How’s Your Corporate Social Responsibility (CSR)?
Your first question may be, “Just what is Corporate Social Responsibility (CSR)?” We see CSR demonstrated in a variety of ways in areas such as:
THE COMMUNITY:
o Contributing to local community programs through financial support and personal involvement
THE ENVIRONMENT:
o Using packaging and containers that are environmentally-friendly
o Recycling
o Using low-emission and high mileage vehicles where possible
o Seeking more efficient manufacturing processes, etc.
THE MARKETPLACE:
o Utilizing responsible advertising, public relations and business conduct
o Exercising fair treatment of suppliers/vendors, contractors and shareholder
THE WORKPLACE:
o Implementing fair and equitable treatment of employees
o Upholding workplace safety, equal opportunity employment and labor standards
Actions such as these not only uphold today’s business standards, but they also pave the way for future generations. In years past, many of these elements were considered almost anti-business and some had to be enforced by governmental regulation.
Successful companies such as Tom’s of Maine (producer of natural personal care products) and Newman’s Own have practically been built on CSR. More and more companies – public and private – are following the elements of CSR. Google is a desired workplace because of the way they treat their employees: great benefits, great food in the employee cafeteria, exercise equipment – you name it, Google provides it.
Recognizing CSR in today’s business climate not only increases shareholder/investor interest, but also increases value. Socially-conscious companies are considered sound investments. They attract buyer interest and acquire higher selling prices when it comes time to sell. After all, most buyers want to find a business with the following attributes:
• Good relations with the local community
• Products and/or services that are meeting the current trends in the marketplace and are positioned to meet future trends
• Positive relations with employees and low-turn-over
• Excellent customer loyalty
• Good relationships with suppliers and vendors
• No “skeletons” in the company closet
In addition, good environmental practices reduce costs, create efficiencies and provide excellent public relations. Good employee relations make for happy workers, which translates to higher productivity and lower absenteeism. Good relationships with customers and suppliers eliminate, or greatly reduce, the possibility of legal entanglements.
All in all, Corporate Social Responsibility not only creates additional value and helps in creating a higher selling price when that time comes – it is also very good business for now and in the future.
Ownership Transition — Survey Results
Mass Mutual Life Insurance Company provided the following survey results based on family-owned businesses. Although the survey was conducted several years ago, the results are still quite revealing, and still applicable.
• Four out of five companies are still controlled by the founders.
• 30% of family-owned companies will change leadership within the next five years.
• 55% of companies fail to conduct regular valuations of the company.
• 55% of CEOs who are 61 or older have not chosen a successor.
• 13% of CEOs will never retire.
• 90% of businesses will continue as family owned.
• 85% of successor CEOs will be a family member.
• 20% of family owners have not completed any estate planning.
• 55% of family owners do not have a formal company valuation for estate tax estimates.
• 60% of businesses do not have a written strategic plan.
• 48% of companies rely on life insurance to cover estate taxes.
The above survey indicates that many family businesses are not optimizing their opportunities. Their insular approach to succession, leadership, planning, etc., indicates their vulnerability for the long term. These vulnerabilities suggest that many business owners should work with professional advisors to resolve these issues. A professional intermediary is an essential member of this advisor group.
An Update on Earnouts
New accounting rules may require that acquirers and acquiring companies report earnout agreements as liabilities.
Joel Johnson, president of Orchard Partners Inc., in his article, “Earnouts,” published by Valuation Strategies, states: “In a given year, 2% – 3% of announced mergers and acquisition agreements involve earnouts. These figures probably understate their prevalence. Earnouts tend to be a characteristic of smaller deals; and in many small deals, terms are not announced. Earnouts are rare when public companies are acquired and more common when ownership is concentrated among a few shareholders.”
This would mean, if implemented, that earnout agreements must have a value placed on them for accounting purposes. As Joel Johnson points out, “The higher the earnout, the greater the liability.”
Why the Earnout?
Johnson further states that earnouts are used for various reasons:
1. to bridge the pricing gap between the seller who places a heavy emphasis on the company’s projections, and the buyer who places most of the company’s value on its present and past performance.
2. to tie the acquisition payout to future performance.
3. to create a form of seller financing in that some of the buyer’s purchase price is delayed into the future. 4. to establish a form of escrow account in that the money is paid on condition of meeting certain thresholds.
5. to act as a type of employment agreement in that the CEO has to stick around in order to collect.
Remember: It Is Not Always the Price
The following are situations where the price was not the deciding issue in the successful sell of a business. The ultimate buyer may be the only one who really understands the situation. A business intermediary really understands the issues and can lead the buyer and seller to a successful resolution.
• One seller had 60 shareholders who needed to walk away from the deal. The losing buyer wanted all selling shareholders to be accountable for the “reps and warranties.” The winning buyer waived the reps and warranties at closing.
• A seller’s management team wanted some future upside in the deal. The losing buyer offered all cash and normal compensation. The winning buyer offered 80% cash, 20% stock plus 3-year earnout on revenues — including acquisitions.
• Time was of the essence. The losing buyer needed 30 day due diligence and negotiations plus a 60-day window to close the deal. The winning buyer offered to close within 40 days of the Letter of Intent and agreed to have limited due diligence.
The Offering Memorandum
A solid, factual and compelling offering memorandum maximizes the chances of not only selling a business, but obtaining the highest possible price. An offering memorandum is also referred to as the selling memorandum, a confidential descriptive memorandum, or simply as “the book.” The memorandum, regardless of the terminology used, must be as factual as possible, but the Executive Summary portion of it allows for a bit of “selling the sizzle.” Most potential buyers want to know the basics of the company and of the deal right at the beginning. What is the proposed transaction and what are some of the company highlights? The executive summary should also contain an outline of the ownership and management structure, a description of the business, some financial highlights, a quick review of the company’s products and/or services, its markets, reason for sale and any other major items of importance.
The executive summary, then, is a quick synopsis of the items covered in the offering memorandum that should entice a prospective buyer to study the offering memorandum itself. Here are some critical elements of the offering memorandum:
• Executive Summary
• The Company
• History of the Company
• The Markets
• The Products
• Distribution
• Customers and/or Clients
• The Competition
• Management
• Real Estate
• Financials
• Growth Strategies
• Competitive Advantages
• Conclusion
• Exhibits
“The offering memorandum should not only be a compelling document in order to capture the reader’s attention, but it should be so thorough that one should expect the potential acquirer to submit a fairly tight price range for his or her initial offer. In short, the best offering memorandums are complete but not too long, easy to read, believably professional and show that the company has an opportunity for growth.”
Source: The Best of the M&A Today Newsletter