Posts made in September 2014

What happens to my people after I sell?

The Denver Post || BUSINESS   Posted 9/21/14 

Gary Miller

by Gary Miller, Founder, and CEO, GEM Strategy Management Inc.

 After spending several decades building a highly profitable, and successful, medium-sized manufacturing business, “Fred”, a middle-aged president sold his company with the understanding that he would stay on as CEO until his retirement, some three years later. At the time the sale took place, both the seller and buyer said it was the best thing for both of them.

But soon after the deal was struck, things began to sour.

I talked to Fred several months after he retired and asked how the post-integration had progressed.

Fred said: “Immediately following the acquisition, a hoard of corporate personnel from the home office descended on us.  Each was a ‘specialist’ in the integration process. Their stated purpose was to integrate and acclimate us to ‘our new parent’s operating methods’.  What they succeeded in doing was driving my people crazy. “

He continued, “We couldn’t make a move without being told that our methods were outdated and ‘we’d have to adjust to the company’s way of doing things’.  When I complained to Corporate about the situation, I was told if I squawked too much, my position would be in jeopardy.  The net result was the company’s morale was destroyed and my key people began leaving.  It wasn’t long before I followed them.”

Fred’s experience is not an uncommon;  and his story ends as many others do – a feeling of helplessness, frustration and sadness – after years of being successfully in charge.

In the many transactions I have been a part of, buyers look at three main areas: Exposure to risk; sustainability of the business and “a fit between the organizations”.

I want to focus on “fit” — particularly the human side of acquisitions – the “cultural fit” as I have witnessed more acquisitions go awry because of this one,  most often overlooked area.  Generally, both parties are oblivious to the blending of two cultures until misunderstandings and resentments start to develop.  Often these troubles grow quickly and become impossible to manage.  They then end in a costly and demoralizing personnel loss which could have been avoided prior to closing if more care and attention had been given during the acquisition process.  While there is no “silver bullet” to successfully blending cultures, steps can be taken by the seller to give him and his team insights as to “life” after closing.

Fred admitted that he made several mistakes during the selling process, and if he had it to do over again, he would do the following:  Hire a professional team with transaction experience including a lead consultant, law firm, tax advisory firm, investment banker and a wealth management firm. Fred was good friends with his accounting firm’s lead partner, law firm partners and his wealth management firm’s partner.  All had little transaction experience.  Fred didn’t hire an investment banker and a consultant to lead the team as Fred decided he could fulfil that role and save money.

Fred said he led the negotiations even though he had never bought or sold a company.  He should have asked some basic questions such as; “What are your plans for my company?”  “What will be my specific responsibilities under the new structure?”  “What are the reporting relationships?”  Fred went on, “I should have consulted management from other companies the prospective buyer had acquired to determine what its track record might be.”

“I should have reviewed the factors and situations which could become post-acquisition points of contention such as compensation of my staff, the acquirer’s objectives, reporting relationships and the degree of autonomy allowed to existing management”.  The following are some considerations a wise seller would have taken into account before selling.

Employment contracts. Negotiating employment contracts may give the seller a good idea of the prospective buyer’s intentions. If the buyer is not serious about retaining management, it is not likely to tie itself to financially binding contracts. Contracts can serve to protect the seller and his top management, not only by assuring a pay-off if the post-acquisition period does not go well, but also by telling — before the sale — whether the buyer is really interested in retaining existing management.

Compensation and Benefits. If you are guaranteed a bonus based on earnings, insist that the details of the bonus package are clearly delineated in the Purchase and Sale Agreement.  Determine if your profit sharing plan will stay or be integrated into the purchaser’s plan.  Make sure the buyer’s plan is of equal value to yours and that it includes all of your employees if your present plan includes all of your employees. If your compensation is higher than your peers, detail how you will be compensated in the purchase price if the acquiring company takes away your company car, reduces your salary, eliminates your deferred compensation, and reduces your vacation and health care benefits. The best way to preclude potentially unhappy scenarios is to insist upon thorough, well-managed negotiations (on your part) in the first place.

Organization Plans and Reporting Relationships. Many of the organization changes made after a company is sold would not have been acceptable to the seller and his management before the deal was closed, if the seller had examined the cultural fit.  The seller has more control over his company’s future if he tries to pin down such matters during the negotiation process. Key questions to ask are: How autonomous is existing management? Do I report to the Corporate CEO directly or through channels? Does affiliation with the parent company serve to bog down, or to expedite work flow? Does management have to devote more time than is warranted to corporate meetings and reporting requirements?

The Need for Understanding. When acquisitions go sour, bitterness arises because the seller “doesn’t understand “the corporate culture of the buyer.  No matter how well a seller feels his management style meshes with the culture of the buyer, no matter how many assurances the seller gives that you will remain in control, you should understand the sale will bring a change and may bring unexpected consequences. Without a doubt, well-managed negotiations are the key to dealing successfully with questions of “What happens to my people after I sell?”

A seller must be aware that over the years of developing and growing a successful company, he has largely considered it his “baby”.  He has taken a parental interest in his key management.  He should be very careful before he gives it over to a new parent.

Gary Miller ( founder and CEO of GEM Strategy Management Inc., a management consulting firm focusing on strategic business planning, growth capital for expansion, mergers and acquisitions, value creation and exit strategies for middle-market company owners.  970.390.4441


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Getting the Capital You Need: Key Questions and Answers

The Kansas City Star | BUSINESS

09/16/2014 6:15 PM  09/17/2014 2:38 PM

Gary Miller

Gary Miller is founder and CEO of GEM Strategy Management Inc.

Lacking sufficient capital to grow is the main constraint for most small and middle market companies. To reach the next level of success, capital is the fuel that drives the company’s growth engine. Without it, reaching that next level is almost impossible.

Many entrepreneurs are skilled at starting and building small, successful companies. But growing a small company into a big one is very different, and in many ways a more difficult task, which is why raising growth capital is so important. Entrepreneurs and business owners often stumble in obtaining growth capital because they are inexperienced and unprepared.

Here are the key questions, and some answers.

What do I do first?

1. Prepare your company to raise capital. Hire an experienced management consulting firm to help you prepare your company and to help you raise the capital. Raising capital means seeking investors whether it is debt equity through a bank loan or investor equity through an investment firm.

To prepare for either choice, clean up your books and records, prepare for due diligence, update your strategic business plan, detail how much capital is needed including its purpose and uses, and plan the optimal deal structure. Lean on your consultant for help with all this.

2. Develop growth and expansion plans. Prepare detailed financial Pro Formas showing monthly income and expenses. Institutional investors look to invest in companies that have a clear differentiation, scalability, execution capabilities, and a great management team. Your growth plans must be creative and strategic.

Consider forming a joint venture, strategic partnerships or strategic alliances with your customers, vendors or competitors.

3. Hire a valuation company to render a “market valuation” opinion. Don’t expect the sort of sky-high valuation entrepreneurial companies enjoyed in the past. Investors have returned to ground level and realize that many of their investments will not qualify for an initial public offering 12 to 24 months later. Therefore, be prepared to give up more ownership for smaller amounts of capital and possibly even more control if you need to raise equity capital.

4. Prepare a “leave behind” presentation. Prepare marketing materials such as an executive summary, management presentation and due diligence materials.

Your knowledge, confidence, experience, commitment and enthusiasm are critical to your success. Practice the presentation. Know your numbers!

Where do I find growth capital?

First, decide whether you are willing to give up some equity and some control of your business.

If not, then your options may be limited. The path you will then follow is to seek debt financing or debt equity through a variety of sources:

(1) Small Business Administration loan programs have significantly expanded over the last decade ranging from loan program guarantees to women’s business centers; (2) asset based lenders; (3) factoring companies; (4) mezzanine financing companies (a hybrid of debt and equity); (5) self-funding (second mortgage on your home; tapping retirement accounts); (6) friends and family; (7) banks (revolving lines of credit and structured financing); (8) Small Business Investment Companies; (9) business incubators; (10) peer to peer lending and investing; (11) OFIs (other financial institutions, such as GE Capital); and insurance companies.

If you are willing to give up some equity and some control of the business, then your options expand substantially and you can follow both paths of debt equity and investor equity. I tell our clients to look at a variety of sources: (1) angel and venture capital investors; (2) high and super high net worth individuals; (3) family offices; (4) private equity firms; (5) investment bankers; (6) merchant bankers; (7) crowd funding; (8) joint ventures, partnerships, alliances; and (9) SBA venture capital programs.

Make no mistake about it. Plenty of growth capital sources are waiting for the right opportunity. However, there is a price to pay and a cost to bear for growth capital. Expected returns vary significantly depending on the source of capital. The cost of capital is considerably higher for privately held companies than for listed public companies. Investors in this space are seeking high returns.

I tell clients, it is best to raise capital when you can, not when you need it. It doesn’t matter who the capital sources are, if you’re desperate for funds, they will smell it a mile away. Your chances of success will be reduced greatly if you are playing with a weak hand.

The best institutional investors act as partners. They bring in other investors, open doors for business development, help in recruiting, act like coaches, are objective in their advice as your company grows, and guide you through the inevitable difficult times.

Choose your source wisely. Match your choice to your goals. Be aggressive, creative and persistent and develop the ability to convince others to buy into your vision and share your dream on a foundation of substance, trust and integrity. Remember, growth is the greatest driver of enterprise value.

Gary Miller is founder and CEO of GEM Strategy Management Inc., an M&A  management consulting firm. Gary’s firm focuses on middle market business owners on M&A planning, exit planning, valuations, buy-side, sell-side, capital formation and M&A integration.  To reach him, call 970.390.4441  or send email to