David Feldman's book, Reverse Mergers: Taking a Company
Public Without an IPO, now in its third printing, was published in 2006
by Bloomberg Press (available on http://www.amazon.com).
View David Feldman's reverse merger blog at www.reversemergerblog.com.
Joseph Smith and David Feldman are coauthors of PIPES:
Revised and Updated Edition - A Guide to Private Investments in Public Equity
(Bloomberg Press, 2005) available on http://www.amazon.com.
In the News
Larry
Langs quote in an article on family
firms in the Investor's Business Daily
on November 9th, 2007
The
Secret Of Getting Along In Family Firms
By Brian Deagon
Investor's
Business Daily
Posted 11/9/07
It
lasted 1,428 years, but the reign of
Kongo Gumi, the world's oldest family-run
business came to an end in early 2006
when its assets were bought by a Japan-based
construction firm.
That ended 40 generations of family
leadership dating to 578 A.D. for the
Japanese temple builder.
Kongo Gumi can thank its lucky stars
for an incredibly long run, though.
Only about 12% of family-owned businesses
survive beyond the third generation,
according to Family Firm Institute.
There are many reasons family-run businesses
ultimately fade or get acquired. Intra-family
squabbles, marriages and ugly divorces
are on the list. In other cases, the
owner dies suddenly without having tapped
a successor. Lawsuits emanating from
greed, envy or just raw anger from an
unjust deed also can deal a crippling
blow if rules and regulations about
running the business aren't written
in stone.
"Many companies are totally
unprepared for the unexpected, where
things such as death, divorce, or sudden
market shifts can wipe you out,"
said Larry Langs, a Los Angeles-based
investment banker and special counsel
to Feldman, Weinstein & Smith, and
who has been involved with many family
businesses large and small.
Family Firms Rule
The good news is this: Family-run businesses
emerge and thrive as naturally as newborn
babes grow into entrepreneurs. Family
firms represent about 85% of all U.S.
businesses. More than 60% of the nation's
gross domestic product emanates from
them, and they employ more than 60%
of the U.S. work force. The greatest
part of America's wealth lies with family-owned
businesses.
But starting a business is one thing.
Keeping it alive and thriving across
decades requires plenty of planning.
If two brothers start a business it's
more than a partnership. It's a legal
union akin to marriage. Something like
a prenuptial agreement is in order,
a legally binding document that specifies
ownership, profit sharing, compensation
and what occurs in the event of a death,
among other things.
Not getting it in writing is one of
the most common pitfalls of a family-run
business. According to the Family Firm
Institute, only 37% have written a strategic
plan.
"It's the same reason why people
don't create wills," said Michael
Conway, a Los Angeles attorney who has
advised family businesses and litigated
ownership disputes. "It's an uncomfortable
subject. People don't think there will
be a problem, or that family members
will fight amongst each other over the
assets of business."
It's a mistake to assume you can trust
family forever, said Conway, who is
general counsel for Family Products
of Van Nuys, Calif., and was general
counsel to Baja Fresh Mexican Grill
prior to that.
But family squabbles of all types often
erupt. Without the proper documentation
in place to address them when they arise,
the business can be thrown into peril
with no way to halt infighting.
"The best time to set up this structure
is when everyone is getting along,"
Conway said.
Without these legally binding agreements,
state laws take effect, just as they
do when a will isn't written before
one's death, which can result in unfavorable
consequences for everyone, he said.
Founders Founder
Another problem can be what
attorney Langs calls founderitus, where
the founder of the firm exerts too much
control and doesn't plan properly for
succession when it's time to retire.
"A father with founderitus might
not give enough room for his kids to
be meaningfully interested in the company
or is such a hard driver that no one
is interested in the business and has
no one to give it to when he retires,"
said Langs. Another problem is delegating
authority to someone who isn't qualified
for the job.
Yet another matter involves psychological,
emotional and substance abuse issues.
"It's staggering how many family
companies are plagued with some kids
having a big substance abuse or addictive
behavior problems," Langs said.
All of which reinforces the need to
set ground rules beforehand with the
understanding that it's not really family,
it's a business.
"You have to separate the
business of the family from the family
business," which requires getting
outside advice on corporate governance
issues, he said. But even with all the
best plans in place, survival is never
assured. Sometimes an important strategic
decision needs to be made when a company
is suddenly getting killed by competition.
There have been times when Langs has
advised clients to establish manufacturing
and relationships in China or other
offshore locations so they can compete
on a global scale.
"The rapid globalization
of industries is catching a lot of these
guys by surprise," he said.
If the time comes to sell the business,
getting the right people for the best
advice can make a huge difference in
what a business is valued at. More than
half of family-run businesses don't
go beyond the first generation. Too
often families will rely on a friend
or an unqualified family member to help
them sell or evaluate options.
Simply getting an accountant to tabulate
a company's value is not the way to
go, said Langs, who's been involved
with more than 200 mergers and acquisitions.
"An accountant would value a company
on past revenue or replacement costs
and not look at the potential of future
revenue," he said. "They are
fee-driven and inclined to push for
a transaction and pushing up how many
hours they can bill."
That can also be true of investment
bankers or financial consultants who
might push for a deal no matter what.
Factors to consider are whether to fix
problems with the company before selling
in order to get a higher price. Another
option is whether to take the company
public.
Despite the pitfalls, many family businesses
grow to be huge empires. The largest
family-founded business worldwide is
Wal-Mart, (WMT) according to Family
Business Magazine. It started with a
single store founded by Sam Walton in
1940.
Others include the Ford, (F) Redstone,
Murdoch and Tyson (TSN) families, to
name a few.
"It's not just mom and pop in the
local grocery store," said Barbara
Spector, editor of Family Business Magazine.
The oldest U.S.-based family run company
is cymbal maker Zildjian, with roots
going back to 1623 in Turkey.
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