Don’t wait until you want to sell your business to find out you could have done more to make it more attractive to buyers.

Tim McDaniel, CPA/ABV, ASA, CBA, principal at Rea & Associates, says there are eight key factors that determine the salability of a company. Knowing how your business stacks up in these areas provides benefits even if you’re not thinking about selling.

“The more you make your business sellable, the more fun it is. Your business is sellable when it’s less reliant on you, there’s less risk, more cash flow and higher growth. You might work on all of those things and decide it’s so much fun you wouldn’t want to sell,” says McDaniel.

Smart Business spoke with McDaniel about salability factors and what buyers are looking for when considering an acquisition.

What are the key factors that determine whether a business is sellable?

There are eight main buyer considerations:

  • Financial performance. The better and more consistent recent performance is, the more assurance it gives a buyer.
  • Growth potential. Whereas financial performance is more about history, growth potential looks at the future. A future income stream with a lot of potential is very attractive. There are times when past performance might not have been great, but there appears to be a growth opportunity on the horizon.
  • Switzerland structure. The business does not overly depend on any single customer, employee or supplier — they remain neutral if there is a loss in any of those areas. For example, one business owner had 80 percent of its business with one customer and went bankrupt when it lost that business. Things like that make the business less sellable.
  • Valuation teeter-totter. Essentially, this is about having up-to-date equipment. If your equipment is old, you either have to invest in new equipment or a buyer will pay you less because they’ll have to buy new.
  • Hierarchy of reoccurring revenue. Alarm systems sell for a premium because they have monthly reoccurring business, which lowers the risk. Reoccurring income is very important to buyers, and it’s particularly attractive if it’s under contract.
  • Monopoly control. Future cash flow is important, and the higher the barriers to entry, the harder it is for a competitor to take away market share. Few people can start a business to compete with the iPhone. However, if you want to compete against a painter, you just have to hire people who are skilled at it and advertise.
  • Customer satisfaction. High customer turnover will create ill will in the marketplace at some point and certainly makes a business more difficult to sell.
  • Hub and spoke. This addresses how well the business can survive without you. Many small businesses are dependent on one person and will fall apart the day they leave. That makes the business less valuable and difficult to sell. A buyer might have some of the purchase price based on you staying, and have you sign an employment contract. That’s why it’s important to start building a good management team and relying on other people.

How can a business improve its salability?

Not all businesses excel in each of the eight areas above. However, an owner needs to work toward improving those areas where it is weak in order to make the company more sellable. Start by identifying what drivers need attention, and then develop specific action plans to positively impact them. You will watch the value of your business increase dramatically. It’s not something you want to start working on two weeks before you sell. It’s a process that takes time and focus.

Often, business owners are too busy running day-to-day operations to sit back and consider their business’ value. Yet, there is benefit in looking at the business through the eyes of someone who might be interested in buying it.

Tim McDaniel, CPA/ABV, ASA, CBA, is a Principal at Rea & Associates. Reach him at (614) 923-6532 or tim.mcdaniel@reacpa.com.

Determine your business’ sellability score at www.reacpa.com/my-sellability-score.

Insights Accounting is brought to you by Rea & Associates

Published in Columbus

It may not seem vital to know the value of your business until it’s time to sell. However, by then, it’s too late. There’s nothing you can do if it’s not worth what you expected.

“Typically, a closely held business is the largest asset owners have, perhaps 60 to 80 percent of their net worth.

Unfortunately, many just guess at the value and guess wrong. Then their retirement is significantly different than what they expected,” says Tim McDaniel, CPA/ABV, ASA, CBA, a principal with Rea & Associates.

Smart Business spoke with McDaniel about determining the value of a business and steps owners can take to help it grow.

How is the value of a business determined?

There are a few different approaches an evaluator will use to value a business, but in most cases, the most effective way is an income approach. In this approach, the valuator uses the mindset of an investor to project the company’s future cash flow and determine how much risk is associated with it.

All valuations are really a forecast. Historical trends are reviewed to predict future cash flows, but the valuator will also interview management to understand what the company’s future looks like.

Should owners always know what the business is worth?

People will spend a lot of time with an investment manager trying to grow a stock portfolio that may be only 10 to 20 percent of their net worth and ignore their largest asset, their business. In order to treat the business as an investment, the first step is to know the value.

Next, set goals — how much should the value grow annually and where do you want it to be when you exit — and implement a plan to reach them. There are three major factors that impact the value of a business:

  • Increase expected future cash flow.
  • Decrease risks associated with your business.
  • Increase the future growth rate.

Develop a plan addressing how to positively impact these three areas. Too often business owners don’t develop a plan — they work in their business, not on their business. Between keeping customers happy, ensuring employees are doing their jobs and maintaining quality control, it’s easy to get caught up in the day to day.

It’s rare when an owner treats the business as an investment and has an annual or biannual valuation. One owner recently thought his business was worth five times its actual value because his CPA told him the value was one times gross revenue, which is completely erroneous. That may be how a CPA firm is valued, but there’s a lot more involved in valuations than a simple multiplier, and it takes years to develop the necessary skills. The unfortunate part is that some people have been living with the assumption that they will retire as millionaires, but come to find they might not be able to retire.

What are the best ways to exit a business?

Exit strategy depends on the individual. If you want the highest dollar amount, sell to a synergistic buyer — a bigger company in the same industry. The downside is that some of your long-term employees might lose their jobs. Another way is to sell to a financial buyer or employee stock ownership plan where the business may continue to run in a similar fashion. Many owners prefer to keep businesses in the family and give stock to children. If that’s the case, make sure your retirement is funded and you gift stock when the value is down. Another strategy that’s gaining popularity is retaining the business and hiring a professional management team to run it so you can significantly reduce your role.

It’s important to develop exit plans early. If you want to retain the business, it takes time to develop a good management team. If you want to sell, you want to sell when cash flows are highest. If you want to gift it to your children, they have to be ready. No matter which way you proceed, it’s a long process.

Tim McDaniel, CPA/ABV, ASA, CBA, is a Principal at Rea & Associates. Reach him at (614) 889-8725 or tim.mcdaniel@reacpa.com.

More on this subject can be found in Tim’s new book, “Know and Grow the Value of Your Business: An Owner’s Guide to Retiring Rich.” Learn more here.

Insights Accounting is brought to you by Rea & Associates

Published in Columbus
Tuesday, 01 May 2012 17:00

How to prepare to sell your company

Selling your business will be one of the biggest transactions of your life.

“The first thing you need to ask yourself is, ‘Is this really what I want to do?’” says Eric Duffee, an associate with Kegler, Brown, Hill & Ritter. “There may be other options, such as selling the business to your employees or keeping the business in the family.”

However, if you are going to seek an outside buyer, realize there is a tremendous amount of effort involved. “Selling your business is like having two full-time jobs,” Duffee continues. “You have the job of running your business, plus the job of getting it ready to sell — and then dealing with the onslaught of prospective buyers.”

Duffee emphasizes that it’s important to work with experienced advisers as you prepare to sell the business and move through the process. “They will help you understand what matters and what doesn’t. They’ll show you where you have negotiating power and where you don’t.”

Smart Business asked Duffee what owners should do to lay a solid foundation for the sale.

How can the owner determine exactly what it is he or she is selling?

This seems like it would be an easy thing to do, but it’s not. Some owners tend to look at their business through rose-colored glasses, overestimating its value. On the other hand, there are owners of service businesses who think that once they leave, there will be nothing left behind; however, that’s not always the case. You have to put yourself in the buyer’s shoes. What are they getting in terms of value? Maybe it’s processes you use or an idea you have. Conversely, maybe you’re doing the same thing that many other companies are doing, but you have great contacts. You can sometimes leverage the value of those relationships and sell that value to the buyer.

How should the owner go about getting his or her financial house in order?

Obviously, it’s better to sell while your company is showing an upward trend. Generally, a business gets sold using an EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) formula. Any deviance on a balance sheet will cost you on a magnified level. For example, if a deal is priced at five times EBITDA and the buyer finds a $100,000 deviation, $500,000 gets taken off the sale price. So make sure your financial statements are accurate. As for the financial presentation, know that buyers have high expectations. They want to see an apples-to-apples comparison. The buyer wants to know your statements follow Generally Accepted Accounting Principles (GAAP). Do you need an audit? Maybe. But at least have an accountant look at your records from a disinterested, third-party perspective so that the buyer can translate what they’re seeing.

How do you go about locking down the value of intangible assets?

Intangible assets include things such as confidentiality agreements, non-competes, invention agreements and registered intellectual property. This is becoming an increasingly important issue, and we see this often in Ohio with the growth in the technology sector. Sometimes you’re selling know-how, ideas and concepts. How do you transfer that knowledge to the buyer? Does it make sense to get copyrights and patents? This is a cost, but sometimes you need to have something tangible and protectable to transfer. At the very least you should have confidentiality agreements in place. If you have a few key employees in your business who hold a great deal of knowledge, consider implementing non-competes and confidentiality agreements before the sales process.

What are some potential ‘warts’ to look out for early on?

There is no such thing as a perfectly clean business. If you know that a situation exists, have an open and honest talk with counsel. Don’t hide anything. Buyers will do due diligence and if they find something you haven’t disclosed, you’ll lose credibility; they may even claim you’re trying to defraud them. It’s better to be up front going into the deal. As a seller, your greatest leverage is at the outset. You don’t want the buyer trying to reduce the selling price deep into the process just because they uncover something that you didn’t tell them about.

How can you be sure you’re getting the best deal — both price and terms?

Be sure to work with a team of experienced professionals — accountants, lawyers, maybe an investment banker or a broker. To find potential buyers, you have to go through people who know people, and that usually means working with a broker or investment banker. The right broker will help you find qualified buyers and will operate confidentially, so as not to negatively impact relationships with your employees, customers and suppliers. In any case, you want as many potential buyers as possible; a competitive situation will help you get the best deal.

ERIC DUFFEE is an associate with Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5433 or eduffee@keglerbrown.com.

Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter Co., LPA

Published in Columbus

If you’re thinking about selling your business, there are a lot of factors to consider before making that decision.

“First and foremost, you need to determine whether it is a good time as it relates to you, as the business owner, to help meet the goals and objectives of the business life cycle,” says Albert D. Melchiorre, president of MelCap Partners, LLC, a middle market investment banking firm. “Other factors include trends in the business and the industry, and economic trends.”

Smart Business spoke with Melchiorre about how to evaluate whether now is the right time to sell your business.

How can a business owner begin to evaluate whether selling is the right decision?

Beyond whether it’s a good time for the business owner and current trends, do you have a successor in place? Are you aging and considering a sale because you’re 75, or are you 55?

Is it a good time as it relates to trends in your specific business? Is the business performing at high levels, with the added opportunity for further growth? Is it a good time in your industry? You may be performing, but if your industry is declining rapidly, is the business’s performance sustainable based on what’s going on in the industry?

Also consider whether it is a good time from a mergers and acquisitions perspective. Is capital plentiful? Are there plenty of potential buyers?

It’s good to have all of these factors lined up. Historically, it’s rare, but in the current economic environment, for a lot of business owners, they are lining up.

How can the current mergers and acquisitions market impact the decision to sell?

Although some areas of the economy are still struggling, other industries are doing very well. As a result, the earnings of corporations remain strong, giving strategic buyers the financial resources to be able to buy companies. Right now, there are trillions of dollars sitting on corporate balance sheets resulting in an incredible amount of liquidity from a strategic buyer’s perspective.

In addition, although the availability of bank debt to lower- and middle-market companies remains tight, overall, banks are beginning to lend money again. And with lower interest rates, the cost of capital remains low and there are a lot of private equity dollars looking to invest in good, quality companies.

So if your business has performed well and has good prospects for growth, the trends in your business are positive, and it’s personally a good time for you, it may be a good time to consider a sale.

How could the potential end of the Bush-era tax cuts impact a decision?

Nobody has a crystal ball, but in all likelihood, the extension of the Bush-era tax cuts will come to an end this year. Whether or not new tax cuts go into effect, there is a strong likelihood that taxes will be going up for businesses and that you will pay more next year on the sale of a business.

I would look at that as the tipping point. I don’t think it’s necessarily a primary driver in determining whether it’s a good time to sell, but it may be a secondary driver if everything else lines up for you.

How can an outside expert help you through the process to maximize your return on a sale?

For most business owners, this is a once-in-a-lifetime event, the most significant liquidity event in their lives. Business owners should focus on what they do best and let investment bankers focus on their expertise. The role of the investment banker is to help business owners maximize the value of their business to allow them to reach their goals and objectives in the sale of their business.

The investment banker will also work with the business’s other advisers, such as an attorney, an accountant and financial advisers. While the investment banker may be leading the charge, it is clearly a team effort.

How can a business owner’s decision about whether to stay with the business after the sale impact that transaction?

Some business owners, especially if they are the founder, may be key to the continued success of the business. But many just want to sell the business and walk away today.

If you’ve taken the step of bringing in key managers or finding your successor, you’re more likely to be able to exit the business at sale. But those who have not taken those steps from a succession standpoint will find it much more difficult to exit upon sale, because if you are still very key to the business, that will have a negative impact on the value of your company if you were to leave upon a sale.

How far in advance of a sale should a business owner begin to prepare?

It varies from owner to owner, but you should begin thinking about it years in advance. This is not a decision any business owner should take lightly, just suddenly deciding, ‘Today, it’s time.’

Having an early conversation with an investment banker can help you think through the process and evaluate where you are with the business today, what you can expect to receive and provide you with an overview of the process. It’s a very good exercise to get the input, advice and assistance of someone who can help you execute on that transaction.

Because this may be a once-in-a-lifetime event, you need to make sure it is the right time for you before moving ahead.

Albert D. Melchiorre is president of MelCap Partners, LLC. Reach him at (330) 239-1990 or al@melcap.co.

Insights Mergers & Acquisitions is brought to you by MelCap

Published in Cleveland

Business owners take great care when it comes to running their companies, including attending to details to assure everything is running smoothly.

When it comes to selling or purchasing a business, however, too many owners fail to get an experienced transactional attorney involved early enough in the process.

“Acting early, when both sides are more open to negotiation, can lead to a dramatically better result,” says Charles W. Ormsby Jr., chairman of the corporate department of Semanoff Ormsby Greenberg & Torchia, LLC. “During courtship, both parties are more forgiving and flexible, and you can obtain significant benefits early in the process, rather than waiting until each side feels they have a deal. Interject the experienced transactional attorney into the deal-making process early and it will pay huge dividends.

“Clients who wait until the last minute to involve a business attorney (usually to save on fees) ultimately regret that decision. Waiting to negotiate certain terms after both parties have ‘agreed’ to move forward with a deal is more challenging and sometimes even impossible, and oftentimes it causes ill will.”

Smart Business spoke with Ormsby about how a business attorney can improve a deal early on but becomes handcuffed later in the process.

How early in the process should the transactional attorney be brought into the negotiations?

 

There are several stages in the negotiations of a purchase and sale of a business. The first stage usually involves a term sheet outlining the bare bones of the deal. Prior to putting anything in writing, this is the best time to bring an experienced transactional attorney into the process. Many times, those bare-bones terms can include things that will be quite advantageous to one side or the other.

After a term sheet, the next stage typically is a nonbinding signed letter of intent. Although it is better to have an attorney involved in that document rather than waiting until the last step, I cannot emphasize enough that the best time to involve an attorney is prior to putting terms in writing. Finally, there is the Agreement of Sale. Once that is to be drafted, the negotiations are nearly completed.

What benefits will the parties realize when they bring a transactional attorney into the process at an early stage?

There are many terms that are better dealt with sooner rather than later, that is, before a deal is established. The sooner an attorney is involved to advise on terms and make recommendations, the better the outcome is for either a buyer or seller.

A business owner may do one or two deals, but an experienced transactional business attorney who is deeply involved in these types of transactions on a day-to-day basis probably has done hundreds of deals and that experience is critical for a buyer or seller. The insertion or deletion of a single word can mean the difference of hundreds of thousands, or even millions, of dollars.

What are some examples of terms that can benefit a client when addressed early on in the negotiations?

For one, ensuring there will be no personal guarantees can provide great value, but even limiting the personal guarantees has tremendous value. Purchase price is not everything. A personal guarantee can result in personal assets being subject to execution if the business person is sued.

Along the same lines, the attorney will want to address indemnification and establish parameters of that indemnification such as caps (usually a percentage of the purchase price), thresholds so that claims need to exceed a certain amount before a claim can be made, and joint and several liability of various buyers or sellers. These terms are hard to negotiate after the business owner sends a deal to the attorney to draft a formal Agreement of Sale.

It is also important to address warranty work. Who is responsible for paying for, or performing, customers’ warranty work? Simple employee-related issues are sometimes forgotten. What about accrued sick and vacation time? As a buyer, are these things that you really want to inherit?

Another reason for bringing in an experienced transactional attorney is knowledge of potential problem areas. Federal tax liens, state tax liens, UCC filing statements, judgments, litigation and other claims can disrupt a deal and need to be investigated thoroughly.

What information should a buyer and seller prepare for an attorney?

 

First, aside from purchase price, an attorney will want to know the reason for buying or selling. Sometimes the reason for doing a deal may result in not doing the deal or structuring it differently. Once, one of my clients called because he wanted to buy a business, but by the time we were done analyzing the transaction, he decided he could achieve the same results he wanted by offering a job to the general manager rather than buying the business. From a buyer’s perspective, the attorney will want to know the location of the business to be purchased and its size. What is the ownership structure? How many owners are there?

Also, the timing of the deal is important. How fast do the parties want to close? Is there a reason to delay it to the following fiscal year? Additionally, financing is a key component, whether the buyer will require bank financing or the seller will take back some financing. From the seller’s perspective, the questions are similar. Who are you selling to? Where is the buyer located, and does it expect you to take back some financing at closing? Will you be paid over time or in full at the closing?

The role of an attorney during these initial phases of structuring deals is to plant seeds that will germinate later and be beneficial to the buyer or seller down the road. All deals can benefit from an experienced transactional business attorney who is focused on mitigating risks for the client, considering potential pitfalls and obtaining significant advantages beyond purchase price so the client can avoid aggravation and save money in the long run.

Charles W. Ormbsby Jr. is chairman of the corporate department of Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-2045 or cormsby@sogtlaw.com.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Published in Philadelphia

By the end of 2008, Tom Sanderson had grown weary from his board

meetings — or lack thereof — at Transplace.

The third-party logistics company had gone from four on-site board meetings a year to two onsite and two via phone. But in reality, it had evolved to a point where there was only one board member he could get to regularly attend the two on-site meetings, so everything was really just done over the phone.

“That’s not a good situation as a CEO to have a board that isn’t really engaged in giving you advice and challenging your assumptions and helping you think through the best way to grow the business,” says Sanderson, president and CEO.

To make matters worse, the board consisted of members of the ownership group, which was four different companies, each of whom competed against each other but also competed against Transplace, to an extent.

“That wasn’t a terribly healthy situation,” he says. “Those companies did not have a good, long-term, strategic interest in our business and weren’t engaged in our business, and the board wasn’t engaged in our business.”

This was made clear by the topics of the phone conversations.

“We didn’t really focus on the issues that were of importance to the business in terms of how to grow it and expand it,” Sanderson says. “It was more just sharing of information than trying to solve problems and make improvements.”

So at the end of 2008, he had had enough and decided that something had to give if Transplace was going to be able to grow and improve.

“We really needed to have a change in ownership of the company, and we needed to get a board of directors who would be far more engaged in our business and be able to challenge and help the executive team grow the business.”

Find the right buyer

Initially, Sanderson approached the companies that owned Transplace to see if they would even be willing to sell, and they had a consensus: If the price was adequate, they’d be willing to sell.

With that as the main criteria, he had a lot of leeway, and while the recession was in full swing in early 2009 and he recognized it may not be easy, he also thought it could present a good opportunity.

“Sometimes when you get into a challenging situation like that, it can really create the best opportunity to get a good deal done, because everyone is not out chasing around all kinds of deals,” he says. “They can focus on the ones that really make sense.”

He looked across the industry, and while some companies were interested in absorbing Transplace into their organization, Sanderson wanted the company to have the opportunity to grow independently.

He also wanted a company that would be a good cultural match.

“Make sure there’s a good cultural fit between the two companies, because if you’re not in sync with your financial partners, it’s not going to be a very good experience for anybody,” he says.

Additionally, he needed to make sure that the buyer was the appropriate size for Transplace.

“It’s very important to have a good size match between your company and the company that’s buying,” Sanderson says. … “If you’re a real small company, you don’t want a huge financial backer because you just won’t be relevant, and on the other hand, if you’re bigger, you don’t want someone who’s too small because they won’t have the capital or expertise to help you grow your business.”

In the spring of 2009, a colleague he had known for more than 20 years called him up and said he’d like for him to meet some guys at CI Capital Partners out of New York City simply because he thought that they would be good people for Sanderson to know. The colleague wasn’t even aware that Sanderson was trying to sell the company.

Sanderson hadn’t had impressive experiences with VC firms. He was used to getting squeezed in for meetings the next time he was in town, and even had one meeting where the guy put his feet up on the conference table, leaned back, snapped his finger and said, “OK, let’s go, let’s hear the pitch.”

Despite that, he called CI Capital, and something impressed him in the first conversation: One principal said he wanted to come to Dallas and get to know his business and team.

That principal visited Dallas in May for an initial meeting, and Sanderson was clear about his expectations for how they would work together and for what he wanted in board members.

The meeting went well, and shortly thereafter, CI Capital came back to Dallas, this time with more people, and Transplace also brought more of its top people to these meetings. They also took time to have dinner together and socialize.

“It’s important to have a little time to socialize outside of just the meetings,” Sanderson says. “[Before] our board meetings, we have dinner because it gives you a chance outside the business environment to get to know people and see what they’re like. Those things are important in due diligence — you can tell a lot about a person about how they treat the waiter.”

Another good sign was when CI Capital’s leadership offered up the names, office numbers and cell phone numbers of other CEOs in its portfolio and told Sanderson to call them. He took them up on that offer and asked what they were like as partners, when things went wrong, when things were good, how board meetings went and about their true personalities.

“That is very important to have good reference checks,” Sanderson says.

By July, he knew that CI Capital was the company for Transplace: It had the resources to grow the business and its executives wanted to be involved after the deal.

Move forward together

Once Sanderson and CI Capital decided to move forward, Sanderson then faced the challenge of getting all four ownership groups to actually sell.

“That was a tremendous challenge because they had multiple law firms involved along with the companies themselves and their interests weren’t all exactly the same, so it was a huge challenge,” he says.

In fact, some were far more interested in selling than others. The variety of motives and people he was dealing with got frustrating at times.

“You just have to persevere and just keep a level head and keep working the deal and not let it get emotional when problems come up,” he says.

It’s important to understand what their problems are.

“Make sure you’ve asked a lot of questions,” Sanderson says. “Don’t jump in with the answer until you’ve made sure you understood the issue. Know what you can be flexible on and what you can’t be flexible on.”

If you see areas that are really important to one party but not to another, those are typically the areas you can have that flexibility in. It’s being prepared to give a little bit to get a little bit. But you also have to know when to say no.

“You have to be prepared to walk away,” he says. “There were a couple of points where we said, ‘We can’t go on like this,’ and that has a way of getting people back to the table, as well.”

As he moved closer to closing, he continued watching CI Capital to make sure the decision he made was the right one.

“You also have to be alert, observe, listen and watch as you’re going through that due diligence process,” he says.

The challenges you face leading up the final paperwork can reveal a lot and either give you the go-ahead or give you a reason to hold off.

For example, with all the challenges he faced with the multiple owners, CI Capital was a great source of help and support instead of taking an attitude of indifference or passivity.

“Some things in the due diligence are going to be smooth, and you’ll hit a few bumps in the road, and the way that private equity company works with you to overcome those obstacles says a lot for how they’re going to work with you about the speed bumps you’re going to hit in the ordinary course of business,” Sanderson says.

As they approached the closing, he also made it clear to CI Capital that any of their people who would serve on the board had to be available for day-long, in-person meetings and be willing to invest their own personal money into Transplace — not just the firm’s — because he felt they’d be more interested if their own money was on the line.

“Making sure that those expectations are known upfront is very important,” he says.

Around Christmas, the deal closed, and Transplace got to unwrap a huge gift of new ownership heading into 2010.

Create a strong board

With new ownership firmly in place, a new board was also being created.

“A strong board is tremendously important,” he says. “You can’t underestimate that. Some CEOs like to get a board that’s sort of their cronies that will rubber stamp what they want to do and is sort of a yes-man, yes-woman type of approach, and pat them on the back and congratulate them for doing a good job.

“It’s far more helpful to have a board that you can bounce ideas off of and will challenge your thinking about things. You don’t want a board that thinks they know your business better than you know it as CEO. They can’t know your business as well as you do as CEO — you don’t want them to tell you how to run your company, but you do want them to challenge the way you’re thinking about your business and get you to think creatively and question the way you’re doing things.”

In addition to Sanderson, three of CI Capital’s people were going to serve on the board — including its president, which was a huge vote of confidence.

They then asked Sanderson who else he would recommend to be on the board. He made two recommendations to them, and they interviewed them.

“I wanted people who really understood our industry so that their advice would be relevant but also that had a little bit different experience than I had so they would bring a different perspective to the business than I bring,” he says.

One was a former president of one of Transplace’s major competitors. He had been in the business for 35 years and had experience with logistics technology, third-party logistics and the trucking industry, so Sanderson liked the amount of industry knowledge he could bring to the table.

The second was a former colleague of Sanderson’s when he had worked at a consulting company. This person had been a very senior executive there, so he was very strong on planning and corporate governance and could bring a lot to the table as well.

In addition to the experience you want to bring on, look at the time people have to give, as well.

“It’s probably a good idea to find somebody who’s not acting as CEO or CFO for another company, because people who are running companies, there’s not much time left in the day,” Sanderson says.

The benefit of these two particular board choices was that they were what he likes to call semi-retired.

“If they were running their own companies today, they couldn’t spend as much time on our business as they do,” he says. “I call it semi-retired — not someone who’s retired who’s looking for a chance to shoot the breeze and have a nice lunch or dinner but someone who is semi-retired who does not have the day-to-day challenge of leading a business but is still actively engaged in business enterprises is, to me, ideal.”

On top of that, Sanderson wanted opinionated people who could speak up and also had good experience and data to back it all up with.

“You want a healthy dialogue and debate about the things that are important to the business, so no wallflowers,” he says.

After the interviews, CI Capital accepted both of Sanderson’s board recommendations, and today, he couldn’t be happier with the dynamics of the group.

 They have quarterly meetings and every board member is there in person every time, and they get together for dinner the night before to have a chance to enjoy each other’s company and socialize. The meeting discussion has also changed. Instead of simply looking at quarterly results, they dive into those numbers and really pause and ask why and what they can do about it if anything has dipped.

For example, they had one customer they weren’t sure would stay in business, so it caused a long discussion about Transplace’s credit policy, which led to a change to eliminate risk to the company. In the end, the customer was OK, but now Transplace is better poised should that situation arise again in the future.

One or two times a year, they also have separate strategy meetings to focus on a particular topic that’s of interest to the board, such as HR strategy and looking at employee turnover and how to develop future leaders.

Sanderson believes he now has the right ownership and board to grow the $900 million company to the next level of success.

“Now our board meetings have just changed tremendously,” he says.

“There’s pretty healthy discussion.”

 How to reach: Transplace, (866) 413-9266 or www.transplace.com

Tom Sanderson, President and CEO, Transplace

As a child, what did you want to be when you grew up?

I wanted to be a baseball player. I loved baseball. I grew up as a Cubs fan — I was born in Illinois — but after 1969, they folded against the Mets, and in ’71 we moved to Boston, and I’ve been a Red Sox fan since 1971.

What was your first job ever as a child?

I had a number of jobs as a child but probably the first one I ever got paid for was working for my grandfather. He baled hay and straw in Illinois. He would let me work on his baler crew stacking hay bales. I was also a paperboy and sold greeting cards. It was Christmas cards or whatever, and you had a catalog and you would go door to door. I think I was in seventh grade maybe.

What did you learn from those experiences that still apply?

I think it’s important to know that when you’re out there working, nobody owes you a paycheck. You have to do a good job, and if you do a good job, it’s going to come with financial reward, but you have to earn it. If you’re selling greeting cards, if you didn’t get the order, it’s like today, there’s no salary — it’s all commission.

What’s the best advice you’ve ever received?

I think it’s more of a role model. My dad worked at IBM and Digital Equipment Corp., and I was always struck by the fact that the people who worked for him really trusted him — he had a lot of integrity. I think that message as a leader and a manager was you’ve got to earn the respect of the people who work for you. Treat them fairly, have high expectations of them, and I think I do too of the people that work for me. Have that integrity, earn the respect of the people that work for you. It was unspoken advice but something he showed by example.

Published in Dallas