Our client, Bob, made his first call to his attorneys. His second call was to his accountant. These initial decisions which appeared on the surface as “logical steps to take” cost him 36 months in not only time but also money with virtually nothing to show for it. He was lost, confused and had no idea where to turn. Yet, he knew he had to separate from his partner. He just needed a good process to do it.
This was a business divorce which requires the knowledge how to:
- Break apart a capital structure
- Design a fitting transaction structure that goes beyond surface level thinking
- Keep the business in tact when everything is said and done
- Bridge differences in perspective
- Maneuver not only the financial aspects of the situation but also the communication complexities that can arise at a moment’s notice
The attorneys were trying to do their best. Yet, they later shared with us that they do not deal with these matters on a regular basis. Nor did the CPAs. It is a specialty skill set just like many other issues in business and in life.
The parties need to be separated and brought together to agree
In this situation, the two partners wanted to (and needed to) go their separate ways. Yet at the same time, as in all equity buyouts, these same two people need to be brought together to arrive at a mutually agreeable outcome, both financial and legal.
Focus on your financial matters first. Get clarity of your options.
In these situations, you have to understand your financial options from a transaction structure perspective before you move down the legal path. Go directly to the end of the process and see what your financial outcome will look like to make sure things are going to work out as you intend. This helps you get your financial house in order before you start down a process that can have much uncertainty.
After you diligently go through this process, you will have the knowledge to confidently involve your attorney and enable her or him to work on the legal aspects of your situation. Having the right skills at work for you at the right point in time is very important to not only save you time and money but also manage your negotiating position properly.
Why are the financial aspects important to do first? Well, most situations are all about the financial outcomes. In fact over 95% of situations are financially related. If you can not figure out the financial piece you will be stuck “in a process” that does not yield a desirable financial outcome for you. Our client later realized he started on the wrong foot. He figured out the hard way his “process” was an unintended, recipe for a disaster. We’ve all heard about these situations too often. Word to the wise, focus on process. Who should work on which aspect of your situation and why? When you have clarity around this question you will manage your financial risks and exposure.
Involve the right people and the right processes at the right points in time.
Our client realized he needed a different process to get him through his equity buyout. He needed a process that focuses on the financial aspects first, communication complexity second and legal matters third. More specifically, he needed to have people who understand how to:
- Manage an equity buyout process from a financial perspective
- Analyze the entire situation, beyond financial issues, to get at the heart of the issues
- Architect financial outcomes that result in a truly workable solution for both parties while keeping the business healthy after the transaction is completed
- Design a transaction structure that balanced the nuances of the situation
- Educate everyone to bridge differences in thinking
- Negotiate and communicate on your behalf to achieve his desired outcomes
Over the 36 months there was a lot of discussion, yet no clear strategy how to bring the parties together. Prior to getting involved, our client was very frustrated and, at times, angry. He never imagined he would be involved in a process like this for so long. He didn’t understand how the attorneys could not come to an agreement.
Educating the parties is critical throughout a business divorce process
Bob and Mark were equal shareholders in a company in the construction space. Neither had much financial training. Financial statements were a completely different language to both of them. Their CPA wasn’t able to explain issues in non-accounting terms, which created more confusion in both of their minds. They needed a layman’s description of what their business looked like from the outside looking in. Equally important to them was to understand why they were in this position after 10 years of hard work.
Unfortunately, Mark, the departing shareholder wasn’t grounded in reality. He requested a much higher buyout price than what was realistic. Although we represented only one of the shareholders, we had to make sure we listened to both sides to arrive at an agreement. Each had their own personal and professional views of the issues. The way this situation, like all situations, arrive at a successful closing is when both sides are ‘satisfactorily unhappy’. Sounds odd, but this is the way transactions like these come to a successful closing. Otherwise, everyone simply continues to fight which drags things out and costs everyone a lot of time and money. As advisors, the key in these situations is to make sure we have:
- Listened to what is being said
- Identified the financial constraints of the situation
- Architected a workable solution that created a mutually agreeable outcome
- Communicated clearly with each party to bring about closure
A financial architecture is critical to arrive at a clear outcome
When we architect solutions we take into account every issue and every dimension to optimize the situation. Our process lets people be heard. It allows people to know you have taken what they’ve shared into account as you design the financial scenarios. When you present to them the solution, they know they have arrived at the very best outcome possible. This brings about much needed closure that shareholders face every day who want or need to separate from each other.
Each equity holder had impressions of what the business was worth. Yet, neither was grounded in core logic. They needed help to:
- Define what they had built to date
- Figure out how to financially separate from one another in a fair and equitable way
- Be coached how to communicate with each other throughout the process
- Among other issues
We completed all of this work and more. Mark, the departing shareholder, viewed the business as being worth a lot more than it was really worth. He shared a variety of reasons why he thought the business was worth so much more. He tried to present a picture that we knew was false. Bob knew how monies were spent and why they were spending monies that way. He also knew how certain contracts were designed which influenced the business value.
Financial storyboards are key in negotiations
We needed to help Bob put together his financial storyboard. The financial storyboard is what makes everything stick together. Each piece of evidence has to connect with other information to make sure everything makes sense. We put this together which became, as it always does, the foundation for the negotiation. Our financial storyboards helped us:
- Figure out how to communicate with the other party
- Handle objections with relative ease
- Bring closure to a fairly tense and elongated negotiation
Our evidence proved invaluable. Cutting through the noise and figuring out how to approach the problem with clear thinking is key. The departing shareholder could not move our position with any logical argument as everything was grounded in irrefutable facts.
Lots of value was created from the process
Our work process created 353% more value above the original offer presented. After everything was all done our client shared with us that he learned a big lesson from this process. “You need the right people doing the right roles in the process at the right points in time. Otherwise, you experience a lot of unexpected risk from the process that can be avoided.”
About the Author
Larry Smith is a Founding Partner of Divorce Outcomes, a specialized professional services firm that manages all of the financial aspects in a divorce process. Since 2003 he has worked as a trusted financial advisor, financial advocate, divorce architect and technical financial expert; he is not an attorney. He is an alumni of KPMG and Andersen with expertise in technical accounting, forensics, sophisticated taxation, management consulting, risk management, advanced process engineering, business combinations, divorce management, multi-party negotiations, advanced quality analytics and cognitive performance technologies. Since 1986 Larry has been advising individuals and organizations about innovative financial solutions to resolve complex financial challenges that arise in life and in business.
For both personal and business divorces, Larry is considered an expert in divorce strategies, divorce process management, financial divorce architecture, financial risk management, taxation for divorces, financial divorce forensics, advanced divorce analytics, financial divorce negotiations and mediation, business valuations and sophisticated equity structures. He helps clients shape complex financial decisions, manage communication risks and ever-changing negotiating positions to strategically preserve or grow wealth from these types of transactions.
If You Have a Question
If you have a question, feel free to contact me at [email protected] or 617-680-5222. The call is free. I will spend 30–60 minutes with you. I will provide you an honest assessment as to where I think you are positioned in your divorce process or answer any questions you have. I may provide you some guidance, insight or advice that you can take with you as you wish. There is no obligation to move forward. The phone call is designed to ease your fears, provide you some options to pursue and a potential road to run on that can lead you down a path to achieve a successful outcome.
About Divorce Outcomes
Divorce Outcomes is a specialty services firm that helps people both domestically and internationally manage all of the financial decisions that arise in their divorce process. We are not attorneys. We are financial experts who partner with our clients as their personal financial advocates. We help our clients manage their divorce process, uncover hidden financial risks, architect divorce solutions, manage ever-changing negotiating positions, communicate complex financial matters and close the divorce process as soon as possible with a goal to arrive at the best outcomes possible. Throughout the process we evaluate the current state of our clients’ financial lives with an objective to best reposition their future. We do not sell any products. We simply raise issues that are in our clients best interest. Our clients share with us we:
- unfold, analyze and repackage their financial life so they are well positioned after their divorce
- preserve the value of their business or marital estate
- continuously strive to provide a return on our services
- build balanced financial solutions grounded in evidence
- find ways to make our client, and at times both parties, money through the process
- design their divorce to work for them and their family’s life
- provide mental clarity to make decisions
- reduce the total process time from start to close
- minimize the stress and unpleasant memories that can last a lifetime
As we reach an agreed upon settlement structure, we help our clients identify a fitting attorney who can leverage the financial solution to draft and record the requisite legal documents. Where outcomes are at risk from a traditional process, we function as expert financial negotiators or financial mediators to turn around the situation and achieve our client’s desired outcomes.
This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute formal advice or a recommended course of action as every person’s situation is unique and different. The information here is not intended to be, and should not be, relied upon by the recipient to make a decision without professional guidance.