Saturday, October 27, 2007

A Major Concern for Business Sellers - What Happens to My Employees

One of the biggest concerns of business sellers is what will happen to their loyal employees when the new owner takes over. There is a common misperception that the new owner will come in and slash and burn in order to hit their profit targets. The reality for the family business could not be farther from the truth.

For family business owners, the employees, if they are not actually family, they are like family. Many have been there through the bad times and the good. They may have not gotten an expected raise because of tough times. They have been to each other's children's weddings. The boss has helped the employee family with an unexpected healthcare expense. The bonds are very strong. An admirable trait that we see from almost every business owner we represent is the deep concern for what happens to my employees when the new owner has our company.

The Hollywood portrayal of Mergers and Acquisitions on Wall Street is that the money guys come in and slash the staff, do their financial gymnastics, show impressive short term profits, and then flip the company to a new buyer and pocket millions on the backs of the loyal displaced employees. Does this really happen? Unfortunately is does happen, but the circumstances are generally the result of industries becoming bloated with legacy costs and wages and benefits at a level not competitive with the world economy. We have seen it with the steel industry, airlines, and now the auto industry.

However, for the family business, the backdrop is much different. The organizations are generally very lean. The employees are not constrained in their job description by union rules. They do what is necessary to get the job done. They often can perform multiple jobs and get plugged in where needed. Every employee is vital to the company's performance.
Business buyers are generally pretty smart folks. If they aren't, pretty soon they will find themselves in trouble from poor acquisition choices. They recognize the value that the employees bring to the table. These employees are keepers of the customer relationships, they are the well of knowledge about the company's products and competitive advantage, they know all the gotcha's to avoid. They are the new buyer's path to business continuity post acquisition and they are valued.

Business buyers look to mitigate risk by keeping these employees in place and will attempt to access the likelihood of key employees staying on post acquisition. We have heard from business buyers that if they feel like key employee A and key employee B leave, then we are not interested in the acquisition. As business sellers it is important to recognize this and to take necessary steps in advance of your sale to help the key employees stay.

At a point where the sale is ready to close, it is important to make sure employees have some reassurances that the ownership change will improve their situation. Often times the benefit package from the large company buyer is superior to the current package. Buyers will often incorporate a salary increase after the acquisition. Owners may elect to share some of their gains with key loyal employees through a stay on bonus or some lump sum payment recognizing the years of loyal service.

The finance and administrative area is the one exception to this rule. These functions are often a total duplication of those functions in the buying company and these employees are most vulnerable to a cut. These employees have contributed greatly to the company and have been loyal. The seller, unfortunately, can not dictate to the buyer that these employees have to be retained, so he must make accommodations on his own. He should attempt to get an understanding from the buyer, their plans for these employees and arrive at a joint proactive communication plan with the buyer.

If the news is bad for the employee, the seller, at the very least should give the employee as much advanced notice as possible. The seller will often implement some severance package, if one was not already in place to give the displaced employee a chance to seek a new opportunity without financial hardship.

Most of the employees will be vital to the post acquisition success of the new company. If they interface with customers and/or suppliers they will be needed. If they are in possession of key knowledge about the company, products, industry, technology, etc., they will be valued and will have a solid job post sale.

Tuesday, October 23, 2007

Democrats in the White House - Watch out Business Sellers

TheFederal Reserve’s Survey of Consumer Finances estimates that business-related wealth transfers will total $4.63 trillion over the next 10 years in the United States. I was talking to a Tax Attorney the other day and discussing our upcoming Seminar - Exit Strategies for Baby Boomer Business Owners. He reminded me that we should stress that if the democrats end up in control of the White House that business sellers would potentially suffer a big increase in their capital gains resulting from the sale of their business and business owners should consider selling sooner rather than later.

That will be just one of the many issues we plan on covering at our free seminar in Oak Brook IL. on October 30, from 7-9 am.

You are cordially invited to attend:

Multi-Disciplinary Business Exit Strategies Seminar
Exit Planning Strategies for your Business
· Preserve your Income
· Enhance Business Selling Price
· Reduce Taxes


Sam J. Valeo, CIMA, CFP
Senior Vice President –

Steve Pierson, CPA
Senior Tax Partner Selden Fox
Certified Public Accountants

Dave Kauppi, CBI
President MidMarket Capital, Mergers & Acquisitions Advisors

Date: Tuesday October 30, 2007
Time: 7:00 AM to 9:00 AM includes Breakfast Buffet

Location: The Wyndham Drake Oakbrook
2301 York Road
Oak Brook IL 60523
RSVP: 630.705.3985

Your host is Sam Valeo,
Senior Vice President – Investments, Smith Barney
Please RSVP to Shirlee Mc Bain, Client Service Associate
(630) 705-3985



7:00 Breakfast Served
7:00-7:05 Welcome Sam Valeo Smith Barney
7:05-7:15 The Baby Boomer Effect on Sam Valeo Smith Barney
Mergers and Acquisitions
7:15-7:40 Preparation for Your Exit Dave Kauppi MidMarket Capital
10 Commandments of Selling your Business
7:40-8:05 Deal Structure for Minimum Tax Steve Pierson Selden Fox
8:05-8:15 10 Steps to Maximize Selling Price Dave Kauppi MidMarket Capital
8:15-8:30 Your Power Years – Strategies for Sam Valeo Citi-SmithBarney
Income Preservation
8:30-9:00 Questions and Answers All Panelists


Hotel Address
Wyndham Drake Oak Brook
2301 York Road, Oak Brook, Illinois, 60523
Tel: 630 574 5700 Fax: 630 574 5717

From O'Hare International Airport (11 miles): Take the 190 East to the Tri-State Tollway (I-294). Take the Cermak Road (22nd Street) exit and take the ramp toward Oak Brook. Turn left onto Cermak Road (22nd Street). Turn left onto York Road. Make a U-Turn at Dover Drive and the Wyndham Drake Oak Brook is there.

From Midway Airport (15 miles):Take I-55 South to I-294 North (via Exit 277A). Merge onto US-34W/ Ogden Avenue. Turn right onto N York Road. The Wyndham Drake is before 22nd

Dave KauppiPresident MIDMARKET CAPITAL, (630)325-0123 fax (630)325-9879 cell (630)

If you would like to sign up for our Exit Strategies newsletter, please visit

Monday, October 15, 2007

Raising Venture Capital – Let's Be Realistic

I do not mean to discourage you entrepreneurs in your quest to launch the next Big Thing. Many of you look at your path as write a compelling business plan, make a few presentations to the well-known venture firms, get $3 million for 5% of your company pre revenue, and launch. Product development progresses without a hitch, you hit all of your milestones, you get a second round at an even more favorable valuation, and you land the big high-profile account. Two years later, you do an IPO with a market cap of $350 million. Fast forward another two years and you are the subject of a bidding war between Microsoft, Google, and Interactive Corp. You finally agree to a buy-out at $3 billion. Life is good.

Wow, that was easy. Unfortunately that is one in 10 million. I was listening to CNBC this morning and they were reporting on a new test developed by a Stanford PHD that would identify people two to six years in advance of developing Alzheimer's Disease. This is an ideal venture play – huge potential market, company founder with great credibility, and a great way to reduce future health care costs. On the surface this would seem like the sure fire bet for the venture guys, but the CNBC reporter said they were having trouble raising venture capital. What a shock.

If this company is having trouble, think about the battle you face. Because no one has a crystal ball, seven out of ten venture investments totally fail. With that backdrop, venture capital investors look to achieve a thirty times return on their investment in three years. Many potentially successful companies fail to achieve the promise of their great idea because they get caught up in the venture trap. They are passionate about their idea and believe that it will become the next big success story. They tend to be very optimistic which is essential for one that takes the kind of risks that a start-up requires. Their biggest flaw is that they focus way too much of their efforts on the venture dance. Endless meetings and presentations followed by delays and more presentations to other members of the same venture teams.

There are other alternatives. How about a strategic alliance with a bigger company in your industry? What about a licensing deal with a big player? Can a value added reseller play a role for you? What about an outsourced sales effort? Should you sell your company? If you do have a great idea and are meeting an important market need, it is likely that there are other companies out there that have the same or very similar solutions. In today's business environment that translates into a very limited window of opportunity to achieve scale. You are on the clock to achieve scale before your funds run out or before a well funded competitor simply captures your market.

Venture is very glamorous, but do not be myopic in your approach to cashing out on your big idea. There are several very important alternatives including building a solid, profitable small company under the radar and then raising venture to achieve scale and take it to the next level.