Transcript Appendix

WELCOME: Leadership Forum
January 14, 2014
Lessons from the Trenches
Building Private Company Value
Sponsors:
Host:
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Today’s Panelists
Dave Bosher
Director, Advisory Services, Fahrenheit Advisors [email protected]
Ben English
Partner, Hirschler Fleischer
[email protected]
Tripp Leonard, CFP
Partner, Virginia Asset Management, LLC
[email protected]
Barry Johnson
Managing Director, Windward Advisors, LLC
[email protected]
Mike Gracik
Managing Partner, Keiter
[email protected]
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Introduction
• Transitions put many facets of a company under a spotlight
• Owners and managers may not be aware of some S.W.O.T.
• Lessons learned by others can help you and your company
• Interdisciplinary team approach
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Key Discussion Topics
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Legal considerations
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Building business value
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Tax and succession planning
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Owner objectives and capital allocation considerations
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Key Legal Considerations
• Use legal agreements as risk management tools
• Clear and current contract provisions
• Rights in intellectual property
• Ownership interests and the securities laws
• Employment-related agreements
• Estate planning
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Building Business Value
Plan Your Work and Work Your Plan – Fundamentals for Success
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The most successful companies:
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know their core competencies
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have a keen understanding of their markets and their own positioning
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have clear mission statements and corporate objectives which are communicated throughout the organization which
are S.M.A.R.T. (specific, measureable, attainable, relevant & time-bound)
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continually measure performance to goals and objectives while remaining fluid to adjust as conditions require
(SMARTER – evaluate, re-evaluate)
A Starting Point – A corporate self-assessment (Situational Analysis):
“It is a capital mistake to theorize in advance of the facts” –Sherlock Holmes-
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performing a Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis, both at the corporate and business
unit level
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best done with both management and Board participation
A SWOT analysis gives rise to:
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prioritized actionable plans
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Provides the basis for a formal strategic plan
• Business Logic (customer, product, economic, structural)
• Operating Environment (customer, competitor, economic, technological, social, political, legal, and physical)
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Building Business Value
Key Considerations in Building a Strategic Plan
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Establishing a functional advisory board
Engaging competent trusted advisors
Assessing growth strategies - organic and/or acquisitions
Capitalization of the business
Building organizational depth
Developing scalable and solid business information tools:
• management, operational and financial reporting
• establishing key performance metrics
Development of detailed metric-driven projections and forecasts with full management
participation
Continual communication throughout the organization of performance to goals
Leveraging the knowledge base of the entire organization and rewarding achievement
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External Value Drivers
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Availability and access to debt and equity capital
Industry condition and trends
• Growth attributes
• Stability
• Cyclicality
• Fragmentation
• Consolidation trends
• Technology
• Product or service risk
Competition
Economic environment, investor confidence
Political environment (i.e. coal industry)
Public market valuations
Company performance relative to competitors and economy
Strategic buyers’ appetites for acquisitions
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Internal Value Drivers
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Solid performance record and operational consistency
• Meeting plans and projections
• Consistent pattern of growth
• Good internal controls and reporting structures which support accountability
A well thought-out collaborative strategic and growth plan
• Identification of new markets where you can win and lead
• Creating sustained competitive advantage
• New products and proprietary processes
• Increased sales channel efficiency in current markets/products
A solid management team
• Leaders that can manage independently
• Experienced, “A” players in key positions
Focus on proprietary assets, products and revenue streams
• patents, trademarks, brands, intellectual property, etc.
Customer and vendor diversification
Effective management of capital to maximize ROI and preserve capital for growth
Environmental or legal risks
Effective internal governance
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Efficient legal corporate structure
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Succession Planning - Building/Retaining Business Value
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Typical Fact Pattern
• Founder is sole shareholder; one child active in the business and another is interested; two not interested
• Founder owns real estate and controls all key business relationships
• Management team is solid but needs new CFO
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Objectives
• Create liquidity to fund retirement
• Create opportunities for children interested in the business, while being fair to those who are not
• Ensure ongoing viability of the company
• Minimize taxes
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Financial Considerations
• Issues
 Does founder have realistic expectations of ability to fund retirement?
 How to transition control while minimizing taxes?
• Solutions
 Get a valuation
 Exempt gifts of stock
 Redeem founder stock with a combination of senior debt and seller note
 Is company cash flow sufficient to service the debt?
 Seller note terms retain significant control for the founder
 Consulting agreement for founder
 Key man life insurance on CEO son
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Succession Planning - Building Business Value
Management Considerations
Issues
 Ability of the management team to operate without the founder?
 Will the heir apparent be up to the task?
 Will non-family management remain with the company?
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Carefully orchestrated transition from founder to successor
Training and mentoring for successor
Evaluate qualifications and provide training for family members
Create incentive for non-family management
Strategic planning built around business and family goals
Family Considerations
Issues
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Is Founder ready to pass the torch?
Does successor really want the job?
Should family members not working in the business own stock?
Is employment a birthright?
How to make it fair for everyone?
Honesty and communication
Founder develops a plan for life beyond the business
Arm's length evaluation of family members as employees (CEO or otherwise)
Bifurcate management and ownership of the business
Use other assets to allocate value to children not involved in the business 11
Owner Objectives - An Investor Mindset
Owner Objectives: ‘Personal’ & ‘Corporate’ are Interconnected
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Owner’s unique objectives drive strategy
Be able to articulate answers—annually--- to the following:
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Desired timeframe in current role
Owner’s required value (versus desired) from the business
Desired successors of the business
Anticipate Trouble
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Creative destruction
What keeps you up at night? Invest in it.
The “Institutional Imperative”—BRK 1989 Shareholder letter– “For example:
1. As if governed by Newton's First Law of Motion, an institution will resist any change in its current
direction;
2. Just as work expands to fill available time, corporate projects or acquisitions will materialize to soak
up available funds;
3. Any business craving of the leader, however foolish, will be quickly supported by detailed rate-ofreturn and strategic studies prepared by his troops; and
4. The behavior of peer companies, whether they are expanding, acquiring, setting executive
compensation or whatever, will be mindlessly imitated.”
Owner Objectives - An Investor Mindset
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Think Like an Investor: Capital Allocation Framework
• Owner-level thinking vs. Operator
• The reinvestment decision: The “What Will They Do With the Cash” Factor
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Reinvestment opportunities offered by the operating company
Bolt-on/strategic acquisitions
Stock repurchase (less relevant in closely-held corporations)
Dividend (distribution or bonus in closely-held corporation)
• To invest/diversify
• Or, to consume
• Understand constraints:
• Illiquidity
• Liquidity is defined as an asset's ability to be sold without causing a significant movement in the price and
with minimum loss of value;
• With an illiquid asset, the lack of ready buyers leads to larger discrepancies between the asking price
(from the seller) and the bidding price (from a buyer) than would be found in an orderly market with daily
trading activity.
• Risk premium
• Business valuation multiple
• Capital allocation flexibility– a competitive advantage
• Diversify your balance sheet
Berkshire Hathaway, Inc. : Holding Company Structure
As per 12/31/2012
Operating/Control
Non-Operating
INSURANCE
Liquid/Marketable Securities:
Company
Cost*
(in millions)
American Express Company
The Coca-Cola Company
ConocoPhillips
DIRECTV
IBM
Moody’s Corporation
Munich Re
Phillips 66
POSCO
The Procter & Gamble
Sanofi
Tesco plc
U.S. Bancorp
Wal-Mart Stores, Inc.
Wells Fargo & Company
Others
Regulated Cap Intensive
Manufacturing, Service, & Retailing Operations
Total Common Stocks at Market
And 65+ Others
13.7 $ 1,287
8.9 1,299
2.0
1,219
3.8
1,057
6.0 11,680
12.7
287
11.3
2,990
3.3
660
5.1
768
1.9
336
2.0
2,073
5.2 2,350
4.2
2,401
1.6 2,837
8.7 10,906
7,646
$49,796
Market
$ 8,715
14,500
1,399
1,154
13,048
1,430
3,599
1,097
1,295
3,563
2,438
2,268
2,493
3,741
15,592
11,330
$87,662
Cash & Cash Equivalents
$42,000
Fixed Maturity Securities
$32,000
Capital Allocation Strategy
Investor Paradigm:
Owner-Based Planning
Operating/Control
The Reinvestment Decision
Non-Operating
Commercial/Inv Real Estate
 Commercial Building
Qualified Investments
 401Ks/IRAs/Profit Sharing
Investable Asset Base
Operating Account
Liquid/Marketable Securities:
XXX Capital
Appendix
Internal Value Drivers
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A solid, motivated management team
A realistic growth strategy
Effective operating systems and processes
A solid, diversified customer base
Proprietary products and technology
Effective financial controls and processes
Consistent, growing financial performance
Scoring On These Issues Determines Long-term Value
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Internal Value Drivers
A solid, motivated management team
 Leaders who can take it to the next level
 Leaders who play well together
 Leaders who will help you develop a healthy corporate culture
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Internal Value Drivers
A realistic growth strategy
 Key components include, but are not limited to:
 Developing market strategy to win in current markets
 creating barriers to entry
 identification of new markets
 creating sustained competitive advantage
 Assessment of quality of business processes
 new products
 Developed collaboratively with management team and board
 Assessment of organizational talent
 Determination of acquisition opportunities
 Capital requirements to execute the strategy
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Internal Value Drivers
Effective operating systems and processes
 ability to sustain the growth and scaling of the business
 integration of operating, ERP and financial systems
 systematic talent recruitment and training processes
 documentation of key processes and work flows
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Internal Value Drivers
A solid, diversified customer base
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target markets with solid growth attributes
minimal revenue concentration in a few key accounts
Demonstrable high retention rates
High customer satisfaction scores
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Internal Value Drivers
Proprietary products and technology
 products insulated from competitive encroachment
 will support premium pricing
 product development finely tuned to target markets
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Internal Value Drivers
Effective financial controls and processes
 detailed, bottoms-up financial plans and projections
 strong internal controls
 accountability driven
 documentation of key processes
 disciplined internal governance
 who approves large expenditures
 contract approvals
 pricing controls
 compensation adjustments
 Financial reporting tailored to the business
 Supports tracking of actual to business strategy and tactics
 Effective use of dashboards and KPI reporting
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Internal Value Drivers
Consistent, growing financial performance
 consistency of results leads to a premium value
 Intentional, unyielding focus on accountability and performance to promises/plans
 effective use of capital
 Working capital management
 Investment spending tied to strategic plan objectives
 instill a culture of continual operating improvement
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