Change of Control – Revisited

Cardinal Ximinez: “Nobody expects the Spanish Inquisition! Our chief weapon is surprise, surprise and fear, fear and surprise. Our *two* weapons are fear and surprise, and ruthless efficiency. Our *three* weapons are fear and surprise and ruthless efficiency and an almost fanatical dedication to the pope.” – Monty Python “The Spanish Inquisition”

I have seen my fair share of situations where change in control provisions in agreements resulted in unintended consequences. Until recently, I thought their sole purpose was as the name implies and as Curly said in “City Slickers,” “One thing; just one thing.” But maybe as the Cardinal suggests, there is more than one thing. Let’s look a bit more closely.

Every smart business owner knows his most valuable assets walk out the door at the end of each day. Most owners like to retain key employees and enter into employment agreements that among other things, provide for incentives (many of which vest over a period of time) that are protected, should the owner or owners no longer be around. This standard solution is known in plain English as a “change in control” provision. What this normally provides for is the acceleration of any vesting or even liquidity provisions of any incentive provisions for the key employee in the event the current owner no longer has more than 50% (usually) of voting control in the company. Everything seems fair so far; what is the problem?

In case one, I was asked to consult with a company that had a key employee that was promised an incentive payment in the event of a change in control. That provision was triggered when the Company was sold to a “strategic” but the Company took the position that they had accepted a lower sales price in return for the key employee being offered a position with the acquirer, thus they did not owe the incentive. While both sides believed their case had merit, the ambiguity created years of turmoil until we helped to resolve it.

In the second situation, an acquirer had issued an LOI for the purchase of one of my clients. During due diligence, they realized that the resulting change of control provisions would substantially “enrich the lives” of all the key management members, and they were sufficiently concerned with their motivation after the deal that they almost walked away. Fortunately, a solution was crafted which all found acceptable.

So just when I thought the key provision in an employment agreement with an incentive was a change in control, I have come to realize that it should be accompanied by a well-defined “continued employment” provision so both the team member and the company do not suffer unintended consequences when there is a change in control. Negotiating them at the start when both sides are not under the pressure of an impending transaction is also very helpful. I am starting to see these provisions in some recent transactions and strongly encourage their use. As the Cardinal said, the two key provisions are…


Kids in the business- Can it work?

“Kids suck” quote from James Beaudette – my very close friend

Jim and I have been friends for over 30 years. We first got to know each other when we began coaching our sons in soccer and our relationship has grown since then. We each had three children and many conversations would inevitably turn to something one of our children had done, which we would both find hard to fathom. The conversation would usually end with Jim stating his conclusion which we both share.

After 40+ years of consulting with family businesses, I could tell you stories about children in my clients’ businesses that would make your head spin. Some had unbelievable success; some abject failure; some were responsible young adults and others entitled brats, I have seen it all. I would almost be embarrassed to tell you how many times I had to lean in to a parent or parents and confide what Jim had taught me long ago.

But out of these experiences came some valuable advice on how to handle kids in the business. Now some of this will sound like motherhood and apple pie, but I have found that it does work. So here are three pointers.

The first is, family is family and business is business. I watched a young son take a $20 million business to over $1 billion in 20 years. Two young brothers who had worked part time in a business stepped up when their father passed away and turned it into one of the leaders in their industry. I also watched two brothers who were in dispute over leadership resolve their differences by craftily splitting the business resulting in two household name consumer products companies. The common theme here is while they shared that important bond of family, they never let family issues blur what they had to do for the business. It was appropriately striking this balance that resulted in each of their successes.

The next is when kids are in the business, be honest with yourself and your children. This is most important when you face major milestones and one that comes to mind is succession planning. I have done more than one succession plan where the end result of my work was that the oldest sibling did not become the heir apparent. They all ended with both successful transitions and with all talking to one another at Thanksgiving. I would love to take credit but it was the direct result of honest dialogue about the objectivity of the process and the importance of keeping the business sustainable. I have also walked away from assignments where the parents wanted me to “anoint” a family member as the next leader. To quote “In Living Color“, “Homey don’t play that.”

Finally, know the difference between being a mentor and being a parent. This is perhaps the toughest task of all. Too many parents make decisions as a supervisor (in one case to support the project a daughter was proposing that had little merit) with their parent hat on versus their mentor cap. This can enable bad behavior, lead to the ill-fated “bosses kid” syndrome and doom your child to failure. So while I am sure that on occasion you will reach Jim’s conclusion about your kids, try to be disciplined and follow some simple rules and you will find kids in the business can work and your family business will beat the odds of next generation success.

Ten Reasons Sale Transactions Fail

Comicus : “Dopus; I almost had the money in my hand”  – dialogue from the movie History of the World Part I

As followers of this blog know, I am a devout fan of Mel Brooks.  I have found his

spontaneous comments on bits such as the 2000 Year Old Man both intriguing

and perceptive.  And, many contain life lessons; garlic as the ultimate weapon against

the angel of death; fear to motivate singing; dancing to avoid someone kicking you.

While I have not experienced as much as he has, I have seen more than

my share of failed sale transactions so I decided to assemble my list of the top

ten reasons sale transactions fail.


In reverse order they are:

  1. Waiting until next year. You believe you will always do better, show improved results and be worth more. As I write this blog, I do not think there has been a better time in my business career to sell a business. And if you wait until you have captured it all and there is no more growth left, your value fades.
  1. Forgetting it’s a process. You have to give it a chance to work. Every transaction has emotional highs and lows and entrepreneurs are loathe to wait it out. You need patience and trust in the process.
  1. Eliminating a logical buyer. With all the consolidation in our profession, my mantra is “today competitors; tomorrow colleagues.” Don’t overlook those who know your industry best.
  1. Too much focus on the past. Buyers are only interested in the past as an indicator of the future. If all you had was historical operations and it was all in cash on your balance sheet, all  anyone would pay you is the value of that cash dollar for dollar.
  1. Poor deal structure. Please let the professionals handle this. It is what you get at the end that counts; not just the price.
  1. Doing the deal yourself. You probably wouldn’t sell your own house; why do you think you can sell your business? Get a qualified, knowledgeable agent.
  1. Ignoring your warts. Perform due diligence on yourself and make sure you understand what is good and not so good about your business. Then develop a plan to address the concerns.
  1. The wrong deal team. This is the transaction of a lifetime. Surround yourself with the best.
  1. Sellers’ remorse. I have blogged about this before. You won’t sell if you do not have something to go to. Make sure you do or do not start the process

1. Unrealistic price expectations. I know; you have the most beautiful baby in the world, but when you sell your company, everything has a price and there is a professional way to understand what yours is. Please do not relegate what may be the most important decision of your life to some friend’s belief in what you should get for your business.


So, there you have it. I am not going to promise you will be able to sell your business for

what you want. But, if you can avoid some of these pitfalls, your chance of success will

be a whole lot higher. Good luck!

Letter of Intent Basics – LOI; IOI; E-I-E- I-O

Marcus Vindictus: “Don’t you know your right flank from your left flank?”

Captain Mucus: “I flunked flank.” 

Dialogue from the movie “History of the World- Part 1.”

I hate playing the acronym game – where certain people toss around terms they are sure others don’t understand. I guess it makes them feel smart. Having recently been involved in a few transactions, I have come to realize that a good number of the non-professionals involved in a deal do not understand what a Letter of Intent or LOI is. So, I thought it might be helpful to provide a layman’s view on the basics regarding this often-used and just-as-often-misunderstood instrument. This is, by no means, an in-depth analysis of all the components; just some education for entrepreneurs and their teams.

First, to begin to understand an LOI, it is important to have some knowledge of the sales process and where the LOI comes in. In the ideal transaction, you assemble a deal team, prepare an offering memorandum (OM) and circulate the same to potential buyers and then receive back an LOI.  In some deals, there are two intervening steps; one is the seller may decide to perform their own due diligence and make that part of the OM and the other is obtaining an Indication of Interest (IOI) as a precursor to an LOI.

An IOI is a brief document that indicates a potential buyer’s desire to proceed further with the seller and may contain some basic outline of what a deal and related structure might look like. After further discussion, the potential purchaser usually generates an LOI. An LOI is a non-binding document between a potential buyer and seller. They key point is that it is non-binding so it is not a contract. The contract for a sale is usually called a Purchase Agreement and it is binding. So why have this non-binding document? The LOI can be a very valuable instrument and is recognized in the deal world as a milestone in moving from the “I think I have an interest in buying you” phase to the “I would like to buy you and here is what a deal would look like” phase. Let’s look closer at some of the key components (and here I am assuming this is a solid LOI.)

First, it should lay out the basic terms of the deal. The purchase price, structure (stock vs. assets), financing (including any contingency) and other terms should be outlined. While it may be subject to due diligence, it should provide a solid outline of deal basics.

Second, it should lay out overall timing – how long the offer will remain open, the timing of due diligence as well as the date to finalize a Purchase Agreement.

Next, it should allow for due diligence and cover non- disclosure / confidentiality. The LOI is often used as the benchmark for letting someone see what is “behind the numbers.”

Finally, there is usually an exclusivity period – the time the seller gives the potential buyer an exclusive right to complete diligence and negotiate a deal.

A well-written and negotiated LOI can become the basis for drafting a solid Purchase Agreement which is why it takes time to negotiate and sign. But as Yogi says, “it ain’t over till it’s over” and so nothing is a deal until the Purchase Agreement is signed. That being said, a solid LOI is a major step in completing a transaction.

When Should You Build a Back Office?

“No time left for you” – lyrics from the song No Time by The Guess Who

I tend to blog about recurring points made in meetings and conversations following the belief that if I hear the same topic from a few people in my little world, maybe there is something happening on a larger scale. So, in the last few weeks I have had the occasion to meet with four different early stage investors (A round types). As is my normal approach, I asked each what were trends they were seeing in potential investees. Expecting to hear the typical “investors have unrealistic price expectations” or “business models that were not viable”, I was shocked to hear three of the four raise concerns regarding the inadequate development of prospective portfolio companies’ back offices. I could not believe the lack of appropriate (pardon my accounting jargon) overhead had even made it into the list of the top fifty items that concerned them. I must admit it was consistent with what we see in the market; almost every early stage company we see has no time (or money) left to even think about their back office.  Being somewhat intrigued by all of this, I decided to probe a little deeper.

What each mentioned was their disappointment in being able to get answers to the most basic of financial diligence questions, never mind being upset that there were no processes in place to track Key Performance Indicators (KPI’s). While none admitted to “passing” on an investment due to this shortfall, I did get the distinct impression that it was seen as a bigger negative than I thought. So what is the problem?

The back office (or overhead) is something most early stage entrepreneurs have no desire to spend either time or money on. As the lyrics to this song go “on my way to better things.” Most believe there is always time to backfill later and a back office does not drive revenue. I cannot tell you how many projects we do reconstructing financial information at a cost many times what some basic processes could have easily covered in the first place. My concern is always how many bad decisions may have been made because of incorrect or incomplete information? As one investor stated “if they spend no time understanding the business now, what are they going to do as it grows; will they see the information indicating changes that are required before it is too late.” This is not just data clean up; it is lost opportunity.

Here is the good news; reasonable solutions are available at least in the NY Metropolitan area. There are flex work solutions for accounting staff, CFO’s and experienced mentors and advisors who can point you in the right direction as well as reasonably priced tools. You just need some help from your advisory team and they can get you on the right track. I would never want a client not to get financed because his or her back office was a mess. Please do not allow a controllable item like this prevent you from achieving your goals. The time to fix it is now.

The Perfect Pitch – How to Avoid Those Painful Pitfalls (Part I)

“We made too many wrong mistakes” – quote from Yogi Berra

I have seen hundreds of “decks” and heard as many pitches and have also studied others’ guidelines on how to hone a pitch.  Unfortunately, I have also seen loads of mistakes so I thought I would offer my approach to the pitch process.  In doing so, I have unashamedly borrowed from many others and added my own thoughts to hopefully provide guidance to help you avoid typical missteps.

First, please keep in mind it is the substance of the content that really trumps presentation techniques.  As the old saying goes, putting ‘lipstick on the pig” does not really win the day.  The focus of this blog is the presentation methods and it will be in two parts.  The first part will consist of some general pitch deck guidelines as well as some helpful presentation hints.  The second part will contain “the” 15 slides you need for your perfect pitch.  While some pieces of this have been covered in prior blogs, I thought it best to consolidate some thoughts here.

When it comes to some general pitch deck guidelines, you may want to consider the following:

  1. Keep the goal of a pitch in mind – it is a succinct overview of “the problem” and your solution with the goal of having investors wanting to know more. It is not to close a funding.
  2. Watch your colors – light blue text on dark blue background is hard to read; clear trumps cute
  3. Less is more – bullet points and concise ideas (not sentences) rule and limit to 5 – 6 lines per page
  4. Avoid acronyms – everyone is not as knowledgeable as you are
  5. Slides should be bold and clear and work in a larger room
  6. Any content (facts) should be sourced

Of course, if you are successful in obtaining the “all important” meeting, after confirming all the logistics including the amount of time you have, you may want to consider these helpful presentation hints:

  1. Limit to one presenter – the person who best articulates your vision is my choice
  2. Maintain good energy and passion without coming across as being on something
  3. Relax – you are probably more knowledgeable about your company than others in the room
  4. Stay on point and on time – you want them to see the whole “show.” Practice using a timed presentation tool.
  1. Avoid grandiose statements – especially knocking off Facebook or the multibillion dollar market leader.
  2. Keep it simple – try the pitch on intelligent friends first
  3. Practice – they do not expect a finished Broadway show but will kill a dress rehearsal. Pitch advisors and ask them to cut it apart
  4. Spend some time explaining how you will overcome the toughest challenges
  5. Avoid exit strategy discussions – smart investors can draw their own conclusions
  6. Encourage questions – in the end – it should probably be 60% you talking and 40% you listening

Armed with these presentation ideas, all you need is a framework for your deck to kill it. How do you know you will cover all the relevant points?  For that answer, please see Part II of this blog.

Non-Voting Shares – An Elegant Solution

Clark Griswold, Sr.: “It’s a beaut, Clark; it’s a beaut” – dialogue from Christmas Vacation

I am often confronted with a somewhat difficult ownership issue that can usually be addressed by what is a relatively straightforward solution; namely the proper use of non-voting shares in a succession plan.  I am surprised that I do not see this technique more often and I have come to believe that it is somewhat misunderstood, so I thought it might be worthwhile to offer some clarification.

My history with this issue started with a consultation I had a number of years ago with a very frustrated sibling (Brother A.)  His father had owned 100% of their company and although he consulted with others during his business life, all knew Dad was in charge and he made all the tough calls.  Unfortunately, the father had passed away a year earlier and wanting to treat his two sons fairly, he left half the company to “A” and half to the other sibling (Brother B).  Unfortunately, “B” had never been involved in the business while “A” had been there for 20 years and had been through a pretty decent succession planning process.  So, what was the issue?  Well, “B” started to exercise his new found rights as a 50% shareholder creating confusion and turmoil in the organization which started to manifest itself in quality issues, turnover of key personnel and declining profitability. “A” believed that without addressing this issue, the Company would get into deep trouble.

So, I undertook a small consulting project to address this and quickly realized that “B” felt his role was uncertain and undefined, but thought he was doing what was right to contribute his expertise as a half owner.  While “B” was perfectly content with his economic interest, he felt he should contribute to help the business he owned with “A” but he just did not know how.  We objectively considered the skill sets required to run the business and “B” realized his were not a match.  He did not understand what his role should be and we established some corporate governance that defined the roles of “A” and “B”.  We also (with the help of legal counsel) outlined how both could maintain their economic interest while allowing the business to carry on.  So, in the end, we converted “B’s” shares to non-voting and all turned out well.
The message here is that one should consider using non-voting shares anytime there is going to be ownership change (other than by investment) resulting in the transfer of ownership to a party not actively involved in the business.  This allows the economic distribution goals to be met while allowing the “management” of the business to carry on.  Please keep in mind that one always has to consider the corporate governance/control aspects of stock ownership when reaching conclusions here.  It would have been a beaut to have had the non-voting technique in place to avoid some of the angst for both of these brothers.