Business Axis | Family Business Alliance

Key Questions for West Michigan Family Businesses

1. What are our core family values and how do they impact our success?

Family values are defined as the underlying beliefs, principles, and ambitions of the family. A shared value system can unite family members and provide a framework for relationships with customers, employees, and the community. Values serve as a compass to help organizations navigate difficult decisions, drive practices and policies, and distinguish itself from non-family run organizations. How do you best understand and identify your family values? Look back at your family business history. Identify pivotal points in the organization and define the value characteristics that best define how your family responded.

2. How do we deal with inherent conflicts?

All family businesses inevitably will experience conflict. Family run organizations operate in three spheres – ownership, business, and family. This is widely described as an intersecting three circle model, and the intersection of the three spheres is where you encounter common conflicts. Some issues that create the most tension include the direction of the business, roles and responsibilities of family members, and compensation. Having family business advisors, outside council, or more formal governance structures can help to navigate and minimize conflicts.

3. What governance systems do we have in place?

Many family business organizations begin with a founder whose entrepreneurial vision launches and builds the business. They prefer an independent operating style and full control over decisions and direction of the organization. As the founder looks to engage the next generation and families begin to expand, there is the need for a more formalized governance structure. Governance structures assist in developing family relationships, support effective decision making, and strengthen accountability of all stakeholders. Board of Directors, Ownership Agreements, Family Meetings, Family Councils, Family Foundation and Family Office are some common examples of systems that are available as the family grows and ownership becomes more complex.

4. Do we have clear compensation and equity arrangements?

Unsurprisingly compensation and equity are often the most contentious issues in a family business. What are the expectations of the family members (active and non-active)? What is fair? What is equitable? Family organizations should have well-defined job descriptions, compensation packages, and promotion criteria for both family and non-family members. Some organizations separate equity and profit structures to ensure that the distribution of profits to family members is documented and fairly distributed to avoid additional controversy. Equitable is not necessarily equal for many family run organizations.

5. What are the obstacles facing family businesses today?

All businesses are currently challenged with talent and retention issues as well as implementing growth and innovation strategies. Family Businesses are also challenged with unique obstacles concentrating in areas of family leadership and ownership. In a recent survey of family businesses in West Michigan, leaders identified they are most concerned with properly preparing the next generation, adapting governance strategies, and implementing their family values. In terms of ownership challenges, they are looking for information and resources on shareholder responsibility, evaluating equity, and shareholder agreements.

6. Do we have a business succession plan?

If you do not have a plan, you’re not alone. According to a recent study by PWC, only 34% of family run organizations have a robust, documented, and communicated plan in place. Succession plans should incorporate all aspects of a family business including ownership, governance, and leadership. Succession planning is a long journey and often includes defining when family members may work in the business, how profits should be distributed, who may serve on the board, preparing future leadership, and other matters such as taxes, liability, estate planning, ownership stakes, and voting rights. From planning to transition, succession implementation can be a seven-to-ten-year process.

7. How am I engaging the Next Generation?

As they say, “All the flowers of all of the tomorrows are in the seeds of today.” Successful succession planning begins long before the next generation can determine their future career choices. Engagement for family run business should include education, communication, and collaboration. Formal and informal education should include sharing and documenting family history and family values. Whether at the kitchen table or a more formal family meeting – these are key opportunities to share information. Families should also explore digital communication vehicles (websites, social sites, or newsletters) to build and connect family members. Finally, creating collaborative opportunities around a project or charitable giving provides tangible experiences to build relationships, reinforce values and cultivate engagement.

8. Do I participate in the family business community and take advantage of resources?

While every family business is different, many share the same operating challenges. Connecting with and learning from other family business organizations while developing a confidential and supportive peer network is a great way to tackle these dynamics. Sustaining a family business is a journey, but you don’t have to do it alone. Family Business Alliance seeks to help family organizations in West Michigan thrive by creating connections, navigating governance, and elevating leadership for over 165 member organizations. Learn more about how we want to help your family organization at fbagr.org.

EPIC Awards: Family Owned Business of the Year

As part of our mission to advance family business, we are excited to announce a new collaboration with the Grand Rapids Business Chamber.

Since 2010, The Grand Rapids Chamber’s EPIC Awards have recognized the amazing organizations that are building this thriving community and supporting our region through EPIC (Entrepreneurial, Progressive, Innovative, and Collaborative) proportions. This year, Family Business Alliance teamed up with the Chamber to establish a category exclusively for family business organizations to engage and be honored for their efforts and innovation.

We are all aware that family run organizations positively impact our community and economy, so we are excited that an FBA member will have the opportunity to be recognized as the Family-Owned Business of the Year!

The award will be given to a family business that is either a Family Business Alliance Member or Grand Rapids Chamber member and exhibits the criteria below:

EPIC Organizational Awards Criteria:

Has a growth mindset and supports/demonstrates equitable entrepreneurship throughout the organization’s services and programs
Creates an organizational culture that is progressive – not afraid to put new ideas into practice and has an intentional focus on belonging and inclusion
Seeks out innovative opportunities to be creative in their designated industry and community by leveraging the organization’s diversity
Gives back to the larger community and is actively collaborative with other organizations and initiatives to create a thriving West Michigan for all

As an organization, you can either nominate yourself, or be nominated by anyone from outside of your organization. To nominate a deserving organization, complete the nomination form. Nominations close on Thursday, August 4th. After all applications are reviewed by an independent Chamber Peer Selection Committee, finalists are notified. Award recipients are announced the night of the event, keeping finalists and attendees on the edge of their seats.

We are thrilled to be able to formally acknowledge the positive impact that family businesses make in our community. Happy Nominating!

Timeline:

August 12th: Nominations Close
September 5th: 3 Finalists are chosen & contacted
October 4th: Finalist Reception
October 19th: EPIC Awards Gala

For more information, please visit the EPIC Awards page or email Aislinn Teachout, FBA Marketing & Events Coordinator, at aislinn@fbagr.org or Megan Steenwyk, Business Services Manager, at megan@grandrapids.org.

Understanding the Key Transitions in the Family Business Life Cycle

Understanding the key transitions in your family business in relation to the family business life cycle can help you navigate the unique operating challenges of leading and succeeding in a family business. With the help of Family-Owned Business Institute of Grand Valley State University and adaptations of several online resources[1], The Family Business Alliance has established a Family Business Continuum to help family businesses in West Michigan understand the distinct axes of the family business model and improve the opportunity for multi-generational success.

The Family Business Continuum Axes are defined as:

Ownership

The Family Ownership Axis identifies the key and controlling stakeholder(s) and is not linked to a specific generation. In many cases, the first stage of ownership is established based on a Founder’s Dream. The succession to the next generation can be either identified as a “New” Founder’s Dream or a Sibling Partnership. In a sibling partnership, the siblings jointly own the shares of the business, however, leadership may be singled out to a primary member. As the family and business operations grow, ownership models may evolve to a Cousin Consortium which includes extended family through multiple generations or may evolve to a model which includes Distant Relatives.

Leadership

The Leadership Axis defines the experience and engagement of family leadership in the business. Stages include Leading the Business where control is either one primary family leader or shared among siblings. The family leader(s) oversee all strategy and operations. In Joining the Business, a potential successor(s) is introduced to build professional experience, operational experience, and industry knowledge. At this stage, the business often

implements professionalization of roles and formal processes are developed. As the next generation has its own visions and often a strong desire to introduce more strategic thinking, they assume mid-level management roles, defined as Working Together. This leadership expansion phase is often linked with restructuring and may include the development of a board of directors, family governance policies, and family council meetings. Leadership succession can span more than a decade as a succession plan is created and implemented. Each generation transitions to new roles both internally and externally as they Pass the Baton. The family may also sell or expand to different markets and the family business may evolve to a Family Office.

Business

The Business Axis characterizes the stages of a business as it strives to move from a Start Up to Growth and Formalization, defined as the company leaving the niche market and entering a more competitive and larger arena. Often, organizations engage in strategic planning with outside professionals to meet organizational objectives to achieve Maturity and Stabilization. In this stage, the business focuses on the development of organizational talent and seeks to create a flexible framework to take advantage of market opportunities and manage threats. At Regeneration, the key stakeholders face a strategic choice for further growth and maturity. If reinvention is not prioritized, these businesses have a heightened risk of decline.

Family Business Alliance, devoted to advancing family business organizations for multi-generational success, designs its programming, resources, and events to meet the needs of its members at these distinct stages. Currently, the Family Business Alliance represents nearly 170 member organizations throughout West Michigan and offers the opportunity to create connections, elevate leadership, and navigate governance.

Understand your organization on the Family Business Continuum and download complimentary resources available through the Family Business Alliance. Serving over 165 members, Family Business Alliance seeks to advance family business in West Michigan. Together we, create connections, navigate governance, and elevate leadership.

[1] Sources: Ivan Lansberg, Succeeding Generations; Thwart Magazine, Family Business Life Cycle; Forbes How to Use the Family Business Life Cycle to Personalize your Family Office.

Part 3, NextGen Series: A Leader in All of Us

15th Annual Family Business Forum: A Story of Family Business Transformation

Lunch with Leaders: Attracting and Retaining Talent

Board of Directors Workshop

Rightsizing Risk Series: Creating Value for the Future

As the economy begins to emerge from beneath COVID-related restrictions, many uncertainties remain in the small business sector. But one step you can take to right-size your risk and improve your opportunities for future growth is to make sure you have good financial management and tighten your financials, according to John Ruther, managing director for consulting firm O’Keefe. He was interviewed by Sheri Welsh for The Welsh Wire podcast, sponsored by the Family Business Alliance.

“Making sure that somebody can see three to five years of really good solid financials, that you can’t poke holes in, it turns out to be really valuable,” he says.

Ultimately, the goal of good financial management is to create value for the future, Ruther says.

“And obviously, if something’s not valuable anymore, then there’s not a need for it. So as long as you’re keeping it valuable, then that makes all the sense in the world.”

Ruther also says it’s also important to expand company knowledge and expertise beyond the firm’s founder.

“In a lot of cases, you’ll see that the people who work for or work within that company look to that person to make all those decisions. So when it comes time to look to either pass it on or exit or take a look at even expanding the customer base, [if] it’s that person that is the reason that the business is so successful [then] it’s really important for you to start to pass that information on to somebody else.”

He also says you can help future-proof your business by spending time now in strengthening relationships and building trust with suppliers, bankers, etc.

The Family Business Alliance serves to advance family businesses in West Michigan with the tools, strategies, and partners to achieve multi-generational success. We provide educational opportunities, events, and resources that will assist you to elevate leadership, navigate governance and create connections.

Rightsizing Risk Series: Fraud in the Family Business

The Association of Certified Fraud Examiners expects employee embezzlement to increase by 71 percent over the next 12 months. Is your family business prepared?

One of the simplest steps to take is regularly checking your bank statements. “I know that those of you that are business owners may think, ‘Oh, I don’t have time, I have people to do this for me,’ but I will tell you, you will catch a lot of things if you periodically run and check the bank statement, just scroll through and see what a few things are,” says Kristen Spence, Fraud & Litigation Manager for Hungerford Nichols CPAs + Advisors.

Other topics discussed during the 30-minute podcast include how to spot red flag warnings in payroll operations, securely manage manufacturing inventory, and reduce risk by implementing proper internal controls.

Those formal internal controls are especially important for small family-run businesses, says Katy Felver, Business Advisor for Hungerford Nichols CPAs + Advisors. “It’s a little bit more challenging to put internal controls in place [but] it is possible,” she says. “And it isn’t because I don’t trust you, it’s because we’ve got to have each other’s backs. We always have to make sure that we’ve got it like you’re watching me, I’m watching you. We’ve got transparency and honesty going on,” continued Felver.

For any business owner, there is no substitute for knowing your employees and knowing what’s going on.

“Kind of my motto is when you’re a business owner, if you’re able, keep your finger on the pulse of what’s going on in your organization,” Spence says. “And a good way to do that is, honestly, hang around the water cooler. Get to know your employees. And if they are comfortable with you, eventually, they will start telling you things that they wish they had told you,” she stated.

Spence and Felver shared their advice for managing fraud risk when they were interviewed by Sheri Welsh for The Welsh Wire podcast, sponsored by the Family Business Alliance.

Banking Relationships that Make an Impact to your Bottom Line

Family-owned small businesses face lots of challenges. 2K Tool, founded 15 years ago by Heidi Smith and her son Kevin, has navigated a path to growth and success by having a productive partnership with their banker, Old National Bank. “I think that partnering with a banker who understands your industry is very important, [who] understands the manufacturing industry a lot, and you have to click in a way that you trust the relationship, too,” Heidi says.

2K Tool is an innovative leader in custom machining and mold making. It has 25 employees in Grand Rapids, including Heidi’s husband, her daughter Amanda, who serves as operations manager, and Heidi’s son-in-law Aric.

New Research Suggests Family Business Profit in Risk Taking

Family businesses perform better in highly competitive environments if they invest in risky activities like mergers and acquisitions, according to new research on risk aversion versus performance in family-owned firms.

Ana Gonzalez, Director of the Family Owned Business Institute and Assistant Professor at the Management Department at Grand Valley State University, talked about her findings when she was interviewed by Sheri Welsh for The Welsh Wire podcast, sponsored by the Family Business Alliance.

Schupan & Sons: A West-Michigan Story of Family Business Resilience

This article was written and originally published by the Seidman Business Review and has been republished with consent.

Ana C. Gonzalez L., Ph.D., Assistant Professor, Department of Management and Director of the Family Owned Business Institute

COVID-19 has hit us all hard, individuals and organizations alike but with very different implications. Family businesses are no exception, of course. A survey conducted by the advisory firm Banyan Global found that even though family businesses are as concerned and focused as everyone on the short-term, having working capital and facing revenue decreases, they are not concerned in the long run about the overall health of their business (Liberti, 2020). This could be interpreted as arrogance, but it is not that at all. It is more confidence that, despite the uncertainty that the pandemic has brought to the world, family businesses have survived more than one crisis throughout their existence, and they have the resources and capabilities to manage and even thrive beyond the crisis. In other words, they are resilient.

Resilience is understood as “the reservoir of individual and family resources that cushions the family firm against disruptions and is characterized by individual and collective creativity used to solve problems and get work done.” (Brewton et al. 2010, p.156) Family business resilience has three main characteristics: 1) adaptive capacity, which refers to the ability to minimize the impact of environmental shocks; 2) strategic renewal, i.e. the ability to find opportunities despite the circumstances and materialize them into innovative solutions, and 3) appropriation capacity, associated with the use of past experiences and tacit knowledge to handle the post-crisis period (Mzid et al., 2019).

At the Family Owned Business Institute (FOBI)¹, in the early weeks after the lockdown, we interviewed John Barry, President of the Aluminum and Plastic Sales Division at Schupan & Sons, a West Michigan family business to learn if the company had deployed any of these characteristics and to ask about his perspective on the future. Schupan & Sons operates in the recycling industry, though not exclusively collecting and disposal. The company is vertically integrated with manufacturing operations and trading divisions. With over 700 employees, the family business is led by a second generation member, Marc Schupan, and both second and third generations are active in the business. Barry is a third generation company leader.

Adaptive Capacity
When the lockdown started, Schupan remained open as it was considered essential, even though the largest revenue producing division, the Beverage Recycling Division, was shut down by the governor as a contagion preventive measure. They applied early to the Paycheck Protection Plan (PPP) program and received a loan to protect employee jobs, and everyone was sent home with pay. Even though they work in an independent and decentralized way across five states, the leadership team (CEO and division presidents) met weekly for updates and spoke daily, as needed, to support each other and more importantly, to support customers. Barry mentioned that engagement with customers occurred as never before. In his own words, “We’re connecting customers with other customers. Sometimes we hear one customer saying I can only go 90%, but I don’t have the other 10%, and you’re able to connect them.” When asked why they were doing that, his answer was blunt: “If our customers don’t do well, neither do we.” In synthesis, they supported each other and customers and looked for resources available to deal with the emergency. They were able to pivot without firing employees due to the pandemic nor did they have a COVID-19 outbreak.

Strategic Renewal
When asked if the pandemic has triggered new ventures, Barry proudly nodded. This is the story: “A CRNA² came up with the idea of adding an additional layer of protection when intubating a patient. It’s a process that involves many aspirations, so the risks are higher for health professionals. The nurse contacted a mechanical engineer who’s also a friend of mine for help in the design, and my friend – the engineer – asked me if we could donate the material to build a few for the hospital. I said yes, then asked if they needed a hand manufacturing them, and he said, yes!” Therefore, they reconfigured the machines, and Schupan manufactured the 20 units they asked for as a gift. Then Barry added, “When they came to pick them up, only three could fit in his car.” Thus, they redesigned a collapsible unit. Barry negotiated with the nurse and his friend to patent and add the product to Schupan’s portfolio³. This new product has significant sales potential since the demand for these types of supplies has only increased through the pandemic. Sales of the product were increasing at the time of the interview. Moreover, the product was recently referenced in the Cleveland Clinic Journal of Medicine for intubation procedures (Chahar, Dugar and Marciniak, 2020). Having the flexibility to decide, reconfigure, and create is an example that illustrates a common family business strategic renewal capacity.

Appropriation capacity
Family businesses are known for their capacity to transfer not only the business across generations but also intangible resources, such as knowledge. This tacit knowledge refers to “the knowledge that is bound up in the activity and effort that produced it.” (Horvath, 1999, p. ix) The transmission of this knowledge is very common in family businesses (Gonzalez et al., 2011), and its use provides evidence of appropriation capacity. At Schupan, Barry mentioned that they have learned over time that diversification is a “must-do”, and this pandemic was proof of that. When the Beverage Recycling unit was unable to operate, they knew they could rely on the other divisions for sustaining revenue. Barry added that he knew there was going to be a contraction in demand for his division at some point because of the economic downturn, but he had confidence that the other divisions could “hold the storm.”

In addition, Barry reflected on the company’s commitment to customer service, which has been a hallmark since its beginnings. Customer support in service of value creation without exception and diversification to reduce risk, have been key tenets of the business during both good and bad times. This commitment reflects Schupan’s appropriation capacity.

About the future after/with COVID-19
Regarding the future, Barry mentioned that there is still a lot of uncertainty to plan for both next quarter and beyond. He continues to foresee a contraction in demand, and the Schupan leadership team is preparing for a “very tough two following years.” He did not deny his concerns with this outlook but confirmed that they are ready to deal with the crisis. They are focusing on efficiency, working capital, and on taking care of customers and employees. These principles should keep the company solid and strong for the long run. In this particular case, Schupan is confident that it has the resources and capabilities necessary to face environmental shocks. While not the only example in the region, Schupan & Sons is a good testament to West Michigan’s family business resilience.

¹ The Family Owned Business Institute (FOBI) is an academic center at Grand Valley State University Seidman College of Business that champions and serves family businesses through scholarship, education and advocacy. For more information visit gvsu.edu/fobi.
² Certified Registered Nurse Anesthetist
³ For more information visit: https://aero-guards.com/why-aeroguard/

References
Liberti, J.M. (2020, September). Family Businesses Are Experiencing the COVID-19 Crisis in Unique Ways. KELLOGG INSIGHT. https://insight.kellogg.northwestern.edu/article/family-businesses-experiencing-COVID-19-crisis
Brewton, K. E., Danes, S. M., Stafford, K., & Haynes, G. W. (2010). Determinants of rural and urban family firm resilience. Journal of Family Business Strategy, 1(3), 155–166. https://doi.org/10.1016/j.jfbs.2010.08.003
Chahar, P. (2020, May 13). Airway management considerations in patients with COVID-19. Cleveland Clinic Journal of Medicine. https://www.ccjm.org/content/early/2020/05/13/ccjm.87a.ccc033
Gonzalez. A.C., Gonzalez, G., & Diaz, L. (2011). The Role of Tacit Knowledge in the Identification of Entrepreneurial Opportunities: A Study of Family-controlled Businesses. In Understanding Entrepreneurial Family Businesses in Uncertain Environments. In Nordqvist, M., Marzano, G., Brenes, E., Jimenez, G., & Fonseca-Paredes, M. Understanding Entrepreneurial Family Businesses in Uncertain Environments: Opportunities and Resources in Latin America. Edward Elgar Pub. https://doi.org/10.4337/9781849804738.00015
Mzid, I., Khachlouf, N., & Soparnot, R. (2018c, March 27). How does family capital influence the resilience of family firms? Journal of International Entrepreneurship. https://link.springer.com/article/10.1007/s10843-018-0226-7?error=cookies_not_supported&code=e00aa023-7448-4da8-bb88-209e9cc4c3c1
Down, J., Sternberg, R. J., & Horvath, J. A. (2000). Tacit Knowledge in Professional Practice: Researcher and Practitioner Perspectives. Administrative Science Quarterly, 45(1), 170. https://doi.org/10.2307/2666987

Three Paths to Growth: Which One Fits Your Company?

The following article was written by Wade Wyant of Red Wagon Advisors.

Every business owner wants to achieve growth. And every business owner should.

So it makes sense that, when you’re seeking growth, you should be able to answer a basic question: What is your primary path to growth?

Now of course, everyone’s answer to this question will include some basic fundamentals, such as focusing on great products and services, and focusing on taking care of customers.

But beyond those fundamentals, there are three primary paths to growth that apply to all industries. And I often find that corporate leaders aren’t entirely sure which of the three best suits their companies. As a result, they’re going full-bore in all three directions, and often wearing out their people in the process.

Here are the three:

Organic growth. This one is the most basic, of course, and it’s nothing new. The company growing organically is not trying to change the world with its products and services, but it’s finding small innovative moves that can differentiate them from their competition. That, combined with a world-class sales and marketing effort, keeps the orders coming in and the revenue expanding.
Execution plus acquisition. Have you perfected the execution of your product or service, well beyond the industry norm? Are your systems and processes far more efficient than those of your competitors? Great. Ride that excellence to happy customers and strong cash flow, then you can grow by acquiring your less-excellent competitors at a value price, and increase their value by instituting your system of excellence to replace their old, inferior ones. I made that sound much simpler than it is, but if you can achieve that level of excellence, this is definitely a great path to growth.
The Unicorn. All the world loves big ideas, and some of the most successful companies in history have been built on them. And it’s only natural, if you operate in the business world, to believe you’re capable of coming up with the next innovation that will change everything. The next unicorn. This is a strategy with high potential, but also high risk and very long odds. So if your entire growth strategy is based on coming up with a unicorn, you’d better find it.

And that speaks to a problem I see with many businesses. Their pursuit of growth is either misaligned with their real strengths and opportunities, or it’s scattered across all three without a real commitment to the one that makes the most sense.

What is your best path to growth? The answer to that question lies within the strengths and opportunities of your company, as well as your market positioning. It lies within the capabilities of your people and your processes.

Do you do the basic fundamentals extremely well, and sell your products and services with exceptional success? Then your primary path to growth might be organic.

Is your execution so strong that you’re running circles around your competition? Then maybe you should consider bringing them into your organization and consolidating your hold on the market.

This is not to say you shouldn’t try to excel at all aspects of your operation. Does it make sense to seek organic growth while also striving for excellence in execution? Of course it does. You want to do everything as well as you can. But you’re trying to grow right now, and the focus of your growth strategy should be on the path your company can pursue most successfully based on its structure and positioning today.

But what about the unicorn? What about the big idea that could change everything? Why shouldn’t you pursue that? Didn’t Steve Jobs? Didn’t Bill Gates?

Of course they did. And so have a lot of other people whose names you’ve never heard because they didn’t become Steve Jobs or Bill Gates. I love big ideas and I am the last person who’s ever going to tell you not to pursue one.

But here’s what you need to know: Big ideas usually take a long time to come to fruition. It never feels that way when they first come to you. You get inspired and you start imagining all the places your idea can take you.

You might even call your team together and share your vision, and they might get very inspired too. Once they’ve heard your idea, they’ll head back to work feeling inspired to make it all happen.

This can be trouble. That idea is probably a very long way from realization, if it ever happens. Your team is excited now, but in six months they’re going to wonder if this is ever really going anywhere. In a year they might be thinking you’re tilting at windmills. In three years, they’re no longer taking you seriously when you talk about big ideas.

Nothing’s happened. There’s been no growth. You keep telling them to just wait for the unicorn, but all they see is the same stagnant company every day.

And it didn’t have to be that way. You can have your big idea and you can chase after it. But in the meantime, your path to growth has to be based on where your company is strong and capable right now. Your team needs to be focused on that.

There’s nothing wrong with having select, strategic people helping you push toward an exciting innovation. But how are you going to make it happen if you’re not growing and earning revenue from your existing operations? That’s where you need your team focused, and they need to know that’s where the company is focused.

Which of the three paths to growth fits your company best? It shouldn’t be a hard question to answer for anyone who really knows their company and their people.

But in order to answer it, you first have to know enough to ask it. Now you do.

Wade Wyant
Grand Rapids, MI

Anatomy of a Deal: Mergers & Acquisitions

Written by Robert Tyndall: Managing Director of Investment Banking and Corporate Finance at Fifth Third Bank

U.S. market valuations for middle market companies are at an all-time high according to GF Data, but the cycle may be at a peak. So for business owners considering a sale of their company or a similar transition in ownership, it is a good time to learn about and evaluate options. Selling a company is a mission-critical, complicated process often taken on with the help of advisors. In addition to a market update, this article will describe the process and seller considerations in detail.

I. Sellers M&A Market
II. Sustainability of Strong M&A Market
III. Business Owner Considerations
IV. Process for a Strategic Transaction
V. Timing a Sale Process

Sellers’ M&A Market. The average middle market company today will sell at a significant premium to market values of earlier years. M&A volumes have ranged from $250 to $300 billion per year in the middle market since a low of $140 billion in 2009. M&A activity year-to-date in 2019 is tracking ahead of the same period last year. Buyers and investors often value companies based on a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA). Multiples of EBITDA paid for high quality companies in the middle market are currently very high, making now an attractive time to be a seller in the market.
Source: GF Data, S&P Capital IQ, Pitchbook, and Preqin
Sustainability of Strong M&A Market. Many of the fundamentals that are driving today’s market should continue to support strong company values, however, there are early indications of a moderating market or eventual downturn.

Sustainable drivers of a sellers’ market include:

Record levels of corporate cash and private equity dry powder (about $3 Trillion) indicate that buyers are motivated and have the ability to pay premium values for quality assets Source: Bloomberg S&P CapitalIQ, Pitchbook, and Preqin
Readily available and low cost M&A financing from banks and alternative sources, fueled in part by interest rates which are projected to stay low
Relatively lower supply of high quality companies for sale driving historically high valuations
Stability of banking system, driven by higher standards and regulation, adds certainty to transaction financing and outlook for liquidity

Other market factors with less sustainability or visibility include:

Impact of international trade dynamics and policy on U.S. businesses
Domestic and international political uncertainty
Consumer confidence and employment rates
GDP growth and projected company growth
Risks of lower regulation and standards in non-bank debt financing sector

It is likely a near-term market downturn would be moderate relative to the severe recession of 2008-2009, due in part to stable liquidity and banking system which was not in place previously.

III. Business owner considerations. The issues business owners face are multi-faceted and complex, between shareholders, company, management, succession plans, and personal or family issues. A strategic transaction, such as a sale, may resolve core challenges and meet key goals.

Types of transactions. There are a variety of common strategic transactions. An investment banker or other advisor can help a business owner evaluate options and the best transaction for the company. Often, an investment banker can run multiple transactions in parallel, allowing the company to choose once market feedback is obtained. Common strategic transactions include:

Growth through acquisitions
Strategic merger
Minority investment / recapitalization
Leveraged buyout
ESOP (employee stock ownership program)
Outright sale

Preparing for a strategic transaction or sale. Great insight, intention, and effort are often required to prepare a company well for a sale. It is usually a mission-critical, once-in-a-lifetime or once-in-a-career transaction for the shareholders and management. The process has voluminous and substantial complexities, risk, and potential for extraordinary gain. Common areas for evaluation, improvement or clean up in preparation for a strategic transaction are described below. Many companies engage legal, tax, accounting, M&A and other advisors in preparation for a process.

Corporate Structure
Financial Reporting
Operational Considerations
Legal Concerns
Management Capabilities
VI. Process for a Strategic Transaction. A sale process for a privately held middle market company requires creating a competitive, confidential market for a highly illiquid security (shares in the company). There are three primary phases of a strategic transaction process, as described below:1. Advisor Diligence and Final Preparation. Completing this phase effectively is essential to avoid surprises and reduce management burden later in the process, and to maximize value. Diligence and final preparation begins with engagement of an investment banker to conduct the transaction, and a four to eight week period of collaborating with the investment banker for thorough final preparation and thoughtful, tailored positioning of the company.

Led by the investment banker with the company’s input and approval, this can include:
i) creating detailed support for growth initiatives and market opportunity, ii) effectively tailoring the message to each investor or buyer, iii) anticipating and mitigating potential concerns, iv) highlighting specific areas that may help an acquirer stretch on value, and v) anticipating buyer questions and addressing them in marketing materials.

Marketing. This phase begins with the company’s investment banker contacting a pre-approved set of potential investors or buyers in the company on a no-names basis. Over a four to eight week period, the investment banker qualifies buyers based on interest, fit, and capability to fund and close a transaction. Investors that sign a confidentiality agreement receive the company’s confidential information memorandum and instructions to submit indication letters. Buyers work with the investment banker to understand the company and how a new owner might grow the business and may request more information that the investment banker coordinates with company permission.

Deliverables and milestones of this phase often include: a) indication of interest letters from buyers, b) management meetings between company and buyers, c) formal offer packages from buyers, and d) an executed letter of intent between finalist buyer and seller.

Final Diligence and Closing. Between letter of intent and closing, the buyer takes final steps necessary to effect the purchase of the company. The company’s investment banker will work with the buyer to construct and execute on a work plan and timeline to close. This phase typically includes in-depth confirmatory diligence on the company, obtaining financing for the purchase if necessary, obtaining regulatory approval if necessary, purchase agreement and other legal document negotiations, and the close. It may last one to three months depending upon complexity or simplicity of the company and transaction, and availability of resources from both buyer and seller to move forward quickly.

This final phase goes best when the company has made proper evaluations and improvements prior to the transaction, and when the company works with qualified advisors who have also helped the company prepare well (see prior sections). Without these two conditions, deals are at higher risk of failing or falling in value during the closing phase.

Deliverables and milestones of this phase include: a) completion of buyer diligence on the company, b) financing of the deal by the buyer if needed, c) execution of purchase agreement and ancillary documents, and d) funding of transaction and payment to sellers.

Importance and selection of third-party advisors. Most middle market companies will fare better in a transaction process by engaging accounting, legal, and M&A experts to structure and coordinate the deal under the company’s guidance. Shareholders should see a large payback on fees paid to advisors in terms of: i) higher valuation for company, ii) higher certainty of closing, iii) lower risk, and iv) faster and more efficient process than without advisors.

For example, an audit and/or quality of earnings report from a reputable and capable accounting firm, along with the ongoing support of the sellers’ accountants during the transaction process, is critical to demonstrate credibility of financial statements and keep momentum in the deal, as well as to minimize surprises later in the process. Also, attorneys with seasoned experience and solid track records in M&A transactions are most likely to help the company achieve the best, market-based terms and their knowledge will enhance the efficiency and speed of the process while protecting the sellers from unnecessary risk.

Investment bankers are likely to achieve a higher valuation for the company than it could on its own, as well as: i) organize and manage the process so owners and management can focus on the business, ii) provide comprehensive market-based feedback, iii) enable owners to make fully-informed decisions, iv) advise management and owners on key decisions and market standards, and v) move the process along rapidly while maximizing value and quality.

Timing a Sale Process. The evaluation of whether now is a good time for a business owner to pursue a sale or strategic transaction is multi-faceted. Particular shareholder considerations are unique to each situation, and will not be addressed here, but are important to understand and align with stakeholders and advisors. In addition, key items to consider include:
Current company performance. A strong performance trend line, well developed value drivers in the business, strong and clean financial and regulatory reporting and compliance, and established customer relationships indicate the timing is good for a sale.
Mid-term company outlook. Indicators of good timing for a sale include favorable industry trends, credible projections for solid growth, and substantiated financial performance.
M&A market tenor. Growing sector investment, active strategic buyers, and abundance of capital indicate the timing is good for a sale.

Written by Robert Tyndall: Managing Director of Investment Banking and Corporate Finance at Fifth Third Bank

Eight Takeaways from Tax Season for Family Business Owners

We just finished filing taxes under the largest reform in 30 years! As we reflect back on
this filing we’ve compiled a list of key takeaways for family business owners.

The biggest changes are: the increase of standard deductions, changes to the income
tax brackets and the addition of a new qualified business income deduction.

1. Limitation on State and Local Income Tax Deductions
The tax law change in 2018 created a new cap for itemized deductions of $10,000 for
state and local income tax and property taxes.

While taxpayers in California and New York were hit the hardest, some taxpayers here
in West Michigan also hit the cap. Those who fall into higher income tax brackets, high
property tax and second homes were impacted the most by this cap.

2. Charitable Giving Impacted by Tax Reform
Charitable contributions may not have as much of an impact on your tax return as a
result of the increase in the standard deduction but that doesn’t mean you shouldn’t
donate! By the way, you may not have received as much of a benefit from contributions
in the past as you thought. We have more information on this topic HERE.

3. Entertainment Expense is No Longer Deductible
Business related entertainment expenses are no longer deductible. Certain business
meals remain 50% deductible and the substantiation requirements have changed under
the new law. But, sorry sports fans, those business related rounds of golf and sporting
event tickets are no longer tax deductible.

4. The Loss of Miscellaneous Deductions may Hurt
In the past you may have been able to deduct a portion of investment fees and
expenses, tax preparation fees as well as casualty and theft losses. These
miscellaneous deductions along with a list of others were eliminated under the new tax
reform. The actual impact on each taxpayer will vary.

5. Un-reimbursed Business Expenses May Impact your Employees
A portion of un-reimbursed business expenses are no longer tax deductible on an
individual taxpayer return. One example of this change may apply to your sales staff.
Previously some employees would write off meals, travel, vehicles, etc. that were not
reimbursed directly by the company. As an employer, you should recognize the change
in compensation for these employees and consider creating a plan to reimburse them
according to IRS guidelines.

6. Qualified Business Income: Beneficial for Most Family Businesses
Introduced in this tax reform is the new Qualified Business Income Deduction. The
deduction is 20% of qualified business income subject to limitations. Depending on the
type of business entities (S-Corp, Partnership, Sole Proprietor), the industry you
participate in and your income level, your qualification and level of this deduction will
vary. In addition, the complex formula may be impacted by retirement contributions and
other moving pieces.

7. Covering Moving Expenses Now Counts as Income for Employees
Whether you reimburse a new employee for moving expenses or whether a new
employee pays for moving expenses themselves, the tax benefit has been eliminated. If
you reimburse the expense it is now considered income to the employee. If the
employee pays the moving expense, the tax deduction is eliminated.

8. Tax Returns for Business Owners More Complicated
The largest tax reform in 30 years means CPAs have to relearn the rules. It’s taking
longer to digest the rules and translate them as it applies individually to you and your
company. We expect that you saw an increase in billable time for the preparations of
your returns this past filing season.

As a family owned business, Kroon & Mitchell is experiencing the same tax and
financial changes and is happy to answer any of your questions. Feel free to reach out
today with questions at 616-356-2002.

Author: Amelia J. Mitchell, CPA, MSA
Kroon & Mitchell, Integrated Tax & Investments

Finding Top Talent – When It’s Time to Get Some Help

Written by Sheri Welsh – SPHR, CPC, CERS

The struggle to find talent is real. The acute shortage of professional talent is staggering! Traditional methods of finding key employees such as job board or website postings often fail to produce a single acceptable candidate. It might just be time to seek help. But many family businesses are hesitant to do that.

Growing up in a family owned business, I understand the struggle in deciding whether or not to outsource a function. We carefully weigh the investment against our ability to do the work internally. If you’ve built a strong operation, with a great customer base and an excellent reputation you may have never experienced a problem with recruiting talent – until now. You may never have faced a business challenge that you couldn’t solve with the help of your family leadership team. And when it comes to recruiting, many think, “This shouldn’t be that hard! We should be able to handle this!” Unfortunately, the game has changed – sourcing great talent just isn’t easy anymore.

Here are some tips on how to know when it’s time to get some help:

You don’t have the resources to conduct the search. Without the contacts, network, and tools to source “A” level candidates, you could come up empty.
You don’t have the time to conduct the search. If you don’t have time to dedicate to managing a search, how long will it take you to fill the position? And what’s the cost in lost business while the position remains open and your focus is directed elsewhere?
Your business needs an individual with skills it doesn’t have. When hiring for skills outside your area of expertise, it is wise to enlist the help of a professional who understands the position better than you do.
Your company culture requires a unique style and fit. Hiring for culture fit often requires a very strategic, targeted approach and direct sourcing efforts that require outside support.
You won’t settle for a mediocre candidate. If “good enough” is just not for you, it’s time to call a search firm to find your next rock star.

Sheri Welsh – Welsh and Associates

Using Outside Directors in Your Family Business

by Mark K. Harder

Publicly traded companies have boards of directors primarily comprised of outsiders. But how many owners of family or other closely held businesses think about, much less have, outside directors for their businesses?

3 Ways Your NextGen Can Increase Your Valuation

NextGen leaders have a unique opportunity to increase the financial value of their company by driving three key conversations with the NowGen that can mitigate business (and valuation) risks. Here are the risks and their counter-balancing conversations:

Valuation Risk – Revenue Growth

How does the company grow? Are there new products or innovation? Markets and technology change constantly. Growth drives value.

Countering Conversation

Spearhead the discussion about future product lines and highlight what you as the NextGen bring to the table. Innovation and insights can be borne out of fresh perspectives.
Dream together about the future of the company – where will growth come from? What markets will you serve? What do you need to do today to get there?

Valuation Risk – Key Person Risk

Over reliance on one specific person (for customer relationships, technical knowledge, etc.). This drives down value due to higher risk.

Countering Conversation

How will the transfer of this key knowledge or relationships take place? How will you know when you are done?
Is the NextGen a good fit for growing into these roles? Are these roles best split between more than one position?

Valuation Risk – Engaged Workforce

Finding a talented, highly engaged workforce can be challenging, particularly in a robust economy. This can limit capacity to grow.

Countering Conversation

People burn out more from lack of growth opportunities than from feeling overworked. How can you reinforce a culture that supports growth opportunities at every level?
How are future leaders being developed and engaged, so they can be retained and create a strong bench?

The NextGen can take a leadership role by driving these crucial conversations. By mitigating these key valuation risks, the NextGen can help forward successful succession plans while also increasing the value of their family business.

Credit: Matt Rampe of Beene Garter

Family-Owned Businesses Wrestle with Talent Concerns

As president of Grand Rapids Label and chair of the Family Business Alliance, Bill Muir understands what family-owned companies are going through right now. According to Muir, manufacturers remain optimistic heading into the new year, and they’re making more investments to support their customers.

Eventually, the economy will go into another cycle and we’ll have a downturn. How well are family-owned businesses prepared for it?

I think family-owned businesses have gotten smarter in terms of not getting too far ahead of ourselves. I think there is a conservative nature of a family-owned business compared to another business in terms of being able to hold cash. It is different because family-owned businesses are willing to put their own money back into the business to support it.

Is family part of your brand identity?

When you think about your business and its brand, what words come to mind?

Pause. Really think about this for a moment. Jot down 3-5 words.

So, what words made your list? Quality? Service? Innovation? These are all great words. But, what about family—did it make the cut? If not, we suggest that it should. And research supports our position.

Sure, working with family can be tricky, but in the minds of your customers, family is a positive attribute. Family Business Magazine reports that 60 percent of consumers say that they prefer to buy from family businesses.

Here are a few reasons to brand yourself as a family business and examples of our FBA members who are getting it right:

1. Humanize your brand. Without a doubt, your business has a story—one that includes a unique set of circumstances and an interesting cast of characters. These stories give context to your business, inspire, and ultimately make your brand more endearing and relatable.

Take this story from BISSEL Inc. BISSELL started out of necessity—Mr. and Mrs. Bissell was looking for a more efficient way to clean up the constant trail of sawdust in their crockery shop. Mr. Bissell invented a unique sweeper and patented it. The story goes on to share that after Mr. Bissell passed away, Mrs. Bissell the business and became the first female CEO in America.

The BISSELL story is pretty remarkable. It gives you a peek at the family’s values of innovation, tenacity, and perseverance.

2. Set yourself apart from the competition. Anyone can start a business, but doing so, and growing it with family, is unique. Use this to differentiate yourself.

Researchers from the Institute for Family Business conducted a survey of 125 family businesses for their report titled Family Business Branding: Leveraging stakeholder trust (note: this report is loaded with great information—definitely worth skimming). Participants were asked why branding themselves as a family business was beneficial. The report states, “A distinct family business brand is assumed to contribute to a company’s image of trustworthiness (81 percent), social responsibility (70 percent), quality-orientation (68 percent) and customer-orientation (67 percent).”

Take King Flour as an example. On their website they say, “King Milling Company has been family owned and operated for over one hundred years. From its humble beginnings using the stone grinding process, to the fully automated network of steel rolls today, the King Milling Company has always pushed to be on the leading edge of milling technology. A quick look at our history will show that our company has always strived to be a pioneer in the milling industry, finding the most efficient way to produce the highest quality flour and wheat products for our customers.”

Without a doubt, this type of information can go a long way in differentiating yourself on the shelf.

3. Build trust. The title of this 2015 Harvard Business Review article says it all—Study: Customers Really Do Trust Family Businesses More.

Positioning yourself as a family business demonstrates steadiness, reliability and a commitment to being around for the next generation. All of these things help customers feel confident and secure in your relationship.

We like this example from Skytron. On their website they say: “Skytron is proud to be a privately held and family-owned company. Since our founding in 1972, we have stood firm on this business structure. We believe it’s one of the many ways that demonstrate our commitment to integrity and long-term focus.”

Reflections: If you are not currently branding yourself as a family business, why not? How could you use this key part of your business to build trust, differentiate yourself and connect more deeply with your customers?