and many of the normal business development activities have been put on the back burner. His or her business will simply not be as strong if the business sale process is not completed.

Normally a buyer that has made it to this point is the one that recognizes the most strategic value and has indicated their willingness to pay for that value. The second, third, and fourth place buyers, if they even have been uncovered, are generally far short of the winning bidder. We have had some very specialized companies that were great fits for only one buyer and the next best bid was less than 50% of the leader's offer. That is not a very attractive backup plan, should the best buyer go away.

The buyer is also damaged by an eleventh hour deal blow up. They have devoted senior level people to analyzing, negotiating, preparing for the integration of the two companies, etc. It often involves several hundred thousand dollars of opportunity costs. If the target company was the answer to a gap in the buyer's product set, they will no longer be able to recognize the anticipated benefits unless they now build it themselves or go acquire the next best target company. Both of these approaches are expensive and time consuming.

Let's get back to the root of the problem. What would cause a buyer to make an eleventh hour change? Our experience has shown that in 80% or more of the cases, it has been the buyer's corporate counsel or outside counsel. They have discovered a deal component that when memorialized in a definitive purchase agreement is either not legal or violates the corporate "risk versus reward covenant."

This is where it gets emotional. It is done "after we had a deal.' We coach our sellers up front and warn them that this can happen. The way we position it is that as a simple matter of logistics, the buyer's legal team has very limited detailed involvement prior to crafting the definitive purchase agreement. In the heat of negotiations, however, the M&A guys have often agreed to something that will not pass the protectors of the mother ship (corporate counsel). When the particular deal term moves the Risk/Reward needle into the red zone, the corporate counsel over rules the M&A guys. An example of this would be an earn out that was open ended and not capped - simply unacceptable on Wall Street.

Another manifestation of the eleventh hour change is the buyer's business development team is tasked with bring the deal along to a point with final approval reserved for the president or the board. Sometimes the M&A team simply commits to something that gets rejected in the final approval process. Unfortunately, sometimes this is real and sometimes it is a popular negotiating ploy called deferring to the higher authority. It can be very tricky determining which is real and which is negotiating.

O.K. So we have established that more often than not, the seller will encounter the dreaded eleventh hour deal change.  How should he or she respond?

First Rule - be prepared and know that it is part of the normal process. Do not put it into the category of this is the evil empire looking to beat up the little guy.

Second Rule - Do not destroy your personal good will with the buyer. Often times, the owner has huge value to the buyer in terms of post acquisition product integration and education on their market. If this last minute deal change turns you into Mr. Hyde at the negotiating table, the buyer's Risk/Reward needle could be moved into the red zone. If they view you as someone that could damage company morale or who will be high maintenance or worse, will be litigious, they will walk away from the deal at this point.

Third Rule - If you feel you are about to explode in front of the buyers, ask for a 15 minute break, go into another room and unload on your advisors. Get it out of your system, calm down, and go back into problem solving mode.

Fourth Rule - Let your advisors do your bidding. Recognize that this is an emotionally charged area for you and it is essential for you to preserve your relationship with your future employer. Let your M&A advisor or your attorney be the bull dog, not you.

Fifth Rule - Respond in kind at the appropriate economic level. Do not look for a pound of flesh to compensate you for your sense of moral indignation. In corporate America it's not going to happen. Work with your advisors to identify the extent of the economic value you have lost due to the change. Ask for concessions in return that match the economics of the buyer's change.

Sixth Rule - Keep your eye on the prize. In this very emotional time, you must prepare yourself to be an economic being. If your next best buyer is $2 million below your current buyer's offer, do not put the deal in jeopardy by violating Rules One through Five for a change with maximum impact of $20,000. Put your ego on the shelf, step back, keep your moral indignation in check and preserve your good will. Remain fluid and creative while allowing your advisors to take on the role of the bad guy. Get your deal signed, enjoy your new substantial bank balance, and prosper as a prized member of your new company.

- This post is part of our continuing series on exit planning, was originally published by "The Exit Strategist" and is used with permission.

About the Author

by Dave Kauppi, Managing Partner of MidMarket Capital Advisors, LLC

Dave Kauppi is the editor of The Exit Strategist Newsletter, a Merger and Acquisition Advisor and Managing Partner of MidMarket Capital Advisors, LLC. MMCA is a private investment banking and business broker firm specializing in providing corporate finance and business intermediary services to entrepreneurs and middle market corporate clients in a variety of industries.  Dave can be reached at (630) 325-0123,