Popular Articles

Sweet marketing music

Tanner Montague came to town from Seattle having never owned his own music venue before. He’s a musician himself, so he has a pretty good sense of good music, but he also wandered into a crowded music scene filled with concert venues large and small.But the owner of Green Room thinks he found a void in the market. It’s lacking, he says, in places serving between 200 and 500 people, a sweet spot he thinks could be a draw for both some national acts not quite big enough yet for arena gigs and local acts looking for a launching pad.“I felt that size would do well in the city to offer more options,” he says. “My goal was to A, bring another option for national acts but then, B, have a great spot for local bands to start.”Right or wrong, something seems to be working, he says. He’s got a full calendar of concerts booked out several months. How did he, as a newcomer to the market in an industry filled with competition, get the attention of the local concertgoer?

read more
by Bob Stewart
September 2007

Related Article

Get 'er done

Read more

Sustaining business value

Bob Stewart,
Platinum Group:
952.829.5700
bstewart@pllc.com
www.theplatinumgrp.com

How to sustain
business value
during changes

WHEN A COMPANY  is floundering or succession is an issue, tough decisions are multiplied if there’s more than one owner. Challenges are compounded in family-owned businesses.

There are no “one size fits all” solutions for overcoming ownership obstacles. Yet there are lessons to be learned from common obstacles that illustrate how equity structures and agreements can benefit or impede  the business and its owners.

Leadership barriers

Leadership control issues often contribute to the inability to resolve differences of opinion.  This is especially true in second-generation businesses in which the founder has passed ownership to children.

In one case, a deceased owner left disproportionate equity interests in the business to each of his four children. The battle for control hobbled the company’s progress for a decade.

The fight seemed resolved when two siblings bought out the other two, but subsequent allegations of misrepresentation and undervaluing at buyout time kept the principals in litigation for 16 more years. The economic burden on the business was immeasurable.

Lesson learned: Company founders who want to leave a healthy legacy should consider organizational structures that will not create animosity among the successor owners.

In all businesses, one person should be designated as top executive and all others, whether owners or not, must agree to follow, including the possibility of job elimination for the good of the business. Without the ability to agree on a unified strategic direction for the company, equity growth is limited.

Blind loyalty

Blind loyalty can contribute to problems downstream in family-owned or close-knit companies. For example, one company founder passed ownership to his son, who had neither a passion for the business nor strong business acumen.

The son felt he had a duty to keep the family business going.  The subsequent rapid decline in the company’s value, and related blow to the son’s ego, caused deep family turmoil.

In this instance, the better strategy may have been for the founder to sell the business to someone with passion for it and leave the wealth from the sale to his son for pursuing his own dreams.

Alternatively, the founder might have trained a non-family, professional manager to run the business so that his son could continue to own it.  As an owner, and perhaps director, the son’s skills could be augmented by trusted advisors and outside directors.

Lesson learned: Timely communication of true aspirations and unbiased assessment of internal abilities and resources are essential to the equity value of any business.  If family or other relationship dynamics inhibit those behaviors, then owners should look externally for more objective decision-making support.

Vacillating decisions

A business owner announced his retirement and staged a ceremonial “passing of the baton” to the new management team that was able to earn a minority equity interest.  However, control remained in the retiring owner’s hands for 10 years and, eventually, his heirs.

The frustrated management team was unable to make decisions (or were second-guessed when they did).  Unfortunately, the business plateaued in an environment in which it should have grown rapidly.

Lesson learned: Owners unable to delegate genuine authority often limit business growth.  Many intellectually understand how their management style impedes talent development, but are reluctant to change to allow others to flourish.

One method to enable leadership development and prepare for succession, yet limit owner anxiety, is to facilitate an owner sabbatical.  With substantial support and accountability established in advance, the management team has opportunity to demonstrate its readiness to “step up” and run the business with plenty of autonomy while proving its ability to succeed.

No buy/sell agreement

Another common equity obstacle is the lack of a formal buy-sell agreement among owners.  For example, when one partner wanted out after many years of helping to grow the business, she wanted a higher price to redeem her shares than the company wanted to pay.  There was no provision for share valuation.  After a protracted negotiation, a compromise was struck but it was filled with angst and disappointment for both parties.

Lesson learned:  In any multi-owner entity, it is always a good idea to have a buy-sell structure in place as a last resort when owners decide to separate.  It is important to quickly trigger and execute this mechanism so the business does not languish while ownership issues are resolved.

For businesses owned by two more-or-less equal owners, another effective mechanism is to allow either owner to declare the need to separate and name a per-unit equity price; the other owner opts to either buy 100 percent  of the partner’s units for that price, or to sell 100 percent of his or her own units for that price. This can be effected almost immediately to resolve conflict without impacting business value.

With the myriad of decisions that business owners must address, it is no surprise that important long-term ownership decisions often get deferred until they are overwhelming.  It takes great discipline to address equity issues early on.

Third-party professionals can bring a level of objectivity and attention to discrete issues, such as buy-sell agreements, sabbatical planning or succession arrangements.

Not all owner disagreements rise to the level of requiring a “divorce”. Frequently, when owners engage in dialogue over differences of opinion, the process of working through the conflict and coming to mutually acceptable decisions leads to a stronger business model.  Nevertheless, it is wise to plan for the worst-case scenario and provide appropriate protections for the business and owners.