Over the past forty-eight years I have had complex interactions with business owners and their professional advisors on the topics of business valuation and transition. By and large I have found those interactions educational and – as might be expected from any large sampling – sometimes surprising and disappointing.
There are always exceptions to generalizations. That said, this commentary – based on my experience to date with business owners and their advisors – somewhat randomly summarizes what I believe to be a number of business owner and advisor characteristics important to business transition.
This commentary includes a story about poison ivy. However, the title goes further to include “wolves at the door” – and by inference other dangerous traps, venomous creatures and beasts that inhabit the ever-changing forest that business owners and their advisors walk through each and every day. This where the unsuspecting, uninformed and unarmed travelling in that forest – and in fact we all are doing that – run a serious risk of being harmed or worse.
Failure to emphasize and practice “Family Business First”
When it is put to them I find family business owners generally understand the reasons that in the current environment they need to put their family business – the proverbial goose that lays the golden eggs – ahead of individual family member self-interests. For many family business owners that seems to be a concept that is easily understood. However absent hard times or third party shareholders it is concept that typically is not systematically and consistently put into practice.
Going forward I believe things will generally get more and more difficult for many businesses, and that prioritizing the family’s golden goose over its individual family members will become increasingly important. I also believe this is a view and practice that should be acted upon now and not later – when it might prove to be too late.
Important business owner characteristics in the context of business transition
A seemingly high percentage of successful business owners;
- are “glass half or more full” optimists.
- often “hear what they want to hear”.
- have difficulty accepting and focusing on comparatively obvious and less obvious things that may prove to negatively impact their businesses.
- often enthusiastically embrace the status quo in circumstances where their business world is changing before their very eyes if they only take the time to look.
- are resistant to changing their business/family relationships, business models, and income/dividend/capital repatriation payout policies. This where, to some degree understandably, they very often don’t see strong reasons to “fix what they see as not being broken”.
A poison ivy story – distinguishing business owner obligation urgency from commitment that can be deferred
As a young adult I was asked by my mother-in-law to cut down a bank of weeds at her summer cottage. I did that, foolishly wearing only a bathing suit. Almost immediately the skin on my legs began to blister. After several days of an ever-worsening poison ivy attack I visited a dermatologist. My message to him: “please cure me as quickly as you can – within reason the cure overrides the cost.”
An obligation is something a person is bound or obliged to do. Making a commitment is the act of pledging oneself to, or engaging in, something.
In my business valuation consulting practice business owners typically came to me when they had a specific business valuation problem. Usually those “problems” related to an “in process” litigation dispute. Frequently when the litigation smoke cleared they engaged me to advise them on business transition.
There typically was a very noticeable difference in how those business owners dealt with their litigation dispute issues and their transition issues. In the case of:
- litigation disputes, like my case of poison ivy, the owner messaging was “cure me as quickly as you can, within reason costs are less relevant than the cure.” This where the owner had a legal obligation to deal with the matter at hand, and could not procrastinate over working to resolving it within a Court dictated time frame.
- transition, unless there was a health or evident business reason that business transition had to be dealt with in the near term the owner typically to a greater or lesser degree said “why do it today if it can be done tomorrow”. This where the owner(s) believed transition ultimately would have to be dealt with, but that they could procrastinate over transition without significant risk to their business or family – and deal with transition over the longer-term.
However, that was then and this is now!
As I currently speak with business owners and advisors I find this difference continues. That is, for most business owners there continues to be a relationship between the perceived immediacy of transition issues and the degree they assume postponing transition activity is not going to harm them or their family to a noticeable degree.
I strongly believe that in today’s and our prospective economic, business and governments environment:
- business owners have an obligation to themselves, their families and their communities, and
- advisors have an obligation to their business owner clients
to not only keep more on top of economic, business and government related news, but to continually look beyond that news as it is reported – and at all times consider that news carefully from 10,000 feet as to what the news reports say and what the raw news itself means or may mean. Stated differently, a majority of reporting does not go beyond reporting to context – and reporting that does often gets the context either incomplete or incorrect.
I do believe business owners and their advisors focus on external events. That said I question whether all business owners and advisors reflect on those events and assess them on a forward looking basis to the degree they should. Obvious external events that are highly likely to impact all businesses and their revenue and cost structures to varying degrees include ongoing globalization, continually increasing government debt levels, changing government protectionism, ongoing and in some cases escalating technological advances, ongoing business combinations the create ever larger companies (read “competitors”) and a myriad of other things – notably central bank policies and financial markets.
Not to take notice of and continually studying these things in the context of their own business puts the business owner in a little red dress in a forest with more than one wolf and many other dangers. As you likely know, in the original version of the story the wolf killed and ate Little Red Riding Hood. Subsequent versions have the wolf being the victim which one might think goes to societal change, not likely reality.
Business owners, objective advice, and expert “pleasers”
In my experience, particularly when it comes to business transition and valuation:
- many business owners don’t value objective advice to the extent they should, even if it hits them over the head. Rather, many business owners seem to be attracted to advisors who tell them – either knowingly or unknowingly – what they want to hear.
- many business and business family advisors, including non-family directors and professionals, seem loath to give advice they think will not be well received and that might jeopardize their position with their business owner clients. This fear particularly seems to arise when the advice is being given to family members who dominate both the ownership and management of the business.
- tend to favour “soft-side advice” over “hard-line” advice, particularly where that advice directly reflects on current business practices – and in particular business family members and their individual interactions with the family business.
- perhaps not surprisingly for many business owners “bigger seems to be better and more reliable” when it comes to professional services firms.
- the best advisors, professional and otherwise, “speak truth to power”. This where “speaking truth to power” means to standing up for what one believes, even if it is risky for one to do that. Stated differently, advisors who “speak truth to power” tell their clients what they believe it is right, even if they know that is not what their client wants to hear – and do that in a way that what is said is listened to.
- the best advisors offer more than book learning, but rather have “hands-on operating knowledge” in the context of the businesses they advise on.
- most business owners have not considered the importance of working with advisors, professional and otherwise, who have such operating experience. That said, when asked some business owners say they are often disappointed by how comparatively little their individual professional advisors seem to know about the operating risks and rewards inherent in the businesses they are advising.
Corporate governance is deficient in most family businesses. Understanding corporate governance and constantly improving it is fundamental to successful family business transition planning and execution. Simply put, the more closely a family business’s operations follow arm’s length business principles, the greater the family’s likelihood of business and transition success.
In a nutshell, corporate governance and resultant business and transition success are all likely to be positively impacted by:
- the election of arm’s length corporate directors.
- alternately the organization of an advisory board comprised of non-family members.
Reliance on EBITDA multiples in business valuation
Many business owners seem enchanted by the idea that they can adopt a simple multiple of EBITDA to determine the value of their business. They claim various professional and other sources for these EBITDA multiple numbers – and there seems to be a large element of consistency in the information they are being provided.
This is worrisome, not in the context of business valuation fees these business owners might save, but rather in the context of the simple arithmetic some business owners are adopting may lead them to misleading value biases and conclusion that may not square with reality in their individual circumstances.
You might want to read EBITDA business valuation methodology: How reliable? The simple answer to that question is: expedient, overrated and for many reasons generally not very reliable as a primary valuation methodology.
- Business owners increasingly need to embrace a family business first and business family second philosophy.
- Business owners need to better understand the external factors over which they have no control and that are and will continue to – potentially materially – impact the long-term viability and success of their businesses. Their advisors likewise need to study and be on top of those same factors.
- Business owners should add arm’s length directors to their board, or failing that should create an advisory board comprised of arm’s length persons. In both cases the business may be better served if appointees have relevant industry operating experience.
- Business owners should not rely on a valuation of their business based solely on a multiple of EBITDA methodology, and in any event should be leery of placing primary reliance on that methodology.
- All other things equal, advisors to business owners and their families who “speak truth to power” should be preferred over those that do not do that.
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50 Hurdles: Business Transition Simplified
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Ian R. Campbell FCPA FCBV
Ian R. Campbell is a Canadian business valuation and transition expert. He is the author of several Business Valuation texts and of 50 Hurdles: Business Transition Simplified. The Canadian Institute of Chartered Business Valuators recognizes his contribution to the Canadian Business Valuation Profession through the annual The Ian R. Campbell Research Initiative.
He writes The Business Transition and Valuation Review newsletter for business owners and their advisors.
You can reach him by email at firstname.lastname@example.org, or by telephone at 905 274 0610.