Succession Plan (Chicken) or Estate Plan (Egg) – Which Comes First?

Dark Helmet: Ah, planet Druidia.  And under that air shield, ten thousand years of fresh air.  dark-helmetWe must get through that air shield!

Colonel Sandurz: We will, sir.  Once we kidnap the princess, we can force her father, King Roland, to give us the combination to the air shield, thereby destroying Planet Druidia and saving Planet Spaceballs.

Dark Helmet: [to camera] Everybody got that?  From Spaceballs the Movie – Mel Brooks

When I am in an initial meeting on succession/estate planning listening to the current “plan,” I can’t help but feel like I am in this defining scene from Spaceballs.  The plan seems pretty clear but soon, succession and estate planning concepts become intertwined.  Then, you ask – what you think – is a simple question for clarification and you are in OMG territory.  I am beginning to think there is a root cause for this; owners have difficulty determining the right way to address these complimentary yet at times, conflicting processes.  Dealing with the desire to avoid the dreaded estate tax burden at all costs, estate planning seems to trump succession planning when it comes to priorities.  Throw in the fact that few realize that there is such a thing as a succession planning process and voila, the more visible and popular estate plan becomes “Numero Uno” in the priority parade.

When an operating company is the primary asset in an owner’s portfolio, nothing is more important than the sustainability of that asset and succession planning is an integral part achieving that goal.  So, how does one get in trouble here?  The simple answer is placing wealth planning ahead of the operating business.  In one of my cases, the bulk of the ownership was placed in a trust.  The only problem was when the owner had to recruit a next generation CEO and in so doing, needed to get a portion of that ownership to that next generation leader.  As a client of mine used to say – “says easy, does hard.”  When promises of ownership have been made to heirs, breaking the bad news about dilution does not go over very well.

Another common mistake is the sibling rivalry issue.  An estate planner suggests significant ownership of the operating company be placed in trusts and the parent(s) opt to spread the wealth equally among the children.  Nice plan; but what do you do when one or more of those siblings are working in the business and in fact, may be responsible for substantially increasing its value?  Is it fair for all to get an equal share of the economic value when those outside the business take no risk at all?

So, what is the answer?  Very simply, succession planning has to trump estate planning… especially where family is involved.  I use the standard organization/ownership/family chart overlay to make sure all are in parity with what an owner needs to do to satisfy each of those stakeholders.  There are techniques which can be used to solve this problem if you consider these constraints before committing to any plan.  A well-thought-out succession plan results in increased and ongoing value to the engine of growth that the estate plan can then be designed to protect.


How Can I Get a Loan?

Quote- Show me the money! –  Jerry Maguire

For years, entrepreneurs have known that you need time, people and money to make a business successful… and getting enough of each is always a challenge.  It is impossible to control time and the right person mayuntitled be difficult to find, but one should be able to find financing – at least most of the time.  Putting aside the recent financial crisis (when good deals still got done) let’s look at some of the factors that can increase your chances of having a financing source show you the money.

Start with timing.  An old client of mine used to say you should borrow money when you don’t need it.  The concept here was not an exercise in futility but the belief that the time to establish a relationship with a banker or finance source is not when you are running around with the fear you will run out of money.  Making your case is much more effective when not burdened with that sword of Damocles.  As we say at Withum, it “Puts you in a position of strength.”  This would be ideal but as we know, we can’t always control timing.

Next, you have to understand why you need a loan and how much you need.  Loans for expansion of your business, like increased accounts receivable and inventory, play well with banks and financing sources.  Borrowings where cash goes outside the business with no assets in return, like repaying another loan or redeeming a shareholder, are much more difficult.  In fact, in cases like this, you may have to seek more permanent type financing.  The size and loan purpose will start to dictate where you should look for financing.

Given the loan’s purpose, an important step is to match the lending source with your type of business.  A solid performing business can seek a cash-flow loan which might contain some minor covenants while a lesser performing company may need to rely more on its collateral and seek an asset based loan.  Understanding the type of lending a financing source likes is also important.  There are even banks that specialize in dealing with technology companies. Leases and factoring should also be considered in the right circumstances.  (There will be a future blog to shed more light here.)  A good professional advisor can provide some additional guidance here.

Having a solid business plan helps – especially if you are talking to a new lender.  It helps relay your story and allows your source to more quickly assess your business.  Put forth your best and don’t forget to address the obvious issues (like a significant decrease in sales the prior year.)  Note: if you click the tab Entrepreneur PowerPlaybook on this blog, then the Rookies, then StartUp Package, you can find recommended Business Plan Components.

Basic projections, which show payback of your borrowing and which are consistent with your financing source, are the next step.  You can’t ask for a cash-flow loan that your cash-flow won’t cover or an asset based loan where your collateral does not support your requested loan balance.

Like everything else, with a little planning and knowledge you will increase your chances of success with your financing sources.  Good luck!

How Do I Prepare My Business for Sale?

Quote – “Nobody expects The Spanish Inquisition!” – Cardinal Ximenez, Monty Python Series 2, Episode 2

spanish-inquisitionFor those who have heard from a friend or colleague who successfully sold their business, certain details surrounding the process itself sometimes get omitted.  The endless series of questions, the mountains of data and the seemingly infinite number of meetings seem to all be a blurred memory when one hears that another “got the deal done.”  Now, unless this is a very small transaction, few buyers these days, financial sponsors or strategics, write a check of any size without performing the dreaded due diligence.  And, much like this humorous sketch from Monty Python, the requests for information seem to always include one or two additional items that were originally omitted.  Trust me, there is a strong parallel between this process and the Spanish Inquisition.

Having said that, there are a series of steps one can take to help ensure a successful transaction.  In fact, we have a registered process called TransactReady® which we use to guide you through the most critical steps to help ensure a transaction is consummated. For purposes of this blog, I would like to focus on just a few of the hard-core items that should be your priority as you enter the diligence phase:

  1. First and foremost, one should “know thyself.”  Work under the assumption that any warts you have will be found out, so it is best to perform your own SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis and understand how you will address any issues which come up.  Potential buyers appreciate the honesty and knowledge you have of your business when you volunteer this information versus having to address it in a findings meeting.
  2. Expect requests for more information than you may have provided to anyone before – probably by a factor of 10. Set up a Virtual Data Room and work with your professional team to monitor this process.
  3. Perform your own Quality of Earnings calculation.  No, this is not a test to determine if your dollar of economic performance is better than any others but an assessment of the items for which earnings should be adjusted as they may be non recurring or not required for the business to sustain itself.
  4. Investors buy growth, so do not try to somehow capitalize on all future growth in the business.  This may seem counterintuitive as most believe growth means higher earnings which generate more EBITDA and thus a higher price.  However, if an investor sees all of the growth sapped out a target, they might lose interest.
  5. Finally, a business being sold should be an ongoing an entity.  New products should be in the pipeline and your team should be ready to manage increasing growth.  Buyers have less of an interest in a business that appears to have reached its twilight.

Remember, while you may think a sale is the end of the line for your company, the buyer should see it as an opportunity to take what you have developed and bring it to the next level.  Ongoing viability commands a good price and helps ensure a transaction gets completed.

Why Investors Say No

Lloyd: Hit me with it! Just give it to me straight!  I came a long way just to see you, Mary.  The least you can do is level with me.  What are my chances?
Mary: Not good. lloyd-300x300
Lloyd: You mean, not good like one out of a hundred?
Mary: I’d say more like one out of a million.
Lloyd: So you’re telling me there’s a chance… *YEAH!* Lloyd Christmas – Dumb and Dumber

So being in this space, I hear a lot of stories (too many, unfortunately) about how some startup crashed and burned a la Tom Cruise in Top Gun at an investor presentation.  Some have gotten the polite – “come back when you are further along” and some just the “we will get back to you.”  With hindsight, when you then ask some pointed questions to these teams, you realize they might have been a tad optimistic based upon how they approached the fund raising process.  Like old Lloyd Christmas, they thought they had a chance, but did they?

So, boys and girls,  what lessons can we learn that will perhaps make us have a better chance with a financing source?  What are the reasons investors say no?  Here are my top five.

  1. Right pitch; wrong investor.  Two big errors here.  The first is talking to the wrong investor for your stage of development.  This is most common with early stage companies – they wrangle a meeting with a VC when what they need is an angel or seed-funding source.  Make sure you talk to an advisor to get in the right pew.  Second, don’t assume because they did one deal in your space (you should know your investors’ portfolio) they are interested in your deal.  Like all smart investors, diversification is part of their strategy.
  2. Wrong or incomplete team.  You do not need your organization dance card filled, but two or three key slots should be hired or known.  And, as much as I love CFO’s, that is not a key role at this juncture.
  3. No sustainable business model.  I love my daughter but her model is selling a device to veterinary practices that only need one or two units, has no replacement parts and lasts forever.  The good news is she wanted a “franchise” business – the type that just provides some additional income – and this fits the bill.  But, she will never go beyond that stage of growth.  If this is your model, think again about approaching investors.
  4. Too “me too.”  You need to cure a pain and if someone else has done that and your differentiator is that you can do the same thing with one less step, think again about your model.  If you always describe your product as “it’s just like a Xerox” (dating myself badly here) well then…
  5. No traction.  This happens especially with multi-channel revenue streams.  Concepts are not enough – the “build it and they will come” syndrome is not a winner.  If you are getting less traction than bald tires on an icy road, solve that problem first.  Money is not going to help you.

While there have been many entrepreneurs who have failed with investors, perhaps you can learn from their mistakes and improve your chances of being successful.  Stay positive and keep innovating!