FAMILY BUSINESS SUCCESSION PLANNING

Written by Dave Kauppi


Continued from page 1
After this transaction takes place, let’s look atrepparttar result of how dad’s estate was fairly divided. Originallyrepparttar 104036 brothers were left with 60% ofrepparttar 104037 $50 million business, or $30 million and a minor portion ofrepparttar 104038 remaining estate. The sisters were left with 40% ofrepparttar 104039 business, or $20 million andrepparttar 104040 bulk ofrepparttar 104041 remaining estate of $10 million. That appears to be fair. However,repparttar 104042 buyout ofrepparttar 104043 sisters for a combined $8 million results in an effective estate distribution of $42 million torepparttar 104044 brothers and $18 million torepparttar 104045 sisters. This is not what dad intended, but it happens allrepparttar 104046 time. This is a very complex and emotional issue and there are no simple answers. Generally, dad had his identity tied up inrepparttar 104047 business and wants it to live on through his sons after he is gone. This is a noble, yet impractical thought if allrepparttar 104048 siblings are not actively involved inrepparttar 104049 business. The children often inheritrepparttar 104050 restrictive buy sell agreements that favorrepparttar 104051 brothers runningrepparttar 104052 business and scare off investors that may have been interested in a minority stake inrepparttar 104053 business. Much ofrepparttar 104054 value from a privately held business is derived fromrepparttar 104055 benefits of working inrepparttar 104056 business. There isrepparttar 104057 very real concern thatrepparttar 104058 integrity ofrepparttar 104059 gift or estate tax business valuations will be compromised ifrepparttar 104060 sisters are bought out at a price approaching a pro-rated division of total enterprise value. Unfortunately, in most cases, nothing is done and as a result there are literally hundreds of billions of dollars of minority interests in privately held business that are providing little return or no return to their owners. We are working with estate planning attorneys, tax accountants and investors to come up with solutions. One ofrepparttar 104061 keys to unlockingrepparttar 104062 liquidity in these minority interests is forrepparttar 104063 business owner to recognize this situation prior to building his estate plan. Unfortunately, we are often brought in afterrepparttar 104064 fact and a fair outcome then is contingent uponrepparttar 104065 majority owners honoring dad’s original intent of fairness and working toward that end.

Dave Kauppi is a Merger and Acquisition Advisor with Mid Market Capital, Inc. MMC is a business broker firm specializing in middle market corporate clients. We provide M&A and divestiture, succession planning, valuations, corporate growth and turnaround services. Dave is a Certified Business Intermediary (CBI), a licensed business broker, and a member of IBBA and the MBBI. Contact (630) 325-0123, davekauppi@midmarkcap.com or www.midmarkcap.com.


Business Growth Through Strategic Merger and Acquisition

Written by Dave Kauppi


Continued from page 1

6.IMPROVING OR COMPLETING A PRODUCT LINE – this approach has several elements from other acquisition strategies. Successfully adding new products to a line improves profitability and revenue growth. Giving a sales force more “arrows in their quiver” is a powerful growth strategy. You take advantage of your existing sales and distribution channel (strength). You may be able to improve your competitive position by simplifyingrepparttar buying process - providing your customers one stop shopping. You have already established momentum and credibility with your installed accounts and it is far easier and cost effective to sell them additional products than it is to win new customers.

7.TECHNOLOGY – BUILD OR BUY? This is a quandary for most companies, but is especially acute for technology companies. Acquiring technology throughrepparttar 104035 acquisition of another company can be an excellent growth strategy for several reasons. First,repparttar 104036 R&D costs are generally lower for these smaller, agile, more narrowly focused companies than their larger, higher overhead acquirers. Secondly, time to market, window of opportunity, first mover advantage can have a huge impact onrepparttar 104037 ultimate success of a product. It has been said that Alexander Graham Bell arrived four hours before another inventor atrepparttar 104038 patent office for essentiallyrepparttar 104039 same invention. If there is a good idea or a market opportunity, most likely it is being pursued independently and simultaneously on several fronts. First one to establish their product asrepparttar 104040 “standard” isrepparttar 104041 big winner. I sure would not want to try to displace Microsoft Windows asrepparttar 104042 operating system for PC’s.

8.ACQUISITION TO PROVIDE SCALE AND ACCESS TO CAPITAL MARKETS – In this area, bigger is better. Larger companies can generally weather a storm better than smaller companies and are considered safer investments. Larger companies command larger valuation multiples. Some companies make acquisitions in order to get big enough to attract public capital inrepparttar 104043 form of an IPO or investments from Private Equity Groups. Many smart business owners have consolidated several smaller companies at lower multiples to create a larger company thatrepparttar 104044 investment community valued at higher multiples. This can be a very effective grow to exit strategy.

9.PROTECT AND EXPAND MATURE PRODUCT LINES - I recently came across an outstanding example ofrepparttar 104045 execution of this strategy. Johnson & Johnson,repparttar 104046 multi-billion dollar pharmaceutical company in 2000 acquired Alza Corporation,repparttar 104047 maker of drug delivery systems and devices for what appeared to be an unbelievably steep price of $13.7 billion, or 23 times year 2000 revenues. They arerepparttar 104048 inventors ofrepparttar 104049 transdermal patch used in products such as NicoDerm CQ. They have developed time released pills that can, for example deliver Ritalin,repparttar 104050 drug for attention deficit disorder in children, at prescribed times with one dose. They have developed an injectable titanium stint to deliver cancer medication overrepparttar 104051 course of a year. Why would J&J pay so much for this company? Here isrepparttar 104052 strategy. The latest price tag for getting a major new drug throughrepparttar 104053 FDA and to market is a whopping $800 million. These delivery technologies can turn J&J’s old drugs into new best sellers that are re-patentable at a far lower price than new drug development. An added benefit is that they can dorepparttar 104054 same for off patent drugs from other competitors.

10.PROTECT CUSTOMER BASE FROM COMPETITION – The telephone companies have done studies that show that with each additional product or service that a customer uses,repparttar 104055 likelihood ofrepparttar 104056 customer defecting to a competitor drops exponentially. In other words, get your customers to use local, long distance, cellular, cable, broadband, etc and you will not lose them. Multiple products and services provided torepparttar 104057 same customer dramatically improve retention rates. Atrepparttar 104058 risk of repeating myself, it costs ten times more to get a new customer than it does to keep one.

11.ACQUISITION TO REMOVE BARRIERS TO ENTRY – An example of execution of this strategy is a large commercial information technology consulting firm acquiring a technology consulting firm that specializes inrepparttar 104059 Federal Government. The larger IT Consulting firm had valuable expertise and best practices that were easily transferable to government business if they could only breakrepparttar 104060 code ofrepparttar 104061 vendor approval process. After many fits and starts to do it themselves, they simply acquired a firm that had an established presence. They were able to then bring their full capabilities fromrepparttar 104062 commercial side to effectively increase their newly acquired government business.

12.OPPORTUNISTIC ACQUISITION FOR WHEN THE MARKET TURNS – as they taught me in business school: buy low and sell high. Well-run businesses often will buy competitors that bring many ofrepparttar 104063 benefits from above at very favorable prices when times are tough. They buy customers, new geographies, technology, management talent, etc. at less than strategic prices because they haverepparttar 104064 staying power to last through a market downturn. Buying a company that doesn’t fit at a bargain is ultimately not a bargain if you are unable to integrate to make your core business more powerful.

Larger firms with lots of resources have established business development offices to execute corporate growth strategies through acquisition. These experienced buyers search for companies that fit their well-defined acquisition criteria. In most cases they are attempting to buy companies that are not actively for sale. If a strategic company is for sale and is being represented by an M&A firm,repparttar 104065 M&A firm’s job is to sell that strategic value torepparttar 104066 marketplace. If properly done,repparttar 104067 buyers are competing with several other buyers that recognizerepparttar 104068 strategic value andrepparttar 104069 price tends to be bid way up. The win forrepparttar 104070 successful corporate acquirer is to target several candidates that have many ofrepparttar 104071 characteristics from above, buy them at financial valuation multiples (traditional valuation techniques like discounted cash flow or EBITDA multiples), integrate to strength and achieve strategic performance.

Dave Kauppi is a Merger and Acquisition Advisor with Mid Market Capital, Inc. MMC is a business broker firm specializing in middle market corporate clients. We provide M&A and divestiture, succession planning, valuations, corporate growth and turnaround services. Dave is a Certified Business Intermediary (CBI), a licensed business broker, and a member of IBBA and the MBBI. Contact (630) 325-0123, davekauppi@midmarkcap.com or www.midmarkcap.com.


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