advising private business owners law t 525 spring 2009 instructor: dwight drake copyright 2005...

Advising Private Business Owners

Law T 525

Spring 2009

Instructor: Dwight Drake

Copyright 2005 Dwight Drake. All Rights Reserved.Business Planning: Closely Held Enterpriseswww. drake-business-planning.com

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Contact Info – Office Hours

Email: [email protected]

Phones: 206.616.6385, 425.281.1493, 425.222.5988, 360.778.1862

URL:http://faculty.washington.edu/djdrake/PrivateBusiness.shtml

Office Hours: Room 416 - Wednesday 1:30 p.m to 2:20 p.m. - Whenever else you can catch me!

mailto:[email protected]

http://www.law.washington.edu/courses/


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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


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


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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!


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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.


US BusinessesProjected Revenues 2007

Corporations $ 21.58 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 $ 25.61 Trillion

LAWYER ROLES

• Litigator - Gladiator / Mudslinger

• Transactor - Deal Maker/ Paper Pusher

• Planner - Strategist / Trouble Maker


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


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Big Picture Challenges

• Capital, Capital, Capital!

• Energy - consume 50% U.S. energy

• Federal contracting - 300 billion/yr

• Women and Minorities - goals forever missed

• Healthcare - 1st concern, huge cost increases

• Retirement Benefits - fewer, harder

• Paperwork Burden - 843 billion cost/yr.

• Tax Relief - comparative peanuts

• Technology - expensive necessity Copyright 2005 Dwight Drake. All Rights Reserved.Business Planning: Closely Held Enterpriseswww. drake-business-planning.com

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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


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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


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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?


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Private Business Owner Classifications

• Soloist

• Toilers

• Golfers

• Hybrid

• Big Fish

• Family Affair

• Personal Service Organization

• Emerging Public Company


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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


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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


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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.


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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?


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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.


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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.


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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.


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Problem 2-B: Hybrid Scenario 2



• 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.


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Problem 2-B: Family Scenario 3



• 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.


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advising private business owners law t 525 spring 2009 instructor: dwight drake copyright 2005...

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