Business Growth Strategy
Tax Planning for C & S Corp Conversions re. New Dividend Tax Law
Strategic Sourcing & Supply Chain Improvements
Acquisition Strategy, Targeting, Financing & Integration
Intellectual Property Licensing & Strategic Alliances
Accessing Non-Dilutive Growth Capital
Improving the Amount or Cost of Senior Debt
Business Governance
Marketing & Sales Best Practices
Value Driver Analysis for Business Profitability Improvement
Value Creation Based Management Compensation Formulas
Improve Business Planning & Forecasting
Business Succession Management
Owner Exit Plans & Inter-Owner Business Transfers
Interim Management Services
Sale of Businesses
 

Business Growth Strategy

We define growth strategy as "the guidance for making directional decisions that influence a company's long term performance." The future viability and value of a business depend both upon immediate results and longer-term, value-building initiatives. Today's rapidly changing and aggressively competitive business environment requires companies to devise successful strategies that anticipate market trends, customer needs and competitor actions. Source can help trustees or executors identify or evaluate key matters that are critical to their strategic decision-making. Clients will often use our growth consulting services to supplement their internal growth strategy resources. Our senior professional staff members can assist with evaluating market positioning, product differentiation, technological innovations, product pricing elasticity, employee aptitude and commitment, and the expectations of customers or shareholders. We can also provide assistance with regard to the impact of macro economic trends (such as the impact of demographics or the stability of currencies or interest rates), the impact of capital market liquidity trends, or international sourcing and trade. Such services can assure heirs or beneficiaries that the trust or estate fiduciaries are actively involved in monitoring and building the value of the business. To request more information on our Business Growth Strategy services for companies click here.
 

Tax Planning for C & S Corp Conversions re. New Dividend Tax Law

Most businesses, which are owned by trusts or estates, with revenue greater than $50MM are either C or S Corps. Most such businesses are also owned by five or fewer controlling shareholders. As such, they are treated as "controlled corporations" under the corporate income tax laws. One significant limitation for controlled corporations under the tax code has historically related to limitations on the periodic redemption of shares by corporations, which are taxed as dividends rather than being treated as a capital gain. These tax rules have for decades limited the planning flexibility for inter generational transfers of businesses, or even for an owner to liquidate an ownership interest in a corporation over a number of years. Until recently, the tax rate on dividends has been much higher than the tax rate on capital gains. This changed in 2003, when the tax rate on dividends was reduced to 15%, which is the same as the current capital gain tax rate. The lower tax rates on dividends expire after 2008. Therefore, many family-owned businesses, which wish to take a longer-term view to their tax planning options, are either: (i) completing partial share redemptions or conveyances now while the 15% rate applies, or (ii) considering the restructuring of their corporations into limited liability companies. Limited liability companies can elect to be taxed as partnerships, which (like S Corps) permit flow-through taxation. However, the partnership tax rules often provide greater planning flexibility for closely held companies. For example, a limited liability company can have different classes of shares unlike an S Corp. This can facilitate inter-generational transfer planning or even provide a mechanism for management incentive shares under which gains will be taxed as capital gains (unlike corporate stock options, which are restricted only to C Corps and that are most often taxed as ordinary income). Partial redemptions of a limited liability company's shares are also taxed at capital gain rates. Some advisors are currently concerned that the lower tax rate on dividends might expire after 2008 or be discontinued prior to then. By currently converting a corporation to a limited liability company, this tax risk can be avoided. The conversion of corporations to limited liability companies will often, however, trigger a tax on any "liquidating gains" from the corporation. The good news at present is that: (i) the lower 15% tax rate would apply and, (ii) given the difficult economy for the past couple years, valuations may be lower at this time. When taking all of this into consideration, many trustees or executors of closely held family businesses are ridding themselves of corporate structures. There has never been a better time to do this. For more information on this tax planning idea click here.
 

Strategic Sourcing & Supply Chain Improvements

Many larger manufacturing businesses have been under increased pricing pressure from their customers in recent years. For businesses owned by estates or trusts, which are controlled by fiduciaries, it is not business as usual. This trend has begun to impact the businesses' earnings and profitability, requiring them to re-examine the competitiveness of their purchasing and supply base. The current conditions take root in the leveraged buyout and re-engineering days of the late 1980s and early 1990s. That was a difficult time for many procurement organizations, which were parts of larger public companies or leveraged companies. In such companies, the focus on getting close to the customer, short-term financial results, and overhead reduction resulted in a de-emphasis on and even a gutting of procurement departments in a misguided effort to be "lean and mean." One forlorn procurement manager once put it, "We went way beyond 'lean and mean,' all we got was skinny and teed off!" As companies saved money on the reduced cost of the purchasing department, it became more difficult to effectively manage the cost of purchases themselves, which can be up to 80% of the entire cost base of the business.

Still reeling from these initiatives, understaffed and overworked purchasing organizations picked up on a new buzzword in the 1990s-"partnering." The promise was to identify a few strategic suppliers, get close to them, commit to long-term relationships, and your business performance will skyrocket. Often, they maintained their long-standing relationships incumbent suppliers, which were frequently family-owned, middle market companies.

By the late 1990s, global competitors from Mexico, China, India, and Eastern Europe put enormous pressure on U.S. and Western European businesses. The suppliers from these regions are very competitive. Often they can deliver comparable quality at 30% to 50% lower-cost. This has required many purchasing organizations to revisit their "partnerships." The margins of many medium-sized companies have been squeezed in the process. But lack of information, trust, and the prospect of extended supply lines has prevented many companies from fully exploiting this historic global business opportunity, which means that pricing pressure may increase going forward.

A challenge faced today by many family-owned companies is that their larger customers are focused on seeking additional purchasing improvements. This, in turn, is forcing many family-owned businesses to re-examine their own procurement processes. Recent experience shows that companies who apply best practice procurement processes, e-sourcing technologies, and global sourcing strategies are consistently saving 15% to over 50% on purchases of both production materials and indirect purchases. Moreover, these results can have even more impact when purchasing focuses its efforts in the product design phase where new products can now be launched at dramatically lower cost. This can generate increased market share and earlier breakeven on products thereby making procurement a driver of company growth.

The focus on global procurement and supply chain improvements is requiring most, larger family-owned businesses to rethink their competitive positioning. Source's growth advisory team has considerable experience in working with clients on both the buy and sell sides of supply chain issues.
 

Acquisition Strategy, Targeting, Financing & Integration

A study, completed by the Association for Corporate Growth several years ago, confirmed that the business acquisitions (i.e. external growth) are one of the three principal growth drivers for the majority of companies with revenue above $100MM. However, supporting an effective external growth plan can be burdensome. Pursuing acquisitions can be distracting to current management team members who need to focus on current operations. Adding new staff to pursue acquisitions can increase fixed overhead and, also, place time and resource demands on companies. Often existing credit agreements must be amended to permit acquisitions. Finally, there are many other competitors and well-capitalized buyout funds that are also aggressively seeking acquisitions; frequently bidding-up prices in the process. When you then read the statistics that suggest that 55% of all middle-market acquisitions fail to deliver value for the acquiring companies, you can begin to wonder whether the cost of the pursuit is worthwhile. While buy-side acquisition initiatives are never guaranteed to produce results, Source can efficiently provide outsourced business development services for clients that: (i) minimize fixed cost, resource drain and distraction while (ii) positioning the business to be a prepared acquirer.. Our skilled senior professional staff members, databases that facilitate acquisition targeting, knowledge of the capital markets to obtain acquisition capital and years of transaction experience can provide cost-effective acquisition guidance for companies owned by trusts or estates. For more information on how Source's acquisition services can aid the growth of your business click here.
 

Intellectual Property Licensing & Strategic Alliances

Intellectual property (often defined as referred to as know-how) is a key ingredient for value creation in medium-sized businesses. Intellectual property helps distinguish a company from its competitors. Distinguishing a business from competitors is a key ingredient in the overall value proposition to its customers, which ultimately determines how profitable and long-lived the business will be. The challenge for most medium-sized companies is how to develop or acquire intellectual property. Competitive pressures and lack of surplus capital often limit the effort that a business can place on research and development, or engineering or testing. Further, in many instances, the most talented scientists or engineers are employed by much larger businesses and are unwilling to take the career risk associated with joining a smaller company. It is also quite difficult for smaller companies to support the business development efforts that are typically required to seek intellectual property owned by others and to acquire it directly or through licensing transactions. Therefore, the vast majority of medium-sized businesses are limited by not being distinguished through world-class intellectual property. This fact relegates businesses to tough-it-out on price, rely upon updates to old product lines or to seek growth merely through business acquisitions. All of these can be limiting or risky strategies. Source has perfected an approach to cost efficiently evaluate whether intellectual property might be available for licensing from Fortune 1000 companies. Such companies are often eager to find smaller businesses that can commercialize their intellectual property for various purposes. Licensing intellectual property can be the most significant value-creating activity for many medium-sized businesses. For more information on how Source can help integrate the concept of intellectual property licensing into your Growth Strategy click here.
 

Accessing Non-Dilutive Growth Capital

Often business growth strategies require capital investments beyond what can be funded by free cashflow. Supplemental funding is required to realize business objectives. Most banks prefer to limit credit to not exceed certain percentages of domestic accounts receivable, finished goods inventory and fixed assets, or to further limit credit based upon conservative formulas relating to a company's historic earnings. Funding requirements may, therefore, exceed bank credit parameters. Trustees and executors are generally reluctant to seek capital from funding sources that will seek an ownership interest in the business for two primary reasons: (i) capital providers to family-owned businesses generally attempt to undervalue their investments, which increases dilution and attendant capital cost, and (ii) the governance of a family-owned business can be sufficiently demanding relative to constituent interests without complicating matters by including a new owner in the capital structure. Many owners of family businesses, therefore, struggle to obtain needed capital but on a non-dilutive basis. That is where Source's experienced guidance can add-value. We know that there are as many as 24 different funding options for many family-owned businesses. We have thoroughly researched these capital market segments and have identified those funding sources, which will provide growth capital to family-owned companies without requiring ownership in the business. Our business financial advisory, corporate finance and investment banking services can assist you in assessing, structuring and obtaining the capital funding required to support the growth of your business. Our focus is driven to help reduce your weighted average cost of capital while also providing capital adequacy to support your company's growth and operating requirements without having to give away ownership. To request more information about our Company Capitalization services for companies click here.
 

Improving the Amount or Cost of Senior Debt

As family-owned businesses grow to become larger companies often they wish to maintain relations with their existing bankers. This is admirable, and candidly something we endorse, since often their existing bankers have supported the companies through some difficult times along the way. Conceptually if you read the advertisements of most banks, which emphasize relationships with their customers, this would also seem to be your banker's objective. However, the reality faced by most trustees or executors is that, without periodically gauging the credit terms provided by their banks versus what might be available in the senior debt markets for companies of similar size, in similar industries and geographic regions, many businesses are not receiving adequate credit support from their existing senior debt providers or the pricing of the senior debt being provided is above market. Some skeptics suggest that many banks simply operate this way: minimize credit exposure and maximize account profitability. However, we disagree. In our opinion, whenever a medium-sized, family-owned businesses is not served properly by its existing bank, it is typically for one of the following reasons: (i ) the company's senior credit needs exceed its current bank's regulatory lending limits and its current bank does not have an active loan syndicate department, but their bank does not want to lose its customer relationship, (ii) bank mergers and consolidations cause changes in bank lending policies, (iii) senior bank officers are often displaced during mergers, (iv) federal or state bank regulators will often force banks to limit their credit exposure in certain industries or geographic regions, (v) the credit needs of the business have evolved (e.g. foreign manufacturing operations) beyond its current bank's geographic reach, (vi) other forms of senior credit are needed (e.g. 10 year term loan for acquisitions or plant expansion, or lease financing for single purpose specialized equipment), which would be better provided by non-bank senior lenders (e.g. an insurance company or mutual fund), but its bank is unaware of the third-party financing options that are available or the banker does not recommend other alternatives for fear of losing the customer relationship, (vii) stiffer federal bank regulatory guidelines limit the amount of credit support a federally insured bank can provide and the credit requirements would be better served by a non-regulated senior lender, (viii) banks sometimes have internal conflicts between what the calling officers want to provide a customer and what the loan underwriters are willing to support, which often requires a company to provide its loan officers with third-party confirmation of what another lending institution might be willing to provide in order to obtain credit commitments from their bank's underwriters and (ix) there are other reasons, as well. This can further create a significant potential for conflict of interest when the fiduciary services provider is an affiliate of the bank lender. For more information on how you might be able to increase the amount of senior debt that would be available to your company, or to learn how to reduce the cost of your senior debt click here.
 

Business Governance

We believe that effective business governance is a process by which the controlling owners of a business create an atmosphere for nurturing quality input to maximize the effective utilization of a company's entire resource base. Effective business governance is especially important for businesses owned by trusts or estates because such companies typically lack a diverse group of shareholders and, therefore, they receive more limited external input. Furthermore, as company's grow or transfer from founders to second or third generation owners, there are often fewer family members that are either interested in being involved with, or who are capable of managing, the business. The greater the number of heirs or beneficiaries, and the more successful the business, the more divergent can be the view and the more their is to argue about. Obviously disharmony is not desirable either during family social gatherings or within the business. As a company grows, improved business governance becomes increasingly essential. Effective business governance involves assembling a trusted governance team, which typically includes controlling shareholders, capable outside members of a board of directors or a business advisory board who consistently demonstrate over-time a commitment to providing frank input on matters relating to the success of the company, and certain key members of the company's management team. Such a trusted governance team then participates in the periodic evaluation of the effectiveness of a company's strategy and its management team's success in implementing the strategy, as well as the quality of the company's overall operating results. Business governance also involves periodic evaluation of business reinvestment risks or opportunities, succession management and contingency plans, owner wealth transfer plans and exit strategies. Most family-owned businesses that have created effective Business governance atmospheres also generate annual value growth progress reports. These isolate management's annual contribution to value growth creation for the owners, and can help trustees or executors demonstrate the fulfillment of their fiduciary responsibilities. For more information on how to improve the effectiveness of business governance click here.
 

Marketing & Sales Best Practices

Most well performing companies include both internal and external growth objectives in their strategic plans. Internal, also referred to as organic, growth is typically the least capital intense route to increasing the size and value of a business. It is also less risky than acquisitions. However, when you isolate the financial performance of many companies, their internal or "organic" growth is often anemic. Only those companies that are performing the marketing and sales functions at a "best practice" level of performance can demonstrate solid results in the area of internal growth. Internal growth is also typically the most capital efficient and poses far less financial risk for shareholders than does acquisitions. However, due to weak internal growth, many management teams rush towards external growth options, which are typically acquisitions, not realizing that their internal sales results could be dramatically improved. After all, it is estimated that roughly 55% of all completed acquisitions fail to provide anticipated financial results. Therefore, an increasing number of business owners, fiduciaries and management teams are examining their businesses to determine where improvements can be realized through embracing marketing and sales best practices.

The objective of marketing is to identify a qualified lead or opportunity. There are a number of processes used to do so. Some of the most familiar include:

• Advertising (TV, radio, billboards, magazines, etc.)
• Trade shows
• Referral management
• Internet search optimization
• Branding activities

The objective of sales is to pursue and close the sale, given a lead/opportunity by marketing. Salespeople are most effective when the following factors are optimized:

1. Knowledge: The salespeople know their products and services so well they can act as a true business consultant helping prospects solve real business problems.
2. Aptitude: The salespeople have a talent for sales that is in the DNA. This talent can be easily ascertained by testing.
3. Skills: The salespeople have mastered the Top Ten Skills of the Super Salespeople. These skills are not in the DNA, they must be learned.
4. Motivation: The salespeople are motivated to sell. Motivation can be partially ascertained with testing, but must be verified in interviews.
5. Process: The salespeople are working in companies that have best practice marketing processes to support them.

Source people can offer the following assistance in helping our client's businesses transition to marketing and sales best practices with the following four offerings:

• Step One: Conduct an assessment of the sales and marketing processes and provide recommendations on transitioning to "best practice."
• Step Two: Assess the aptitude and motivation of all current and future salespeople.
• Step Three: Train salespeople on the top ten skills used by the country's very best salespeople.
• Step Four: Conduct and facilitate a Strategic Marketing Planning offsite for company executives and salespeople. The output of the offsite is a roadmap for growing the company.

Value Driver Analysis for Business Profitability Improvement

The financial results reported by companies have been likened to the score on the board during a football game. They indicate whether you have are winning or losing. However, the score does not necessarily provide insight into the state of play on the field. This can be problematical for trustees or executors, who are oftentimes not expert in the assessing business performance. Similarly, analyzing the performance of a company based solely upon a review of its financial results does not provide the critical insight needed to gauge a company's value driver strengths or weaknesses. The key qualitative Value Drivers in businesses are Marketing, People, Process and Information. Strengths or weaknesses in each of these critical areas ultimately will affect the financial results of a company. Is it possible to evaluate the Value Driver Strength of an organization to determine in advance how strong or weak its financial results might be? And, in fact, to enable the owners to improve the performance of a company before poor financial results are reported? From years of working with medium-sized businesses, Source has been able to examine the Value Driver performance of hundreds of companies and, by doing so, has developed a proprietary Value Driver Survey that can be used by clients to materially improve the future profitability and financial results of a medium-sized company. The Value Driver Survey will: (i) identify the value drivers that can have the most immediate impact on improving the value and profitability of your business, (ii) isolate the discrepancies among internal views held by owners or key managers, which might be hindering the effective implementation of business plans or otherwise causing progress to lag, and (iii) provide a highly accurate comparison of a company's Value Driver ranking relative to other companies, which enables owners to quickly gauge how long their business will likely survive and prosper in the future. For additional information on our proprietary Value Driver Survey, please click here.
 

Value Creation Based Management Compensation Formulas

The value of a company, its profitability and survival are all highly dependent upon the strength and performance of your core management team. Typically in family-owned businesses there are both family and non-family members who are part of the management team. As a trustee or executor of a family-owned business, you are also likely to be one of the key management team members or the temporary or permanent substitute for a former leader of the business. As such, there is likely to be inherent owner-bias among your key management team. These factors are often the principal management team development challenges faced by growing family-owned businesses. The managers in a strong, effective management team understand and are committed to the owners vision for the business. They manage to satisfy the needs and wants of your customers. They manage to sustain a high level of morale and productivity among your employees. They make the best use of the resources you provide them. They coordinate the operating elements of your business. In short, everything a strong management team does should be geared toward building the value of your company. However, developing a strong management team in a family-owned business is a challenge. It is sometimes harder to recruit or retain strong management candidates to work in a family-owned company. Non-family management candidates are also often concerned that the owners will have a bias in favor of family members when it comes time for salary and bonus reviews or internal promotions. Also, most smart managers soon realize that the family members who work in the business will ultimately be dependent upon the company to support their lifestyles. The perception can develop that a growing family owned company will be at a growth disadvantage because of the financial demands placed on it by the owners. Such concerns are obviously heightened if the key owner/manager has died or become disabled without a clear succession plan. Our experience with hundreds of family-owned companies has shown there are several key steps in any effort to create a more effective management team. For more information on this subject click here.
 

Improve Business Planning & Forecasting

The vast majority of family-owned businesses, even larger businesses, demonstrate weakness relative to translating their future business plans into actionable steps and forecasted financial milestones. Traditional budgeting generally falls short in projecting future performance. The budgeting process itself in most organizations does not isolate management's annual contribution to value growth creation for the owners. Furthermore, many family-owned businesses have also not analyzed the key metrics, which drive value creation in their businesses and are, therefore, unable to established value-based pay systems for their key managers. Value-based pay systems are often a critical link for improving future business performance. Source has considerable experience assisting with management team development, leadership mentoring and development, and business succession management planning. These are essential parts of good Business Governance, which ultimately lead to improved business planning and forecasting. For more information on how Source can help trustees or executors improve business planning and forecasting click here.
 

Business Succession Management

A recently completed survey of the owners of medium-sized businesses concluded that most such companies have weak business succession management plans. Furthermore, at present over 65% of all family-owned and other privately held medium-sized companies are today controlled by persons over 58 years of age. Finally, the average tenure of a president in a family-owned business is 22 years (as opposed to less than 5 years among public companies). The survey also reported the typical medium-sized family business expects to have to find a replacement for its president within the next five years. This is no easy task for a number of reasons. First, given the long tenure of most presidents, most of them know intuitively how to run their companies to make business decisions. Little is documented regarding their business strategies, operating tactics or know-how. Next, the key management team members typically have personality styles, which are highly compatible with the long-term president. Incompatible personality styles do not survive long-term in most family-owned businesses. Replacing the president often requires either: (i) carefully selecting a candidate who has not only the relevant experience but who also has a matching personality style or (ii) risk losing the entire senior management team over a two-year period. All of these factors can place business value at risk, and create risk for trustees or executors. For more information on how Source's services can help with regard to Business Succession Management click here.
 

Owner Exit Plans & Inter-Owner Business Transfers

Most owners of family-businesses have not designed effective exit plans or inter-generational business transfer plans. Certainly with regard to the owner's exit the subject of business succession management arises. That subject is covered above. Another hurdle is that the lifestyle requirements for most family-business owners financially exceed what their company's retirement plans have been funded to support. Therefore, as part of their withdrawal from the company, their retirement will have to be supplemented, whether in the form of unfunded deferred compensation or through refinancing the company to support the redemption of the owner/president's shares. Such unfunded obligations can be burdensome on companies, which also need to reinvest to remain competitive in the future. Many family-owned companies also delay the implementation of inter generational business transfers, which can create additional future financial burdens due to transfer taxes. For example, if a company is currently refocusing its strategy and funding to support a period of increased growth, and concurrently no effort is made to transfer (e.g. into a family business trust) some of the business ownership, then successful execution of the business plan will accelerate the growth in share value that is part of an older-generation owner's taxable estate. Often principal owner/managers die or become disabled prior to finalizing their exit plans. Thus, trustees or executors are left with the responsibility to sort-out such matters. It is for a combination of these reasons that relatively few first generation family-owned businesses are successfully transferred to the second generation. For more information on how to successfully plan for the exit of an owner or the inter-generational transfer of a business interest click here.
 

Interim Management Services

Trustees or executors can find themselves thrust-into challenging business matters. The sudden death or disability of a principal owner, who has also been serving as the CEO or President of a closely held company, can represent significant risk relative to value-erosion. In many closely held businesses, for reasons outlined above, there are weak succession management plans. Source's experienced team of senior professionals includes a number who have successfully operated companies. We have often provided interim management services for closely held companies. We can provide such services until a management successor has been recruited or until a business is sold. For more information on our Interim Management Services click here.
 

Sale of Businesses

Although the majority of our engagement activities with clients focus on the long-term ownership and growth of businesses, ultimately with any business some of the owners might decide to sell or need liquidity. Further, in some businesses, whether it is due to lack of succession management planning, or the business has outgrown the capabilities of a family to operate it, or the family has outgrown the business (whether that be financially because of the number of next generation heirs, or the interests or pursuit of the family members include no time for, or interest in, the business), the trustees or executors must decide to sell the business. Liquidating a business interest, especially after the death or disability of an owner can be challenging. Business performance can slip. Key managers may become concerned about their futures, and the best performers might seek opportunities elsewhere including with competitors, and competitors can move aggressively to take market share, key suppliers or key employees. Source has considerable experience on working with trustees and executors in such situations. For more information about our Sale of Business services click here.