Succession Planning #2– Case Studies

Developing Next Generation Management When No Family Members Exist

A client asked us for advice in preparing his business for sale.  There were no family members interested in continuing the business for the next generation.  However, he was not eager to sell in the near future, just wanted to be in a position to do so over a period of years.  He also wanted to be able to reduce the requirement for his own involvement in the business.  He felt there would be stronger enterprise value created if the business had a solid senior management team without his participation.
BFR designed an incentive compensation plan for a young and talented manager in the company.  Features of the plan included a combination of current cash (annual bonus) and deferred compensation.  The value of the deferred portion behaved like phantom stock, rising or falling with the growth and profitability of the company.
The goals of the plan were to 1) create a significant value for this manager, encouraging him to stay with the company, 2) provide him with a “down payment,” enabling him to participate in trying to buy the company when the time comes, and 3) having characteristics of the plan that preclude it being included in his taxable income or requiring the company to accrue for the liability.  All of these goals were met and approved by the company’s accountants.  Fourteen years later, the owners have still not sold the company; the young manager provided with this plan is now President of the company.

 

Succession Planning – Case Studies

A company came to us to help structure the transition from father to his son who had worked in the business for many years.  They had been talking about undertaking this step for several years, but had not made any real progress.  So far, the family discussions had centered on how much money Dad would need in retirement, and whether or not the company could afford to pay it.

BFR started by asking the father what he would do in retirement, whether he wanted to stay involved in the business or be completely out of it, and who would take over his duties leading the sales effort of the company.  We have found that business transitions move forward when all parties have a more concrete vision of what is coming next.

Initially, it appeared that the father would have to hold significant paper if he was to realize the value he believed to be inherent in the business.  Ultimately, it was decided that the building, owned jointly by father and son, would be transferred to the father as part of the transition.  Building ownership lent itself to a passive management role more consistent with the father’s stage in life while providing a steady income stream.  BFR was also able to find a bank that would finance the purchase of the father’s shares so he didn’t have to hold any paper at all.  At that point, the transaction came together quickly.  BFR has stayed on as a financial advisor to the son and the business has continued to prosper.

 

Receivership – Case Studies

Receivership as a Successful Tool

Our client found itself under a substantial amount of debt with its secured creditor. Over 30% of all operating costs were going to pay for interest expense and the debt load was crushing. The “Line Lender” transferred the loan to the bank’s workout department. We became an advocate with the workout officer and negotiated a substantial reduction of the balance by convincing him to consider an amount that was comparable to the liquidation value of the assets securing the note(s) including the cost of collection. In a situation comparable to that in Problem/Solution #7, the lender was convinced to “sell” the note for a mutually agreed upon value to a member of the management group but someone unrelated to the ownership structure. This individual then became the secured lender and the old company was thrown into a receivership. The assets were then sold to the highest bidder by the receiver through the process of a “credit bid”. Since the note was well in excess of any single obligation then remaining, the “secured lender” was able to acquire the assets at a substantial discount and in the process, eliminated all of the unsecured creditors. Even though the business had to then pay for goods and services on a COD basis after the transaction was concluded, an investment of less than 10% of the overall liabilities, enabled the business to regain its footing and become competitive in a challenging economy and competitive marketplace.

Tax Advantaged Recapitalization – Case Studies

How to use the vehicle of a sale/leaseback to undergo a tax advantaged recapitalization

We had a client that prior to our involvement, had suffered major losses from the departure of three major accounts that had taken their business overseas.  The owner had advanced large sums to keep the business going, since no bank was willing to take a chance on the company after three years of losses and an overleveraged and undercapitalized financial condition.  Since no lender was in the picture, we advised him to consider selling some of the company’s production equipment to him and leasing it back to the company, particularly since the company had rebounded from its earlier difficulties and was now making profits.  The result was an arm’s length sale at the appraised value of the equipment which was significantly higher than its depreciated book value.  A capital gain was incurred but that tax was offset by the cumulative losses of the business.  The owner entered into a sale/leaseback contract with the company and for the first time in three years, was able to receive some compensation in the form of lease payments, the majority of which were, in turn, shielded from tax because of the increased depreciation of the equipment he purchased in exchange for his original debt to the company.  The result was a tax advantaged recapitalization of the company and the road to fiscal health.

 

How to Buy a Company for No Cash Down – Case Studies

How to Buy a Company for No Cash Down

A client was faced with a dilemma:  how to increase sales without an internal sales staff.  The solution was the identification of a comparable business that was on the verge of shutting down as the owner was retiring.  The owner was introduced to the concept of getting paid on a royalty of retained accounts, the catch being that he was to assist in the orderly transition of the old business to our client, the loss of which would forfeit revenues for the seller.  Many of the employees from the old business were hired by our client and in the first year following the purchase, revenues are expected to increase from $2 million to $3 million.  These incremental revenues require very little in the way of increased overhead, the result of which will create meaningful economies of scale and a much improved profit potential.