Owner-managed and family businesses are facing unprecedented challenges including increased competition, uncertain economic conditions, constantly changing technology and shifting demographics. When a business-owner is also faced with a dispute involving shareholders, family members, or employees or with key customers or suppliers, it not only exacerbates daily operational challenges, but can also negatively affect the saleability and value of the business.
In a recent case, we were asked to value a window manufacturer that was being sold as a result of a shareholder dispute. The business' founder retired and his two sons took over as equal shareholders. The brothers had never seen eye-to-eye and after a few years it was obvious that they could not continue to work together. They eventually agreed to sell the business. Unfortunately, their infighting and lack of consensus on key operational issues had resulted in significant staff turnover, neglected maintenance and repairs and the loss of several lucrative contracts. We were retained to value the business in advance of a sale. The value of the business had decreased since the time of the founder's retirement, even though the values of other competing businesses were increasing. The decline in value was solely attributable to the actions of the two shareholders –they were focussed on their personal dispute, rather than on growing the business.
Value Drivers at Risk
Value maximization strategies are most successful when the business owner times a sale of the business to coincide with favourable personal and business conditions. Factors to be considered include:
- the owner's personal situation (e.g. health, financial stability, family relations);
- economic and industry conditions; and,
- the company's most recent actual and pro-forma future operating results.
When economic and industry conditions are favourable and the outlook for the business is positive, the value of the business and the ultimate selling price will be higher.
Preserving shareholder value when a dispute arises and navigating your way through the dispute quickly and in the least costly way is a challenge. Litigation proceedings can be very slow and it can take years before a decision is reached. In addition, the retention of legal counsel, accounting and other experts and the diversion of staff time to compile relevant documents and analysis and attend required legal proceedings can have a significant impact on a company's operating budget. In some cases, the parties may be able to resolve their dispute more quickly and decrease the costs they incur by engaging in a mediation or arbitration process. Regardless of the dispute resolution process adopted, it is imperative that the senior management team not lose sight of the company's value drivers and focus on strengthening the attributes that will be highly valued by prospective purchasers.
Value drivers that may be affected by a dispute and/or litigation proceedings include:
- Customer retention – key customers may be lost if there is a:
a) dispute with a significant customer;
b) departure of a key employee (particularly if he or she joins a rival or sets up a competing business);
c) dispute between shareholders (particularly when one of the shareholders is the key point of contact); and,
d) marital dissolution which can distract the owner-manager from focusing on customer service and development.
- Cost control – litigation is expensive. In addition, owner-manager distraction can result in decreased monitoring of operating costs and profitability, employee performance and/or progress of key projects or customer contracts.
- Management depth and breadth – if the business is too reliant on one person (e.g. the owner), it will be reflected in the financial results and/or operating performance of the business if this individual is distracted due to litigation matters. This can cause a "red flag" to potential purchasers and reduce the value and/or saleability of the business.
Managing Value Drivers and the Litigation Process
Conflicts and disputes are not always avoidable. Having the right advisors and other resources available can help a business owner in both managing the business and working through an efficient resolution to the dispute.
Minimizing disruption to the business and maintaining management's focus on key value drivers may be assisted by:
- Nominating a senior executive/manager to take the lead in dealing with the conflict/dispute so that the business owner(s) can focus on day-to-day operations; and/or
- Retaining an interim manager to focus on business operations and value drivers, so that the business owner can direct his or her efforts to resolving the dispute and/or supporting the litigation proceedings.
The litigation issues should be prioritized and advice concerning the financial impact of various courses of action should be obtained. A financial expert, like a Chartered Business Valuator, can provide assistance by:
- prioritizing the litigation issues from a financial perspective;
- preparing a preliminary cost-benefit analysis to focus the parties on the most significant allegations;
- preparing various "what-if" analyses and preliminary calculations for settlement discussions; and
- identifying key information and documents required in order to calculate losses or damages as part of the discovery process.
With many businesses looking to transition ownership over the next 5 to 10 years, disputes can mean that a business-owner's retirement and/or exit strategy could be negatively affected. The sooner the key issues in a dispute are identified, the more likely it is that the matter can be resolved in a cost effective and efficient manner, allowing the owners and/or the senior management team to regain their focus on the business's operations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.