TLS tidbits: (Business) plan of attack … tips from ROI-NJ’s Family Business event

Every business has a plan. Or does it?

While it seems obvious, too often, family businesses operate in such a day-to-day fashion that they lose sight of the future.

That was the feeling from the experts at the recent ROI-NJ Thought Leadership Series on Family Business.

Jason Navarino, partner at Riker Danzig, said being prepared for seemingly all possibilities is key.

“Clients are always focusing on bringing in profit — and that’s got to be their main focus — but, that said, they have to think about what could happen and be prepared for what may come in the next day, be it a death or a departure or an exciting growth opportunity,” he said. 

“Perhaps they weren’t expecting to grow, but, suddenly, there’s a unique opportunity to acquire a competitor. You don’t know when that offer to buy the business that’s too good to look away from will come in; if it does, are you really prepared to sell?”

This preparation, he warns, is not a one-time thing. 

“Sometimes, this involves simply looking at the documents that are on the shelf that some lawyer prepared for you 20 years ago,” he said. “Are they still accurate? Do they still reflect reality? If you’ve got loans, are you complying with all of your covenants?

“These things are going to matter when you go to do a transaction. And, when you’re in the thick of it — when you’re trying to run your business and you’re trying to close a deal — and you’ve got the lawyer and the accountant bugging you about these issues, you’re not going to have time to navigate and deal with these things then. And then deals can go sideways very quickly if you’re not prepared to engage in them.”

Paula Ferreira, partner at Mazars, said preparation often means people.

“When I talk to my clients, I always talk to them about building a solid infrastructure,” she said. “A lot of small business owners are used to doing everything themselves rather than having the assistance and having the people in the right positions to help them get to that next level.

“So, the first thing I tell them is: What is (it) going to take to get you to that next level? Do you have the people in place? Getting the right individuals underneath them to help them get to that next place is key. So, I would start with infrastructure and making sure that infrastructure is solid, because, if that infrastructure is solid, then they can improve that top line, which, if they’re looking about an exit strategy down the road, that top line will give them more appeal.”

Bob Koar, senior managing director at Sterling Bank, said having a plan is just a start. Having the willingness to stick with it is key.

“Once you have the plan, are you able to stick with it?” he said. “You don’t want a waffle halfway through the plan. You want to have the fortitude to be able to stick to it. Execute it.

“You may hit some bumps on the road, and that’s where you can get a good banker, because you can’t stop the money flowing in. Being very focused on the profit pools that you want to go after is critically important when you build a growth strategy.”

What a banker is looking for in an owner

Bob Koar, senior managing director at Sterling Bank, spoke about leadership at ROI-NJ’s Thought Leadership Series on Family Business.

Bob Koar, senior managing director at Sterling Bank, values leadership when he is working with family business clients.

Simply put, he wants to see if the leaders can lead in times of trouble.

“There are some classic questions that we always propose to people like: What keeps you up at night?” he said. “That’s supposed to take you right to the greatest fear that the business owner has about day-to-day operations. That’s an important thing to learn from them, because business owners will tell you exactly what they need and what they want.”

Koar, speaking at a recent ROI-NJ Thought Leadership Series on Family Business, said evaluating grace under pressure is important.

“The questions that you really need to ask are the ones that allow you to get the know the business owner and get to know how he’ll react under a stressful situation,” he said. “When everything’s good, that’s great, because everything’s predictable.

“The key to lending money to people is to understand how they will react when things go really bad. Are they going to be able to deal with the adversity in the marketplace? So, the conversation really has to get into the times when things really weren’t so good. How did you react? What did you do? How did you handle these types of problems?

“That will tell you an awful lot about the ability of the business owner to deal with the adversity that may not be there, but you know is going to come at some point in time.”

Disability insurance

Scott Taylor of Mass Mutual says no one likes to talk about buying insurance. ­

Scott Taylor of Mass Mutual has been selling insurance to business owners for most of his professional life. And he knows one thing to be true: No one likes to talk about buying insurance.

“The business owner knows that, eventually, they are going to want to address it,” he said. “We know it, they know it. But many of them spend more time planning a vacation than they do planning on their protection.”

Taylor told the audience at ROI-NJ’s recent Thought Leadership Series on Family Business that his job is to push that unwanted conversation to the forefront. And he does it with a simple incentive.

“I tell them: Once we get the insurance pieces done, it’s behind you,” he said. “It’s not like we have to address it each and every year. Yeah, it’s not fun. But it’s a product that you have to address at some point. But I assure them that, once it’s behind them and they have it, that’s a big marker check.

“If something happens, we’re good. We got the defense.”

What can happen, Taylor warns, are events business owners don’t necessarily think about.

They may have life insurance in case they — or their partner — dies, but what about disability insurance?

“Simple example: One partner becomes disabled and is unable to work,” he said. “That can be a mess. So, we do a decent amount currently and it’s growing. … It’s a wonderful way to protect the business completely.”

And partners, he clarifies, often are related.

“I love selling to family partnerships,” he said. “The reason is because the insurance company then becomes the definition of whether the brother or the sister or whoever the partner is, is disabled. Because if the one that’s disabled is at home taking half of the income and not working, there’s tension. This allows the insurance company to be the deciding vote.

“This is one of the areas that I like to focus on, because I like to call it the low-hanging fruit. It’s something that a lot of businesses don’t address, but it’s extremely important and very valuable.”

So, you want to buy? Sell? 

They are the questions every family business owner faces: Should I look to sell my company or buy another one? And how will I know when it’s the right time to do either?

Our experts at the recent ROI-NJ Thought Leadership Series on Family Business offered their thoughts:

It’s the company, not the market

You can’t jump into a deal prematurely if your client’s not ready for it. If they’re not ready to grow (or) they’re not ready to exit, it doesn’t really matter what the economy is. That’s not a deal that’s going to be successful. And remember, even in a down economy, there are opportunities if you’re looking at growth acquisitions — but you have to be ready. If you haven’t gone through the preparation to get your company in the market, it doesn’t really matter what the market’s doing. 

Jason Navarino, Riker Danzig

The first valuation always will the highest

When you are preparing for a transaction, you start to think about the things that you don’t necessarily think
about when your business is chugging along every day. When you start going through the deal process and you start having the buyer engage in due diligence and they start looking at your contracts and they start digging into your financial statements and making adjustments, things change. I always advise a client when they’re getting into a transactional situation is that you start with a price. It might be great, but it is only going in one direction. A buyer never says, ‘Hey, I looked at diligence and this business is great. I’ll pay even more for it.’

Scott Taylor, Mass Mutual

Early preparation is key

You have to be prepared. The more you put into it, the more you’re going to be able to get out of it. Valuations really do depend upon making sure that you have all of your I’s dotted and your T’s crossed in that you’ve spent some time preparing for the valuation. You have to adjust everything a couple of years in advance, so that your audited financial statements accurately reflect the true profitability of the company, because that’s how valuations are done. It’s the same as applying for a loan. The better your financial presentation, the more likely it is you’re going to be able to get the terms and the rates that you think you deserve as an owner of a business. The easier it is for us, the easier it is for you, to be honest.

Bob Koar, Sterling Bank

Don’t judge the value of your business by the value of another

I’ve had numerous clients who, over the last couple of years, get a false sense of the value of their company based on all the transactions that are occurring. What I tell the client is: Each circumstance is different. Sometimes it’s the location, sometimes it’s a market base. I say, ‘Let’s look at your situation. Let’s focus on your sales. Let’s do this.’ When they bring up another company, I try to break that transaction down and say, ‘This was a buyer out west who wanted to hit the East Coast’ or something like that.

Paula Ferreira, Mazars

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