Family Business Director

Corporate Finance & Planning Insights for Multi-Generational Family Businesses

Special Topics Valuation

Only 2% of Small Businesses Know This Key Fact

Do you know how much cash is on your family business balance sheet? How about receivable health and your debt position? Reading this blog, you likely answered “yes” to these questions.

Do you also know how much your family business is worth?

If you answered “Yes,” you are in a select company as 98% of small businesses polled by M&T Bank over the past two years didn’t know the value of their businesses. Knowing and understanding the value of your family business is essential to making critical decisions around dividends, capital structure, or capital budgeting that have long-term effects on your family business.

Travis Harms, who leads Mercer Capital’s Family Business Advisory Services Group, spoke to CNBC recently on the importance of valuation and understanding the value of your business. This week’s Family Business Director post highlights the piece, and we hope you check it out.

Planning & Strategy

Is Your Family Business Worthy of Its Name?

Unlike McDonald’s franchisees, directors and managers of family businesses are not required to undergo a renewal procedure to maintain access to the family’s human and financial resources. However, pretending that you had to is a good exercise for managers and directors. What evidence do you have to support your decision to continue managing the family’s wealth? Do you have a regular reporting procedure in place that takes those elements into account? In this week’s blog post, we provide some broad elements that should be considered for any stewardship reporting model.

Special Topics

The Importance of a Quality of Earnings Study

Acquirers of companies can learn a valuable lesson from the same approach that pro sports teams take in evaluating players. Prior to draft night, teams have events called combines where they put prospective players through tests to more accurately assess their potential. In this scenario, the team is akin to the acquirer or investor and the player is the seller. While a player may have strong statistics in college, this may not translate to their future performance at the next level. So it’s important for the team to dig deeper and analyze thoroughly to reduce the potential for a draft bust and increase the potential for drafting a future all-star.

A similar process should take place when acquirers examine acquisition targets. Historical financial statements may provide little insight into the future growth and earnings potential for the underlying company. One way that acquirers can better assess potential targets is through a process similar to a sports combine called a Quality of Earnings Study (QoE).

Planning & Strategy

Bear Market Silver Lining? An Estate Planning Opportunity

The risk of a recession is growing, and inflation in May reached a new four-decade high. Companies and consumers alike are feeling the pinch and battening down the hatches in anticipation of stormy weather, with markets reflecting less-than-optimistic expectations. Stocks are in the red outside of the energy sector. Lower broad market pricing translates to lower family business valuations. So, what? A market downturn, on the other hand, presents an opportunity for family businesses planning long-term intrafamily transfers and gifting plans to significantly reduce their estate and gift tax exposure. We’ll show you how in this post.

Planning & Strategy

Recession, Expectations & Value

Corporate executives are considering how a recession would affect their businesses due to the current uncertainty in the macroeconomic environment. How will your family business fare in the event of a recession, and how are expectations for the future affecting the value of your family business right now? We discuss this impact in terms of value in this week’s blog post by categorizing expectations into three primary categories: cash flow, risk & return, and growth.

Performance Measurement Special Topics

Peloton, Planet Fitness, and Family Business

Pedaling Too Close to the Sun

Think back to March 2020.  Many businesses and operations saw immediate stoppages and closures with no idea when they could restart. The fitness industry was no exception. Planet Fitness, the gym operator, completely shut down its locations and its stock plummeted. Peloton Interactive saw sales surge for its at-home exercise spin-bike and its stock soar. These two businesses entered very different seasons at the onset of the COVID-19 lockdowns and slowdown. Planet Fitness was facing a sudden and bitterly cold winter, while Peloton was spinning its way into summer.

We think there are three lessons that can prevent your family business from pedaling in place: understand what season your business is in, be prepared for slow-downs, and diversify prudently. Read more in this week’s post.

Performance Measurement Special Topics

Review of Key Economic Indicators for Family Businesses in Q1 2022

In this week’s post, we take a look at a few key macroeconomic trends that developed in the, shall we say, busy, first quarter of 2022. Between volatile equity markets, mounting global geopolitical tensions, raging inflation, and increasing interest rates, a lot went on in the year’s first quarter from a macro perspective.

We hope that this blog post cuts through some of the “noise” and provides our readers with a concise and unbiased look at economic trends from the first quarter of 2022. 

Planning & Strategy

Your Family’s Guide for the Next 100 Years

How your family business thinks about success is important. James Hughes, author of Family Wealth: Keeping It in the Family poses a question early on in his book: Can a family successfully preserve its wealth for more than one hundred years or for at least four generations? It’s a compelling question and a compelling book.

Hughes is now a retired sixth-generation counselor-at-law, prolific author, and renowned multi-generation family meeting facilitator. He has advised numerous wealthy families on how to maintain and grow their wealth over time. Hughes views “shirtsleeves to shirtsleeves in three generations” plaguing family businesses not as destiny but as a cycle family businesses can overcome with thoughtful practices and patience over many years. In this week’s post, we review his very insightful and helpful book.

Planning & Strategy

Three Reasons to Hold Cash on the Family Business Balance Sheet

For one weekend a year, the spotlight of the financial world shifts from New York to Nebraska. The annual meeting of the Berkshire Hathaway company has developed a cult following among shareholders and financial journalists alike. A compound annual return of 20% over 55 years (!) will do that for you.

The consummate value investor, Warren Buffett, attributed the growing cash stockpile to an absence of compelling investment opportunities. Better to hold cash than make bad investments, after all.  Market volatility in the early months of 2022 did loosen the purse strings a bit as Berkshire made a large acquisition and built large positions in three publicly traded companies. All told, the first quarter investing activity drew cash down to approximately $105 billion, which is still enough to cover payroll for a while.

Mr. Buffett certainly doesn’t need us to remind him of the perils of “lazy capital” on the corporate balance sheet – the yearend cash stash represented approximately 20% of Berkshire’s overall market capitalization. Giving Mr. Buffett the benefit of the doubt (which he has probably earned at this point in his career), are there any good reasons for family businesses to hold some cash in reserve? In this week’s post, we share our view of the three potential benefits to keeping some cash on the balance sheet.

Consulting Services

Family Business Advisory Services

Mercer Capital provides financial education services and other strategic financial consulting to family businesses