Valuation

Death of the CEO

Losing a family member is never easy.  There are so many things that need to be dealt with, funeral planning, handling financial affairs, grieving.  In the midst of all of this, would you want to force your family to also deal with trying to take over or sell your business?

I have worked and spoken with many business owners who express deep pride in all of the effort and sweat equity that has gone into building their companies.  Their families have been by their side over the years, supporting and cheering them on.  But how well does your spouse really know what you do on a day-to-day basis?  Would they be able to step into your role and run the company at the same level you have been? Would they want to?

I performed a valuation for a lumber company that suffered the loss of the founding owner.  After he passed, his wife stepped in to run the business.  Her professional experience leading up to that moment was “chief lint collector and piemaker” at home, which did not lend itself naturally to the work of timber allocation, lumber grading, and pressure treating. After running the business for a few years, she was ready to retire and called Blue Sky for help.

This woman was amazing, she stepped into the business and learned everything there was to know about harvesting and processing lumber.  As with anything you do, there is a learning curve.  As she was learning about the business and industry, she did her best to keep things running.  As I analyzed the company a couple of things stuck out: revenue was trending down over the last 5 years, wages were higher than industry normal, and net income had been negative for the last 4 years.  It was disheartening to learn that she was barely paying herself $13,000 per year and that she had infused the business with $2M to keep it open and the employees paid.  The result of the valuation was that after paying off debt and the loan to herself, she would not receive any additional money from a sale of the business.  I really don’t like having to tell clients bad new like this, especially for a business that has a legacy over 50 years in the making.

After discussing the valuation, we talked about what options were available to help build value in the company.

  • Building out/adding to her existing management team to hand off some of her responsibilities.
  • Rebuilding revenue streams to facilitate durable revenue growth.
  • Strategic planning of purchases to reduce cost of goods.

I did not have the pleasure of meeting this owner until a few years after her husband had passed.  So I’m not sure how things went when she initially jumped into the business.  I can only see the results.  Had she not taken over though, I’m fairly certain the business would have shut its doors and let all of the 40+ employees go.  I do believe that she is definitely up to speed with the business now and with the right partner she could make it profitable again.

Had her husband done some succession planning this could have been a very different story.  She may not have had to step into the daily operations and been able to be a passive owner. A good exit strategy achieves two things, it facilitates the creation of a more resilient company in the face of adversity, and it puts leadership in control of the timing of any change of control. A benefit of these two outcomes is more money in your pocket and more security for you and your family. It is never too early to begin the process of protecting yourself and your loved ones from the worst-case scenario. Give me a call today, and let’s talk about your options and opportunities.

Amy LaSala