Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
Minnesota has a long history of start-up companies spun off established large corporations, such as 3M, Medtronic and Best Buy. As a small-business banker and economic development official, I’ve observed many spin-offs and one thing seems clear: The successful ones follow a careful planning process that forces the entrepreneur to think through new issues and map a course of action.
John Hamilton, formerly principal and vice president at Cuningham Group Architecture, P.A., a major Twin Cities architectural firm, recently underwent this process. Hamilton was the principal in charge of the Urban Studio, a division of Cuningham Group that provides architecture, landscape architecture and master planning services to developers of multifamily and mixed-use developments in Minnesota. Hamilton and Cuningham associate and studio manager Noah Bly came to a revelation.
“The firm was getting larger and was continuing to develop a national focus, while our business was very local and very focused on a specific industry. Our vision of service to housing developers was sometimes out of step with the larger corporation. The Urban Studio needed to break off if we were going to stay authentic to our vision,” says Hamilton.
Plan and negotiate
Hamilton and Bly planted the seeds for the new UrbanWorks Architecture LLC by developing a comprehensive business plan as a tool to guide their communication with stakeholders. “You need to treat your new company like a customer project,” Hamilton states.
“Taking time to complete a good business plan helped us maintain an authentic, holistic approach to our business.”
Hamilton’s next step was to sit down with Cuningham management and discuss the situation. Admittedly an unusual step, the early communication was part of a strategy to protect the interests of their customers.
Often, customers are left in chaos as a spin-off company and the original corporate entity fight over ownership of client accounts. By negotiating for a smooth transition, Cuningham and UrbanWorks were able to assure that their clients would be well served throughout the transition, a primary goal for both firms.
Cuningham and UrbanWorks even went so far as to set up joint face-to-face meetings with affected customers.
Clearly, UrbanWorks’ cordial relationship with former employees at Cuningham is rare. While most separations aren’t as collegial, this parting shows that you shouldn’t assume there always will be an ugly battle for the business. Sometimes, management values a “good” separation vs. a bad one if it can be shown to be “in the best interests of the children.”
Financial hurdles
Financing can pose another hurdle to your spin-off. Again, a strong business plan plays an important role in considering your financial options. Whether you are pondering debt, equity or both, financial projections tell your stakeholders whether or not you have completely thought out your financial choices.
The most important thing is to be realistic. Keep in mind that bankers want to know that you will be able to repay the loan, while investors want to know just how profitable your business will be. Know the difference and keep your audience in mind as you put together your analysis.
UrbanWorks focused their analysis on the high chance their loan could be repaid. Their plan was honest, showed potential pitfalls and steps to address them. For example, UrbanWorks owners recognized that a major business sector, residential condos, was likely on the downswing.
But, they argued, with more choices for fewer customers, good design is more important than ever. Developers would more than ever need UrbanWorks’ design services on future projects. UrbanWorks’ plan also carefully considered alternative markets of opportunity to fill any gaps.
Cash flow is another major challenge for new businesses. Therefore, your organization’s business plan should discuss the cash cycle and predict needs for working capital.
UrbanWorks’ business plan recognized that working with developers often results in slower payment than some other client types. A careful projection of cash inflows and outflows based on their experience helped UrbanWorks know what to ask their banker for.
Lastly, but perhaps most importantly, consider the legal and ethical issues associated with spinning off. You have worked years to develop a solid reputation, so don’t damage that reputation with questions over proper use of confidential information.
UrbanWorks split from the Cuningham Group is the ideal situation. Most spin-off companies wouldn’t even think of inviting their old bosses and colleagues to a holiday open house the very next year, but UrbanWorks has.
