Tag Archives: Option

How Do You Purchase a Company as a Non-Owner President? Four Points

Situation: The President of a company has a long-standing relationship with the Chairman and Founder, who is also the principal owner of the company. The President joined the company at a time that the Chairman/Owner thought that he was terminally ill and needed an individual who could take over operations as well as leadership. Since then the owner has fully recovered and wants to retake control. The President would like to buy out the owner. How do you purchase a company as a non-owner President?
Advice from the CEOs:
• What role has the President played so far? The President has advised the Chairman on how to grow the company and is leading this growth through developing key customer relationships.
• What is the owner currently doing? The owner has fully stepped back into his prior role, and is micromanaging all aspects of the business, effectively shutting out the President.
• The best way to avoid a situation like this is to negotiate the full deal, including transition of authority and terms of transition of ownership, up front before the signing of an employment contract. Not having not done this, the President currently has no leverage.
• The best option at this point is to have a conversation with the owner and to see whether the owner is open to a transition of either power or ownership. If the owner is not interested, the President may want to consider other opportunities.

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How Do You Preserve Exit Strategy Value as a Minority Owner? Five Points

Situation: A company has been in business for 38 years. The majority owner founded the company. One of two minority owners has obtaining her share position through sweat equity. Another minority owner is on the Board but is not involved in the day-to-day operations. There are buy-sell agreements in place to preserve the interests of the three owners. In the case of an exit how do the minority owners preserve the value of their shares of the company? How do you preserve exit strategy value as a minority owner?

Advice from the CEOs:

  • Details of the current arrangement:
    • All partners are currently capped at 33% ownership.
    • The expectation is that in 10 years the two minority owners will buy out the principal owner and split ownership between themselves.
  • It is far better to negotiate potential ownership position up front – at the time of entry into a business, rather than along the way. As this apparently was not the case the minority owner has two points of leverage:
    • The minority owner has a good relationship with the principal owner, a very important factor, and the owner cares about the minority owner.
    • As the minority owner develops a track record of success, this should be leveraged in addition to the relationship to assure that the interests of the minority owners are preserved.
  • Additional key points of leverage of the minority owner asking the question:
    • The option to walk away as principal manager of the business if not happy with the situation.
    • Upside value of the company.
    • The desire of all owners to maintain their current life-styles, which are dependent on income from the business.
  • Separate management and control of the business entity from day-to-day operations. These are distinct and different areas of focus.
  • Another option to consider is the use of insurance policies to fund a buy-out of the majority owner.

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Do You Diversify or Stay the Course? Five Thoughts

Situation: A CEO seeks advice on the direction of her company. Her objective is to build a lasting company which is a wonderful place to work. She has a creative group of employees who have suggested options to expand the scope of the company. Should she maintain the current direction or entertain exploration of these options? Do you diversify or stay the course?

Advice from the CEOs:

  • With a solid, sustainable business model and the current level of revenue, diversification is not as important as it was when the company was a fraction of its current size. Current objectives could well be reached by just doing more of what the company does now.
  • The most important question to ask is: “What do we want from this or that option?”
  • Concerning the top opportunity under consideration, the group felt that:
    • It’s not the company’s core business and doesn’t play to the company’s strengths.
    • However, there are aspects of the opportunity that fit both the company and the existing client base. These represent an opportunity that fit’s the company’s culture.
    • Explore these aspects in small steps that do not detract from the current business.
  • If culture is a key ingredient of the company’s offering, how scalable is this, particularly into new markets? Look for ways to grow that are consistent with the strong culture that already exists.
  • Improve selling the full breadth of the company’s offering. The company offers many services that may be of interest to clients, but which are not mentioning in initial sales calls.
    • In sales presentations focus on the client, rather than a detailed description of the service offering. Offer clients a small brochure that covers the range of the company’s services.
    • By focusing on clients’ needs it is easier to selectively mention options that will serve these needs.

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What is the Best Way to Utilize Excess Year-end Cash? Three Perspectives

Situation: A company has excess cash at the end of the year. Options are to distribute the excess in bonuses following a challenging year, or to invest in the company. Two questions: how should the company structure a bonus distribution, and how would the company best invest the excess cash? What is the best way to utilize excess year-end cash?

Advice from the CEOs:

  • Evaluating bonus options.
    • One company uses a published step-function bonus program, with the steps tied to company profitability, and performance against individual objectives.
    • Include evaluation and scoring on company core values as part of the overall performance evaluation scheme.
  • What’s the best way to utilize the current cash surplus?
    • Use the current surplus to reduce debt or invest it in the future of the company. Build value. Retained earnings are fine even if the company’s accountant is concerned about tax consequences.
    • Consider purchasing life insurance, or other tax-favored deferred-compensation for partners and key employees. Cash bonuses get spent by recipients, whereas tax-advantaged deferred compensation programs build future value for the team.
    • Consider using the excess cash to buy the building.
      • The company can afford a sizeable down-payment.
      • Negotiate a favorable purchase price at a reasonable interest rate.
      • Doing this, monthly lease payments become monthly payments toward ownership of the building and additional value for the firm.
      • Consider purchasing the building under a separate corporate entity, even if ownership of this second entity is identical to current ownership. This may create tax advantages.
  • What do company owners keep in pay versus investing in the future?
    • Keep the cash needed to run the company, plus a bit. Focus on securing the long-term value of the company.
    • “If you take care of the company, the company will take care of you.”
    • If excess cash is invested in the firm, assure to retain long-term access to the value invested. There will be times when the company will need the cash.

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How Do You Manage Succession Planning? Seven Considerations

Situation: The founder and CEO of company needs to find a successor. She is ready to reduce her role but wants to assure the ongoing operation and future growth of the company, as she will remain the principal shareholder. How do manage succession planning?

Advice from the CEOs:

  • Options for management succession and growth.
    • One option is to create an employee stock option plan (ESOP) to expand ownership of the company and to help recruit new managers to support growth.
    • A second option presented itself through a broker who has approached the company to help them find a buyer for the business. The broker suggests finding a customer who is a potential buyer and also the right fit.
    • A third option is to purchase a smaller company with a good CEO and then do an ESOP transaction to allow the CEO to reduce her role while providing new incentives for management.
  • Options for maintaining continuity of the business.
    • The CEO has identified an individual with the background to lead the company and identify the talent to fill key roles.
    • In addition to a leader, what other key roles must be filled? Look at the current and planned organizational charts. Determine which roles must be filled, the order of priority to fill them, and management succession plans for each.
  • When and how should the CEO’s plans and options be communicated to staff?
    • One approach is to say nothing until either a successor has been identified or an actual deal is in place. This will avoid unnecessary disruption that will accompany and news of the plans.
    • On the other hand, if an ESOP is the option, let current staff know early, along with anticipated specifics of the ESOP Plan.
    • It is best to be straight with staff once the timing has been determined. Complement disclosure of plans with assurances that the change will be good for staff and that there will be financial incentives for them to remain with the company.
    • Be sensitive to what drives and motivates staff – build this into plans to inform them of what is happening.

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How Do You Construct a Deal to Expand? Three Areas of Focus

Situation: A CEO has an opportunity to combine with another business to expand their market geographically. A lead to work with the current owner to manage the transition has been identified. A second option is to bring in a new manager from the outside to manage the transition and the expanded business. How do you construct a deal to expand?

Advice from the CEOs:

  • Basics that are needed prior to initiating negotiations:
    • Define what the seller wants – both financially from the sale and in terms of ongoing involvement in and support of the business.
      • Without a lengthy transition period, the value of the business is not significant. The value is in the current owner’s relationships – both with clients and his team. It is critical to retain both.
    • The other big question is what the seller wants personally.
      • Is it legacy? Is it the opportunity to transfer knowledge?
      • The seller knows the CEO’s company and approached them about a sale. Play on this.
    • Are there potential complications to the deal?
      • Do any non-compete clauses exist with other companies?
      • Do other agreements exist that impact the value of the acquisition?
  • What other aspects of the deal does the group recommend?
    • Within the new organization, put the current owner under the recommended lead. This gives the lead more prestige and demonstrates trust. It also raises the bar for the lead.
    • A bonus is that the current owner and the lead get along. This will facilitate the current owner’s mentoring of the lead – like the child that he wishes would have taken over the business.
    • The current owner is a savvy businessperson, and the existing relationship between the seller and the lead will facilitate his ability to pass this knowledge on to the lead.
    • The current owner’s key assets are his connections and knowledge of the business. This will include subtle aspects to the business of which only the current owner is aware.
  • The option to bring in an outside office manager potentially complicates the situation.
    • Bringing in an outside office manager to manage both the lead and the current owner is the worst case – the most likely to blow up.
    • This arrangement puts the current owner two reports away from the CEO.
    • With an additional person involved, the personal dynamics become more complex. Keep it simple.

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How Do You Shift Culture as the Company Grows? 12 Challenges & Countermeasures

Situation: A company has grown through its expertise consulting for other companies. For its next growth step the CEO and Board want to shift to a project basis. This entails several changes, from compensation to organization and focus. How do you shift culture as the company grows?

Advice from the CEOs:

  • Risks & Challenges
    • Biggest risk – dissatisfied employees who see less billable income per hour and may not see the “more hours” part of the picture.
    • The biggest personnel challenge will be those who have been with the company for many years, and who will see the most change – maybe not to their specific practices if they can bring in business, but on the project side.
    • Communication is a critical challenge, and also the best way to avoid landmines. Put a velvet glove on the presentation of the opportunity: “This is good news – we know that the low hanging fruit is now mostly gone, and that the remaining fruit is higher; to counter this we now have more options.” Carefully prepare communications to both management and consultant team members.
    • Another potential landmine – the impact on the company’s reputation if it blows up after a year. Set appropriate expectations – the company is introducing a new program rather than a wholesale rebranding.
  • Countermeasures to Mitigate the Risks
    • Maintain a structural option that preserves the old model for those who can bring in new projects and who prefer this model. For them, the new model is just an option that can help tide them over if there are gaps between the projects that they bring in.
    • Present the project option as new opportunity. Give more senior and experienced consultants priority in choosing whether to participate or not in new project work.
    • Plan and create the ability to assess the old consultancy model vs. the new project model. This will be especially important when individuals are spending part of their time in each area.
    • Create a set of metrics for each business – the consulting and project businesses – to measure whether they are on track. Identify and monitor the drivers for each business.
    • Keep the title Consultant on consultants’ business cards – Consultant, Sr. Consultant, etc. Allow them to continue to take pride in their role.
    • Move to the new model through a planned phase-in but retain the option to adjust the speed of transition between the old and new models. This will allow sensitivity to changes in the environment.
    • Don’t consider an immediate and complete rebranding – think in terms of introducing a new product under the company’s well-known brand. Plan a gradual transition of business to the new model. Introduce the new product as a new offering. As it picks up steam, gradually move brand identification and promise to the new model.
    • For the new project model, create incentives for project performance. Show team members that while the hourly rate may be less, if they perform as a team they will share the upside through project bonuses.

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How Do You Fuel Early Stage Growth? Five Suggestions

Situation: An early stage company has assembled an impressive team and has a solid service offering. The immediate challenge is bringing in clients to fuel growth. The team has the capacity but needs some creative ideas on where they should focus their efforts. How do you fuel early stage growth?

Advice from the CEOs:

  • Fully utilize the team’s talents. Team members with established expertise can offer clinics featuring the company’s service offering at local colleges, business organizations and other venues to target audiences. Think about business organizations with members who would benefit from the company’s services. Also reach out to venture capitalists and the entrepreneurial market.
  • Develop a strong value proposition:
    • Go-to Organization
    • Eyeballs on the market
    • Links to highly qualified resources
    • Demonstrated expertise in your space
    • Claims tied to the top priorities of target clients
  • For start-up and entrepreneur client targets:
    • Offer a packaged set of services for a fixed fee. Be open to creative payment options to fit the financial needs of entrepreneurs.
    • Start developing a full suite of services. Start by assessing the need and developing a target list of early clients. VC portfolio companies can be a great target.
  • Build a good web-based communications interface for client use. Think of what is needed to create an attractive menu and let this drive service development.
  • Develop a separate brand for ancillary services that will complement the current offering, but which is outside of the current offering. Look at markets which would benefit from the service, including medical and nursing providers.

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How Do You Evaluate Business Opportunities? Five Guidelines

Situation: A company is planning for growth and is considering several business opportunities. None are fully baked, but broadly speaking the CEO is interested in a list of pros and cons that will help her team to evaluate the opportunities before them. What questions should the management team be asking? How do you evaluate business opportunities?

Advice from the CEOs:

  • Which of the opportunities do you find exciting? Which opportunities ignite your passion? Which opportunities would be exciting to pursue on a daily basis? Use this to create your first cut.
    • When you meet with your team, prompt discussion by asking: why do you come to work each day? What drives you now?
    • Now look at each of the opportunities that you are considering. Which opportunities best reflect your answers?
  • Rank the opportunities in terms of probability of success. For each, do a SWOT analysis – how does each address your current strengths, weaknesses, opportunities and threats? How could each make the company stronger or address potential threats that you foresee?
  • Which opportunity provides the best segue to your long-term strategic opportunities over the next 2-3 or 3-5 years?
  • On a personal basis, how important is power and authority to you? What about the personal and work time that is available to you? What is your role, as CEO, in each opportunity? For each opportunity, does this role reflect your personal priorities? Finally, what is your ideal opportunity, in personal terms?
  • Once you have evaluated all of your opportunities – including your personal ideal opportunity – perform a weighted scoring of the opportunities to test your assumptions. Among the opportunities available, which is closest in score to your ideal opportunity?

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How Much Should Management Own Post-Financing? Five Points

Situation: A company anticipates closing a Round 3 financing this year. The CEO has an idea of the range of management team ownership that is likely at this round. He seeks advice from others with experience. What can the team do to assure that their ownership is at the upper end of the range? How much should management own post-financing?

Advice from the CEOs:

  • The numbers change depending upon both company valuation and the funding environment. Currently, Silicon Valley venture capital firms are becoming more cautious and risk averse. This is because many companies that have received financing over the last 2-3 years have underperformed. Many have yet to even produce and release a product. In this environment, the chances for maintaining a larger share of ownership for management are not as good as in headier times.
  • Seek two outside counsel to generate two independent opinions on a fair management option pool, and to assist in negotiations. These will likely be boutique firms.
  • Approach the situation as an executive option pool objective. Determine what needs to be in place to attract new executives, as well as to replace existing executives should they leave or be unable to serve.
  • When discussing this with your board and investors, phrase the challenge in win-win terms. The objective is to lock-in key personnel and assure that key positions will be filled to meet company objectives. This is the best way to assure future financial success.
  • Key members of the executive team may want to seek independent advice, apart from the company or executive team.

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