Advising Private Business Owners Law T 525 Spring 2009 Instructor: Dwight Drake Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 1-1

Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 1-2 Contact Info – Office Hours Phones: , , , URL: URL: PrivateBusiness.shtml Office Hours: Room Wednesday 1:30 p.m to 2:20 p.m. - Whenever else you can catch me!

Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 1-3 Course Objectives Substantive knowledge of planning strategies and challenges of private business owners Enhance development of planning skills:  Identify and address client’s business objectives  Identify and implements best planning strategies  Effectively communicate with business owners and executives Improve the development of personal professional goals

Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com Case Study Team Game Team Size - 5 Case Study Problems - 50 total One member of team must be prepared to verbally advise client on day of assigned case Client advice should be concise, direct, conversational Team selected to present in class based on random drawing Team members encouraged to collaborate on every case study More than one Case Study Memo may be submitted by a team

Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 1-4 Some Tips… First: Study Assigned Readings in Text Beat Up Code Where Necessary Work Case Study Problems Hard Before Class Consult Team Members of Case Studies Focus in class – Download PP Slides as needed Think Write your personal summary Get ahead – Stay ahead!

Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 1-5 Grade Criteria - Exam Option 100% take-home final No tricks, gimmicks or time pressure Focus on case studies and class discussion Three Comprehensive Case Studies Can use any non-living thing Premium on knowing scope of materials well Half grade (.3 points) reduction for each team failure after first failure

Final Opt-Out Option Author 11 written Case Study Memos - Grade B or 3.3 Author 15 written Case Study Memos - Grade B+ or 3.5 Author 18 written Case Study Memos - Grade B+ or 3.6 Must do Cases 4-B, 7-A, and 8-B No more than two cases per chapter Collaborate with Team Members as needed Be prepared if and when you are up in class Attend class regularly

Case Study Memo Format Summary statement of client challenges and/or key issues Additional facts (if any) that would help analysis Summary of your conclusions and related rationale Analysis, including (where appropriate) rationale for rejected alternatives Should be short, concise and direct.

Writing Basics Four “C”s – Concise, Credible, Confident, Convincing Keep it tight, real tight. No needless words. Use strong, precise verbs. Avoid overstated adjectives. 100% Intellectual honesty – no finessing. Average sentence length: 20 words. Avoid multiple negatives. No “shall”, “provisos”, “and/or” and other drafting jargon. Write for the normal reader, not the intellectual. End sentences emphatically. Organize, then draft. Edit, edit, edit.

Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com US Businesses Projected Revenues 2007 Corporations $ Trillion (84.2%) Sole Proprietorships $ 1.23 Trillion (4.8%) Partnerships $ 1.35 Trillion (5.3%) Limited Liab. Companies $ 1.45 Trillion (5.7%) Total $ Trillion

LAWYER ROLES Litigator - Gladiator / Mudslinger Transactor - Deal Maker/ Paper Pusher Planner - Strategist / Trouble Maker Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com

Closely Held Businesses in America 25 million businesses 99% of all employers 50% of all private sector employees 70% Americans first job 60% to 80% net new jobs 14 times more patents per employee 50% plus of all U.S. sales Career answer for planning professionals Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 1-1

Big Picture Challenges Capital, Capital, Capital! Energy - consume 50% U.S. energy Federal contracting billion/yr Women and Minorities - goals forever missed Healthcare - 1st concern, huge cost increases Retirement Benefits - fewer, harder Paperwork Burden billion cost/yr. Tax Relief - comparative peanuts Technology - expensive necessity Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 1-2

Family Business Survey 80% controlled by founders 39% expect short-term leadership change 42% have not identified successor 10% leaders female; 34% expected in future Board activity non-existent for all but few Weak estate and transition planning common Life insurance is answer to estate taxes Over 63% have no strategic plan 47% S corps; 42% C corps Advisors - Accountants clobber lawyers Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 1-3

Client Goals The Starting Point Measuring rod and ballgame Natural tendency is too broad Challenge is specificity Advisors role - Ask smart questions - Flush out key facts - Facilitate more precise definition Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 2-1

Joyce Goal: Jim to Have Equity Incentive Advisor queries: Does Jim get existing value or just interest in future value growth? Does Jim pay anything for his equity interest? Are tax consequences to Jim a concern? What if Jim flakes out and does not do job? Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 2-2

Private Business Owner Classifications Soloist Toilers Golfers Hybrid Big Fish Family Affair Personal Service Organization Emerging Public Company Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 2-6

Problem 2-A: Big Fish Scenario 1 Big fish Jason not want stock shopped Larry and Jane stock tied to employment Thus, Larry and Jane stock exit carefully controlled Right of first refusal makes no sense Copyright 2008 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 2-5

Problem 2-A: Professional Scenario 2 Owners are professional colleagues Admission of new colleague huge deal Exiting colleague should not control or impact admission of new colleague Right of first refusal makes no sense Copyright 2008 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 2-6

Problem 2-A: Golfer/Family Scenario 3 Is sibling factor important? As passive golfers in single development project, right of first refusal may be acceptable. No market and undesirable owner risks still need to be evaluated. Copyright 2008 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 2-7

Problem 2-B: Growth Rate Fears Advisor potential queries: What are specific risks of faster growth? What factors contribute to faster growth? Does each growth factor pose the same risks? Are some owners more risk-adverse than others? Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 2-3

Problem 2-B: Fast Growth Risks and Fears 1.More equity capital or guaranteed debt. 2.Hiring and training pressures. 3.Higher risk of program failure and financial losses. 4.Quality control risks. 5.Risk of damage to reputation and steady growth agenda. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 2-4

Problem 2-B: Growth Factors 1.Accelerate growth of existing programs. No serious risks. 2.Obtain new proven program from competition. Plum opportunity requiring capital and people but no serious failure risks. 3.Obtain new unproven programs. All growth risks in spades. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 2-5

Problem 2-B: Toiler Scenario 1 Potential Resolution for Accelerated Growth: Accelerate existing programs full throttle New Proven programs require consent of three of four New Unproven programs require consent of all four. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 2-7

Problem 2-B: Hybrid Scenario 2 Potential Resolution for Accelerated Growth: Accelerate existing programs full throttle New Proven programs accepted if Company profitable (last year and current year) and debt/equity ratio not over 5-to-1. Otherwise, requires consent of three. New Unproven programs require consent of three of four if existing bank lines will handle. Otherwise, all four must consent. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 2-8

Problem 2-B: Family Scenario 3 Potential Resolution for Accelerated Growth: Accelerate existing programs full throttle New Proven programs accepted if Pete and Sue (Parents) approve and provide needed funding or guarantees. New Unproven programs same as Proven but Rick (inside child) can veto based on risks of specific program. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 2-9