Governance | Family Business Alliance

SecurAlarm Celebrates 30 Years

Brothers and family business leaders standing next to each other similing.

Brent Van Haren, President and Todd Van Haren, Controller

Family business success is different for every family-run entity. There is no one-size-fits-all approach.

To honor and celebrate our members who have achieved “Milestone” anniversaries, we are sharing insights into their business journeys. In our first highlight, read what second generation leaders, Todd and Brent Van Haren, share as they reflect on the 30th anniversary of SecurAlarm.

About

SecurAlarm is a second-generation, family owned business located in Grand Rapids. They specialize in providing comprehensive commercial security services – from cyber security, building security, and more. They proudly address the risks and concerns of their clients from physical property to business continuity.

Gloria Lubben and Pat Van Haren

Where and how did the family business journey begin?

It began in the heart of another family business. Our father, Pat Van Haren, began his career teaching but quickly realized it wasn’t his passion. He shifted to wiring houses and businesses with his dad who was operating a small electrical business, Van Haren Electric. It quickly grew into a successful electrical contracting business defined by high quality people and installations.

Gloria Lubben joined Pat and his brother, Brian, to launch SecurAlarm Systems, Inc as a subsidiary to Van Haren Electric. At that time, there was a gap in the market for delivering complex solutions with high level quality. They cared enough and believed they could do better in protecting what matters to businesses. This is why we exist today.

Todd Van Haren speaking on an FBA event panel

What’s been most surprising about your family business journey so far?

The generosity of other family businesses and how invested they are in seeing each other succeed. We have learned so much from our fellow FBA members through Peer Groups, events, workshops, and other connections. While each business is different from a family/corporate structure and industry perspective, it’s amazing the similarities and challenges we share.

If you could go back in time, what’s one piece of advice you’d give yourself?

Van Haren Family Photo

Enjoy the time with prior generations. Capture their story and preserve it. It has shaped so many aspects of who we are. While some aspects might not be as favorable as others, try to understand and leverage them.

Also be intentional about including all family members (spouses, siblings, parents, children, etc.) that aren’t directly involved in the business. Family can be a huge strategic advantage and it’s important to keep everyone informed and engaged.

In SecurAlarm’s 30-year history, what do you see as the family business’s most important contribution?

Remaining dedicated to why we exist: We Care, So We Protect. It drives our decisions, how we measure success, and how we serve our community, team, and clients.

We are in a rapidly changing cross section of industries (construction, security, and technology) and we look to our WHY whenever we’re at a crossroads. We engage with empathy and a desire to see our team, clients, and partners succeed. We invest significant energy into making sure whoever we encounter feels cared for by listening, confronting brutal facts, and taking action on whatever is holding us back. Because of this, our team members tell us they are better individuals, spouses, siblings, friends, and leaders. Our clients trust us and lean on us for guidance.

What do you identify as a pivotal change throughout the business’s history?

Over the last year, SecurAlarm has embarked on a business model shift, which we are still in the midst of. We are shifting our focus from products to services because we believe security is so much more than technology and transactional relationships.

We want to align technology, procedure, and training unlike any other security integrator out there. We want to deliver personalized, comprehensive, and strategic plans and solutions to our clients, who we think of as partners. So much change is required, and it will be a long journey, but we know it will allow us to better serve our team and clients for another 100 years. Why the shift? It goes back to our Why, of course! We Care, So We Protect.

All photos are courtesy SecurAlarm.

This feature is part of our Member Anniversary Program. For more information or if you are interested in exploring opportunities to be featured, please email aislinn@fbagr.org.

Family Business Alliance strives to help family businesses with the tools, resources, and connections to help businesses succeed. Learn more about our resources including Leading Forward, Succeeding in Succession, and Navigating Governance that help to advance family business in our community.

Small Business Week Feature: Ludema’s Floral & Garden

To celebrate small business week, FBA sat down with Allison Ludema from Ludema’s Floral and Garden to understand their small, family business story and what makes them tick. Read on to learn how their business has blossomed over five generations.

Where it All Began

Ludema’s Floral and Garden, a fifth generation, family-owned business, has been on the same land since they opened in 1907. What is now a busy commercial area in Kentwood was once an agricultural area filled with greenhouses and family farms. Allison’s great, great grandparents began the business by selling their extra produce on a road-side stand, and they would drive their products to the East Side Market in Detroit and other local markets. Then, their focus was mostly fruits and vegetables. They eventually evolved into indoor plants and other garden crops.

Over time, subsequent generations began infusing their passions into the business. As Allison explained, the fourth generation, her mother and aunt, started moving the business toward floral sales.

“My mom was the one who developed the department from nothing…It’s grown by leaps and bounds, even in the last 10-20 years.” When Allison was a teenager, they began offering wedding services again and Ludema’s continues to expand and connect within the West Michigan Community.

In addition to weddings, corporate partnerships and events sales have continued to expand as they grow their reputation in this space within the community. For example, Ludema’s partners with the Amway Grand Hotel Downtown Grand Rapids to provide fresh, beautiful floral arrangements throughout their lobby.

“Our quality of work has pushed other people to recommend us,” says Allison. The family business also works with Corewell Health through a concierge service, and Allison’s goal is to continue developing these relationships and community partnerships in coming years.

“A lot of people still don’t know that we do flowers. They associate us with the greenhouse and produce we used to have, rather than a year-round floral business.”

Although the fifth-generation business leader manages the strategic direction of the company, the fourth generation is still involved behind the scenes. “We of course talk to each other about everything that’s going on,” and her parents still reside on the property where she and previous generations grew up. In addition to the strategic direction, Allison manages the retail operations and, like many family business owners, wears many hats. She is thankful to have a great team of managers and coordinators to help her day-to-day. Year round, their team consists of fewer than 20 employees but employs as many as 50 employees during peak seasons.

Allison never anticipated joining the family business even though she grew up on the property that has been in her family for over 100 years. “We always had to help growing up, even as little kids.” From learning how to serve customers, to tying bows for arrangements, she has been involved in the business for as long as she can remember. Wanting to pave her own path, Allison majored in Hospitality & Tourism with an emphasis in Event Planning. Although she didn’t know it at the time, it came in handy for her role today.

Today, it is the legacy and history that makes her most proud. She explains it wasn’t until COVID-19 created so much uncertainty for the business that it dawned on her just how special Ludema’s is to her and the community.

“It lit a fire under me. I did so many things I never thought I would have to do or explore. I’ve always been proud of it and love it, but the fear of losing it heightened it even more.”

Another point of pride is the relationships with her customers. “We have a lot of regulars who know a lot about our business and our family. That we know them by first name, and when they walk in we can greet them that way is a really special thing.” Maintaining that for more than 116 years is no small feat, and they have worked hard to do so. Allison explained that their cohesive team culture is part of creating this customer experience and welcoming atmosphere.

Aside from the customer connections, Allison feels that locally owned business are important “because we understand the community, how it changes and we can evolve with it.” Not to mention the passion and quality of their products, which has been passed down for generations.

“We care about the quality, and we care about what we are sending out the door, and I think that’s the difference with a small business.”

What’s Next For Ludema’s?

When asked what she is most excited about in the future of Ludema’s, Allison expresses, “I am very passionate about continuing to build our floral department and continue to let people know that we are here all year round to get a beautiful floral arrangement or help with an event. We put our hearts into everything that we do and when we do it, we do it well.”

As they continue to move forward, Allison acknowledges that without “that family connection from the beginning” and the foundation it provided, “we wouldn’t have the other unique parts of our business.” Like any family business, Ludema’s has transformed and evolved over the generations yet maintains the shared roots of generational passion and expertise.

Experience with Family Business Alliance

As a small, family business owner, the Family Business Alliance Peer Groups have been valuable for Allison. “Being in a room with people that have the same sort of struggles that I do is very comforting but also mind-blowing.”

“To hear people from corporations that I have known my whole life dealing with similar issues to my own is so comforting. No matter how big or how small, or what the struggles have been within you family company, to know that someone else is experiencing something similar that can provide insight, is what I appreciate.”

This interview has been edited for length and clarity.

Written by Aislinn Teachout

Succession: Why Logan Roy Was Doomed to Fail

HBO Succession cast seated posing for a serious photo.

Image by HBO

If you are a family business leader, don’t be a Logan Roy.

For the last three years, millions of viewers have tuned into HBO’s hit TV show, Succession waiting for Logan Roy to identify a successor for Waystar Royco. The series magnifies all the complex drama which can plague a family run organization, but after 4 seasons, I do agree with Logan – they are all “idiots,” and Waystar Royco should not be succeeded to any of the family members.

So, why was Logan doomed to fail in succeeding the business to his children? He ignored crucial components and best practices of family business leadership development. As each character develops through the series, viewers are tasked with evaluating them and trying to fit a square peg in a round hole.

We come to understand that Connor has disengaged from the business completely and lives an entitled lifestyle without any sense of obligation to the business or community. He continues to purge his financial resources on an election campaign where he polls at 1%.

Kendall, who appears in season one as the “chosen” son, lacks instinct, confidence, and organizational knowledge. When he appoints himself as CEO after his father’s airborne stroke in the opening scene, it is only then that he learns the organization is $3 billion in debt. He is also plagued with addiction and self-destructive behaviors attributed to his relationship with his father.

Shiv, a politically savvy and competent political consultant, is filled with insecurity. Even when it comes to her judgement on picking a political candidate – the one area she is most qualified for – her expertise was undermined by Logan.

And, finally, Roman, the youngest Roy child, constantly lives up to the “baby of the family” monolith and is enabled by Logan despite being incapable of cultivating relationships, personal or professional. We learn that despite being fired from an entry level role in the family business, he has earned a seat on the board and is eventually hired as Chief Operating Officer.

Kendall Roy from Succession looking serious with the quote "I love you, but you are not serious people," from Logan Roy typed out.

Image from Reddit / turdette_ferguson

Based on this assessment, Logan Roy was right when he said, “You are not serious people.” The children are not capable of taking over his most prized possession, yet in many ways, he set them up for failure. If you are a family business leader, don’t be a Logan Roy.

HBO’s Succession captures many of the stereotypes of family businesses and their heirs, and the series is just one exaggerated example of what not to do. Successful family business leadership transitions take years of careful consideration and planning. They require consistent attention, re-evaluation, communication, and should include a backup plan.

Here are a just a few considerations for family business leaders as they seek to identify their own successor:

Define Leadership Needs of the Organization. Establish a leadership profile based on the opportunities, threats, and weaknesses of the organization. Consider the input from outside advisors, board of directors, and senior level management. What are the skills required to move the organization forward and to serve as the next steward of the organization?
Define and Establish a Path to Leadership. No one starts at the top, even if they share the last name of the Company’s founder. Maybe the family member works through a management training program and experiences various aspects of the business, all these norms can be established through good governance.
Utilize Leadership Development and Assessments Resources. History has demonstrated that the most effective leaders are self-aware. Assessments provide an objective view of the skills and capabilities of each family member. Once the assessment is completed, you have a professional development roadmap. Support individual development by engaging in leadership conferences that are dedicated to the development of family business leadership skills. Create opportunities for transparent and consistent communication through an annual review. Recognize the “perfect leader” does not exist and begin to develop a senior leadership team to support the next generation leader.
Develop Professional Skills Outside the Business. A widely accepted best practice for family business organizations is to establish a governance policy which requires all family members to develop professional skills outside the business. This provides the family member an opportunity to build professional networks, gain organizational operational insight, and create diverse perspectives.
Hire Based on a Job Opening and Alignment. Every Next Generation leader will be scrutinized when they join the business. Family members should be hired based on professional skills and experience to fill a need. Their entry point should be commensurate with the skills and experience they bring to the job and follow employment and market compensation guidelines.
Identify Development Paths within the Organization to Build Confidence. Find opportunities for development within the organization in either roles or special projects. Many organizations rotate family members through departments to learn integral sections of the business. Others can create opportunities with new product lines, innovation projects, and market expansion opportunities. These roles provide learning opportunities for the next generation to develop confidence while also earning respect and credibility with other organizational stakeholders including other leadership, clients, and employees.

If you seek to succeed in succession and transfer your family business to the subsequent generation, investing in leadership development and good family governance are two of the critical components to ensure that your legacy, values, and your organization survive for years to come.

Written by Robin Burns

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.

Why Won’t My Parents Retire and Let Me Run the Family Business

If you have spent your career preparing to take over the family business, it can be frustrating to wait for the senior generation to decide that they are ready to retire. It also may be hard to understand why mom or dad chooses to keep putting in the long hours and would rather deal with the challenges of the business instead of retiring and enjoying life.

For the next generation, the waiting is even more difficult if your parents have not created a succession plan. This causes great uncertainty regarding the role each person should be preparing for and how a successor will be chosen if a parent passes away without a plan.

Sometimes the wait exists because the parents may still enjoy running the business. They likely are in no hurry to let go of a company to which they have devoted their lives. Or, parents may not wish to deal with the complex emotions, the fear of the unknown or the hard feelings associated with choosing successors. These issues and others can create barriers to planning for a transfer of the business to the next generation.

If you want to help your parents focus on succession, it is important to understand the issues behind their reluctance to do this planning and understand the strategies for addressing them (warning: it might take years). Below are some common issues that our succession planning attorneys, working with the family’s other professionals, help families overcome to begin preparing for ownership transition and creating a succession plan.

Coping With Reasons Why Parents Won’t Leave the Business

1. They are uncertain about how they can be financially secure away from the business.
This one is huge, and succession will not be addressed if this concern is present. However, many options exist to solve this problem, and your wealth advisors and your attorney can certainly help you find one that is right for your family.

Common approaches include taking higher pay for a few years and saving it, selling a portion of the equity back to the business or to other family members, creating deferred compensation arrangements, or retaining assets to lease back to the operating business.

2. Their identity is tied to the business.

A parent may be able to identify a new role for themselves that is related to the business such as: Chair of the Board, consultant, informal advisor, trainer/mentor, representative to industry associations or other related groups, etc.
Depending on interests and skillsets, a parent can develop a new role relating to a family foundation, family investments, family governance, next-generation education, or a family office.

3. They worry that their life will lack purpose without the business to run.

After they have devoted decades to building a business, it may be hard for them to see that they could have an important purpose elsewhere.

Help them realize that as they transition the business to someone else, they can use their lifetime of experience to benefit others. Examples of new ventures could include starting a consulting firm, speaking on business or motivational topics, serving on boards of other companies or nonprofits, leading philanthropic organizations, teaching business classes at a college, working with local business associations or business startup programs, or coaching students in business/entrepreneur programs such as Junior Achievement or DECA.

4. They believe successors are not ready to run the business.
Find out what their specific concerns are and take steps to alleviate these concerns.

Seek opportunities to demonstrate the ability to succeed, including rotations through all functional areas of the company.
Engage in learning and development such as an executive MBA program, leadership courses, mentorship plans, connections with other business leaders, and working with consultants or mentors from other businesses.

5. They believe that they are irreplaceable.
Some of the strategies mentioned above can help with this concern too. However, this one may be difficult to address without outside help.

Make sure the senior generation gets exposed to the skills and successes of next-generation family members and a well-functioning management team.
Identify friends or business acquaintances who have successfully transitioned their business and who might be helpful examples or resources.
Consider meetings with former owners of multigenerational businesses now managed by the next generation. This could provide an understanding of the issues they faced during the process and help gather best practices.

6. They are avoiding hard feelings that will occur in the family when a successor is chosen.
This is where a good succession planning attorney or advisor can help your family design a plan that creates a win-win situation for the members of both generations.

You may need to enlist additional help to move your parents to realize that if they want to ensure the continued success of the company after they are gone, they need to make decisions now that will make that happen. Help them see that it is bad for the business and for the family to have the children fighting for company control while working through their grief after a parent’s death.

7. They equate retirement with a decline in health or even impending death.
Everyone has heard a story about someone who died soon after retirement, and even though this is rarely the case, some people still equate retirement with the end of an active, healthy life.

If you have solved issues #2 and #3 above, this may cease to be a worry for them, since they will be plenty busy. But if this worry still exists, there are plenty of resources and professionals to help you work through this issue.

8. They fear losing their prestige in the community (the business leader and/or the spouse).

This is tough to deal with, although having the leader continue working in a new role in the business, foundation or family office – one that still provides opportunities for networking, speaking engagements and social visibility – could certainly help.
Finding a board position or a leadership position in another organization, such as a nonprofit or industry organization, can also help with this.

If you are in a waiting situation that appears to have no end in sight, perhaps it is time to engage someone to help you have conversations about the future of the business. Our succession and estate planning attorneys can often facilitate these conversations and help families start planning for a successful business future.

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. To receive more complimentary resources, connect with us online at Family Business Alliance.

This article is reprinted with permission from Warner Norcross + Judd LLP and author Bruce Young. This article is not intended as legal advice. For additional information, please contact Bruce Young at byoung@wnj.com

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.

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.

The Family Constitution: A Foundation for Family Alignment

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.

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

Family Businesses are Different

Written by Haans Mulder, JD, MBA, MST, CFP^®

If you own a business with another family member, you know that family businesses are different than other companies. A lot can be said about how, but I’d like to point out one area you may not be aware of. If you’re part of a family business, you’re a greater target for the IRS. In other words, when you have a business transaction with another family member, that arrangement is at risk of being questioned and scrutinized by the IRS.

A recent tax case illustrates this. A family-owned business loaned money to another family-owned business over a number of years. They followed the legal formalities in some cases (i.e. promissory notes were signed, actual repayments were made on the loan, etc.). But, as happens with family businesses, the arrangement changed over time and informality crept in. The borrower eventually couldn’t pay back the loans and the family-owned taxpayer tried to claim that those written-off loans were a bad debt loss (which would have given them a tax benefit). The IRS challenged this and ultimately the government’s position was upheld.

The take away from this case is that family businesses need to be very vigilant and treat transactions with family members like they do any other arrangement with an unrelated company. The relationship needs to be documented and it needs to be implemented as you would with a customer or supplier. If you remember and follow this principle, you’ll be in a much better position if a transaction is ever challenged by the IRS.

If you have any legal questions regarding your family business and structuring these types of transactions, feel free to contact me.

Haans Mulder Family Business Alliance Grand Rapids

Haans Mulder, JD, MBA, MST, CFP® Partner, Cunningham Dalman, P.C. PHMulder@cunninghamdalman.com

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