Good lawyers get up close and personal with family businesses

David Simpson knows all too well the tough battles that need to be fought to successfully transition a family business. He has worked with many of Canada’s leading family businesses and he has worked in one himself, with his brother. He now teaches the next generation of entrepreneurs at the Richard Ivey School of Business MBA program in London, Ont.

He also knows the important role played by lawyers.

“When talking about transition success, your long-time lawyer may not let you in on a little secret,” says the founder of the Ivey Business Families Centre. “The lawyer may not ask if you realize that the legal documentation of your transition or success strategy is the easiest part of the succession process.”

Is Mr. Simpson implying that family business lawyers have it easy? Not at all.

A family firm lawyer will know the law, but a good lawyer will also get to know the family very intimately and how the members interact. This close and frequently personal relationship brings its own set of challenges, often requiring a lawyer to step outside of the legal box. The lawyer is like a ring master, advising the owner on when to call in experts to deal with various non-legal family issues encountered when running a business and balancing the long-term succession planning.

“The toughest part of transition is asking three key questions, which have nothing to do with the law or the business itself, but they will challenge every family business,” Mr. Simpson says.

His questions are as follows:

• Does your family speak the same language? A successful transition requires a common frame of reference, and even the simplest everyday terms such as “soon” – as in we’ll meet soon on that – or “long term” can mean different things to each family member. A daughter might ask to run a philanthropy event, but when the founder says ‘we can do it later,’ it means next year. Meanwhile, the daughter thinks her father means next month and conflict arises. It is critically important to meet together as a family to work out common frames of reference to avoid misinterpretations within the family, which can then spill over and confuse staff, customers and other stakeholders.  
• Are the children dependent on the business? While children are growing up, they are dependent on their parents. When the business relationship is added to the family dynamic, it can be emotionally difficult for adult children. They have to be at peace with working for a parent while competing with their parents’ legacy goals for the other “baby” in the family: the family business. Children need to realize that their livelihood may not come from the family business if their skills are not a good fit with the requirements of the industry. Author and family business adviser David Bork said it best: “The purpose of family is to raise responsible adults, who have high self-esteem and can function independently in the world – acceptance is unconditional.” Now compare that unconditional love with Mr. Bork’s description of the uncompromising world of business: “The purpose of business is to generate profits! Acceptance is based on skills, competence, the ability to produce and perform.”
• Have you discussed personal goals within the family? It is critical for the leader who is passing the torch to not snare the next generation in a trap. There can often be a conflict between the founder and his vision of how the legacy will continue and the next generation’s goals. For example, the younger generation might want to move marketing efforts online and use Google Adwords, Facebook and Twitter. The founder says, “What’s this Facebook – it’s for teenagers?” or “I don’t want to tweet,” and puts a kibosh on the plan. To pass the torch to a new generation, a founder needs to grant full freedom. Great families honour the founding entrepreneurs and understand stewardship of family assets, but they are also mindful that success lies in allowing the next generation to remain entrepreneurs. This means providing the new leadership with the fullest autonomy to take the business in new directions.

Jacoline Loewen is a director at Crosbie, which focuses on succession advice for family businesses and closely held small to medium-sized enterprises. Crosbie develops customized strategies, particularly in relation to M&A, financing and corporate strategy matters. Ms. Loewen is also the author of Money Magnet: How to Attract Investors to Your Business. 

Ask These 5 Questions Before Acquiring a Foreign Firm

If you’re eyeing a potential acquisition abroad, be sure to do a thorough background check—and then a bit more

Allan Britnell

 

 

Any acquisition requires complex layers of scrutiny to make sure a deal doesn't collapse, or worse, cost you your company. If you're considering making a purchase in a different country, the associated risks are even greater.

So before you launch into an overseas buying spree, here are five considerations to add to your due diligence checklist.

1. Is everyone using the same accounting system?
When it comes to transnational finances, don't assume anything. While math may be universal, accounting systems aren't. "It's almost as if some countries are a generation behind in terms of accounting practices," says Vince Simonelli, a partner in Collins Barrow's Transaction Advisory Services group, who has worked on more than 50 buy- or sell-side due diligence projects for the accounting firm. Overseas accountants may have different interpretations for how to recognize asset values, for example.

These issues can be compounded when the deals are conducted in a foreign language, so it's imperative to hire highly skilled translators. Even when accounting practices are more standardized, key terminology can still vary. In some countries, for instance, receivables and payables are referred to as "debtors and collectors."

2. How much taxes will you pay?
If you thought interprovincial GST/HST was complicated, wait until you do business abroad.

"You need to look at the tax environment and the country-specific liabilities related to taxes," says Simonelli. "For example, in France, there are particular pension obligations that the government imposes on companies that you wouldn't expect in Canada, so you have to look for that liability being recorded."

Foreign ownership (by you), may also impact existing agreements, such as negating work permits for foreign workers employed at the facility.

3. Are you able to hire locally?
Government agencies such as the Department of Foreign Affairs, Trade, and Development can help you get up to speed on overseas trade issues. Even so, "It's critical to use a local law firm," says Simonelli.

While you may plan on moving part of your core team to the new operations, you'll still need local contacts onboard as well. "Supply chains are often built on relationships," points out Simonelli. "If one of the guys in the chain doesn't want to work with you for whatever reason, the whole chain collapses."

4. Are you familiar with the local culture?
What you may think of as standard business practices, such as how you handle loans or make government payments, can differ from country to country, reinforcing the need for local legal advice.

And while most phases of an acquisition can be done remotely, onsite visits are a must. While there, be sure to familiarize yourself with the cultural norms—a faux pas could jeopardize a deal. In Japan, for example, there are customs around presenting and receiving business cards. Casually accepting someone's card and writing details of your meeting on the back would be viewed as a terrible insult.

5. Do you know how to handle bribes?
In many parts of the world, bribes and kickbacks are considered part of doing business.

Regardless of where you are, Canadian law—specifically, the Corruption of Foreign Public Officials Act (CFPOA)—still applies. In January 2013, Calgary-based Griffiths Energy International, an oil and gas company with operations in Chad, was charged under the CFPOA and fined $10.35-million for making a $2-million payment to the wife of Chad's ambassador to Canada.

One tool to help prepare yourself for the level of bribery and corruption you might encounter is the website for Transparency International. The organization releases an annual Corruption Perception Index ranking the level of public sector corruption in 177 countries. The 2013 list will be released December 3, 2013.

The best mergers get the timing right

JACOLINE LOEWEN

There are many reasons for companies to acquire another business and merge it with their own. One type of mergers-and-acquisitions (M&A) strategy that’s popular with firms needing the new, new thing is to use it as a substitute for their own R&D.

For example, Vancouver-based Flickr, a photo-sharing application, was acquired by Yahoo Inc. for the reported sum of $35 million. Yahoo has in-house R&D but it recognizes that by acquiring unique technologies of startups such as Flickr, it can build market share quickly.

The objective for the M&A of smaller companies set by Yahoo in the Flickr case, or by other large technology firms such as Google or Blackberry, has been carefully defined. It is to supplement in-house R&D to remain on the cutting edge of their industries. John Banks teaches MBA students about M&A at Waterloo, Ont.’s Wilfrid Laurier University, and he reinforces the importance of identifying the purpose of buying a business.

“Regardless of how attractive the deal price or fortuitous the opportunity,” he explains, “it is essential that the impact the acquisition is intended to have on the firm’s strategic direction be both understood and realistic for the transaction to be truly successful.”

Companies that use the M&A process to supplement their R&D must have access to rigorous corporate finance skills in order to stick to their mandate. “The assessment needs to be especially meticulous,” Mr. Banks says, “since research shows that this particular aspect of M&A is often characterized by incomplete if not irrational thinking.”

A smaller firm is often attractive as an acquisition target because it can have the flexibility of a speed boat that manoeuvres rapidly around larger ships. “A company should challenge bigger companies,” says Amar Varma, founder of Xtreme Labs – which provides mobile experiences to firms – and who mentored Rypple and its acquisition by Salesforce. “There is the ability to think several strategies ahead of the larger company – a company should either be an opportunity as an acquisition, or a threat.”

The issue for a larger company choosing to use M&A to develop an innovative product pipeline is the risk of missing the window of opportunity to buy. “An early-stage company is rushing towards bankruptcy and they need cash to survive,” Mr. Varma explains.

Being acquired can alleviate that immediate pressure for cash but as he warns: “The larger company only has the window of opportunity to do an acquisition while a company is small enough to need the cash. Once the company gets to a larger size, it reaches a more stable scale and then it no longer needs the acquisition to grow further. It can go it alone.”

When a firm uses M&A to supplement its R&D, the corporate finance process needs to be highly streamlined and earmarked as mission-critical. An engineer who sold his company several years ago to a large U.S. firm, and who is still working at the large company to transition the technology, spoke anonymously about his experience. “It's estimated that approximately 70 per cent of M&As fail.

“For an M&A to work well, there needs to be strategic alignment for the bigger vision of the deal, an appropriate integration plan that minimizes day-to-day disruptions, and very importantly, alignment and consideration for the cultural fit of both companies.”

The first six months will be the most challenging, as the small firm is usually superior and this can cause resentment. The need for a cultural fit suddenly becomes startlingly clear. The on-boarding entrepreneurs will need a top executive in the firm to champion the acquisition and remind them of all the good reasons for the M&A.

“It becomes important to keep employees of the acquiree informed about what the M&A means for them – this can be a confusing time for acquiree employees who may feel their jobs are at risk and could consider leaving if they're not well-informed,” the engineer explains.

The engineer is satisfied with his decision to be acquired. “I do agree that an M&A can be a viable alternative to organic growth. For the company buying a business – the acquirer – their benefits in our case included immediate access to intellectual property, business and technical domain expertise in terms of talent, and also our customers.

“For my business – the acquiree – our benefits included gaining access to more R&D, as well as sales and marketing resources that accelerated business growth. Our M&A resulted in improved sales reach, cost optimization, and increased revenues.”

Jacoline Loewen is a director at Crosbie, which focuses on succession advice for family businesses and closely held small to medium-sized enterprises. Crosbie develops customized strategies, particularly in relation to M&A, financing and corporate strategy matters. Ms. Loewen is also the author of Money Magnet: How to Attract Investors to Your Business. You can follow her on Twitter @jacolineloewen.

Economic slowdown speeds up drive for acquisitions

JACOLINE LOEWEN

The Globe and Mail

Published Tuesday, May. 28 2013, 5:00 AM EDT

Gloomy pundits and unfavourable macro-economic news can lead business owners to shelf plans to sell their companies, but the smart ones don’t try to time the market, nor do they wait to be courted. They actively seek out buyers.

They also watch for micro signals within their industry because the implications of small shifts in one area can signal bigger changes ahead.

Spots of activity are happening across the ethnic food industry in Canada, which is highly fragmented, with a wide scattering of companies making revenues from $10-million to $100-million. These owners are often running lifestyle businesses and they serve a niche market, such as tropical fruit drinks and spicy snacks for Asian customers.

The range of consumers clamouring for exotic tastes such as coconut water or tandoori-barbeque flavoured chips is expanding. Big companies, including Pepsi and Loblaws, are private-label innovating in this segment. Owners of ethnic food companies are finding their products moving from the back shelves to front-and-centre at the big-box retailers and gas stations to catch the consumer eye.

There are few large ethnic food players in Canada to keep a good balance of power with the corporate retailers and wholesalers who have been consolidating. The opportunity is ripe for a large company to roll-up the smaller ones and create a significant ethnic food business.

The economy continues to make it a struggle for any company to increase revenue by building capacity through its own efforts. Buying smaller businesses as “add-on” acquisitions is an attractive strategy for organizations that want to boost sales. Larger buyers can acquire smaller companies at lower risk because they bring a niche client base that would take years to develop.

As the economic slowdown continues, there has been an increase in the drive for acquisitions – sellers of ethnic food companies have a chance to turn this situation to their advantage. If they identify the major players in their industry and look at the acquisition activity closer to home, they can create a sale opportunity.

There are many moving parts for a seller in a fragmented industry such as ethnic foods, and to suggest the complexity of the selling process can be reduced to a handful of points is a risky proposition. With that caveat in mind, a seller should start by asking three questions:

1. What is the buyer seeking?
As management guru Peter Drucker has said: “The purpose of a company is to create a customer.” If you understand your target buyer’s customer focus and figure out what it is trying to offer consumers, you will gain insights into how your company can add something unique to that buyer.

“With ethnic foods, would the buyer be interested in adding to their product mix and bringing something new to their consumer’s table?” asks Kamal Baig, former CEO of a tropical drinks company in Toronto. “When you have products with a unique niche, this is a powerful addition of loyal consumers, and there could be the potential to scale up the amount sold.”

Perhaps the buyer’s larger distribution network would give your innovative products exposure to a new set of consumers while refreshing a brand?

2. How would a buyer look at my business?
How would your business fit into the buyer’s company? Be able to explain the synergies your firm would bring and how these would benefit the larger, platform business.

For example, will there be efficiencies if manufacturing is combined?

3. How can I know what my business is worth?
Your business is worth what a buyer will pay. Sellers often make the fatal mistake of conducting serial negotiations, which is a recipe for a poor valuation.

Jacoline Loewen is a director at Crosbie, which focuses on succession advice for family businesses and closely held small to medium-sized enterprises. Crosbie develops customized strategies, particularly in relation to M&A, financing and corporate strategy matters. Ms. Loewen is also the author of Money Magnet: How to Attract Investors to Your Business. You can follow her on Twitter @jacolineloewen.

Good lawyers get up close and personal with family businesses

JACOLINE LOEWEN

The Globe and Mail

Published Tuesday, Apr. 02 2013

 

David Simpson knows all too well the tough battles that need to be fought to successfully transition a family business. He has worked with many of Canada’s leading family businesses and he has worked in one himself, with his brother. He now teaches the next generation of entrepreneurs at the Richard Ivey School of Business MBA program in London, Ont.

He also knows the important role played by lawyers.

“When talking about transition success, your long-time lawyer may not let you in on a little secret,” says the founder of the Ivey Business Families Centre. “The lawyer may not ask if you realize that the legal documentation of your transition or success strategy is the easiest part of the succession process.”

Is Mr. Simpson implying that family business lawyers have it easy? Not at all.

A family firm lawyer will know the law, but a good lawyer will also get to know the family very intimately and how the members interact. This close and frequently personal relationship brings its own set of challenges, often requiring a lawyer to step outside of the legal box. The lawyer is like a ring master, advising the owner on when to call in experts to deal with various non-legal family issues encountered when running a business and balancing the long-term succession planning.

“The toughest part of transition is asking three key questions, which have nothing to do with the law or the business itself, but they will challenge every family business,” Mr. Simpson says.
His questions are as follows:

• Does your family speak the same language? A successful transition requires a common frame of reference, and even the simplest everyday terms such as “soon” – as in we’ll meet soon on that – or “long term” can mean different things to each family member. A daughter might ask to run a philanthropy event, but when the founder says ‘we can do it later,’ it means next year. Meanwhile, the daughter thinks her father means next month and conflict arises. It is critically important to meet together as a family to work out common frames of reference to avoid misinterpretations within the family, which can then spill over and confuse staff, customers and other stakeholders. 
• Are the children dependent on the business? While children are growing up, they are dependent on their parents. When the business relationship is added to the family dynamic, it can be emotionally difficult for adult children. They have to be at peace with working for a parent while competing with their parents’ legacy goals for the other “baby” in the family: the family business. Children need to realize that their livelihood may not come from the family business if their skills are not a good fit with the requirements of the industry. Author and family business adviser David Bork said it best: “The purpose of family is to raise responsible adults, who have high self-esteem and can function independently in the world – acceptance is unconditional.” Now compare that unconditional love with Mr. Bork’s description of the uncompromising world of business: “The purpose of business is to generate profits! Acceptance is based on skills, competence, the ability to produce and perform.”
• Have you discussed personal goals within the family? It is critical for the leader who is passing the torch to not snare the next generation in a trap. There can often be a conflict between the founder and his vision of how the legacy will continue and the next generation’s goals. For example, the younger generation might want to move marketing efforts online and use Google Adwords, Facebook and Twitter. The founder says, “What’s this Facebook – it’s for teenagers?” or “I don’t want to tweet,” and puts a kibosh on the plan. To pass the torch to a new generation, a founder needs to grant full freedom. Great families honour the founding entrepreneurs and understand stewardship of family assets, but they are also mindful that success lies in allowing the next generation to remain entrepreneurs. This means providing the new leadership with the fullest autonomy to take the business in new directions.

Jacoline Loewen is a director at Crosbie, which focuses on succession advice for family businesses and closely held small to medium-sized enterprises. Crosbie develops customized strategies, particularly in relation to M&A, financing and corporate strategy matters. Ms. Loewen is also the author of Money Magnet: How to Attract Investors to Your Business. You can follow her on Twitter @jacolineloewen.

Top 10 Reasons to Conduct IT Due Diligence

In too many M&A transactions, even those related to software and technology companies, IT due diligence is, at best, an afterthought. There is no doubt that financial and legal due diligence are critical, but IT concerns too often receive insufficient consideration. This article will explore the top ten reasons to make IT an important part of your due diligence process.

1) Be Sure the Technology is Real
A financial or legal expert simply can’t tell if a target company’s product is real. You can’t rely on a PowerPoint presentation or even a product demo. It’s too easy to create something that looks great but doesn’t do what it’s expected to do. Ideally you will have an expert in the target company’s specific technology review source code, product plans, etc. At a bare minimum, you need to have a technical person sit in on a demo and ask questions, but that’s no substitute for a source code review.

2) Determine the Technology’s Compatibility
Even if the technology is real, you need to know if it’s compatible with the acquiring company’s technology. If the target company uses leading edge or proprietary technology, it may not integrate easily, if at all, with the acquiring company’s legacy systems. This can have serious ramifications for the integration of the companies, the maintainability of the software and the retention of key employees at the target company.

3) Establish the Technology’s Scalability
If you determine that what you’re acquiring is real and is generally compatible with the acquiring company’s technology, it’s important to consider the scalability of the technology. How will the software or systems behave if the number of customers doubles, or increases tenfold? Will the technology expand gracefully with a low marginal cost, or will significant growth require a large investment in new servers or other hardware? In the worst case scenario, a complete re-architecture of the technology may be required. Even if this doesn’t kill the deal, it represents a cost that needs to be uncovered and may impact the terms of the transaction.

4) Uncover Licensing Risks
It’s not uncommon to find that a startup or small technology company has not properly licensed all of its production or development software. It’s not always intentional – in the frenzy of getting a product developed and into the market, any number of administrative tasks can fall by the wayside. Whatever the reason, at some point the fact that additional licensing costs are due will come to light. You want it to be before the transaction closes, not after closing or the expiration of any holdback period for reps and warranties. 

5) Explore the Compatibility of Company Cultures
IT due diligence includes interviews with some or all of the target company’s technology staff. Through these interviews, you can get a good feel for the personalities involved. Will they work well in a larger organization, if that describes the acquiring company? If these are important employees, you may need to put employment agreements or retention bonuses in place to be sure the key players remain post-transaction.

6) Determine the Appropriateness of Current Levels of Resources
Many smaller companies scrape by with minimal resources when it comes to things like networking and other IT infrastructure. Has the target company put off making needed investments in order to artificially inflate profitability? Are you confident that your legal or financial experts would notice? 

7) Identify Opportunities for Cost Savings
By the same token, technical knowledge is needed when it comes to determining a realistic level of synergies in the transaction. Don’t assume that simply because both the acquiring and target companies have data centers, you’ll be able to combine them after the deal occurs. Are you sure the technical platforms are compatible? Can you evaluate the skill sets of the target company’s IT staff to determine if there is any overlap with the acquiring company’s staff?

8) Discover Hidden Gems
It’s not unheard of that the technology staff at a company is working on projects that the senior management of the company isn’t aware of. These experimental projects aren’t likely to end up in the target company’s CEO’s PowerPoint of company products. The right technical expert can make the connections between these “secret projects” and the strategy and technology of the acquiring company. 

9) Verify that the Technology Can be Supported
This broad area includes basic things, such as whether or not the target company has a clean copy of the source code for their technology, or whether they own the rights in the first place. These issues come up more often than you might think. Even if there is s viable copy of software source code and all ownership rights are in order, are the people who wrote the software still employed by the target company? Don’t expect any of this information to be volunteered – you have to look for it and you can’t make any assumptions.

10) Reveal Important Integration Issues
Let’s face it – most transactions that get to the point of a serious due diligence effort eventually close. After the deal is done, the real work of integration begins. IT due diligence provides a critical opportunity to get a head start on the identification of issues, planning for solutions and development of an execution plan for the integration of the target company.

These are just some of the most important reasons to conduct an effective IT due diligence effort.