The New EBITDA: Emotion Before Interest, Taxes, Depreciation and Amortization

emotions2We recently read an article on this topic that pertained to the failure of Private Equity to get deals done with family businesses because they focused on the numbers and failed to understand or pay attention to the role that emotions play in family and closely held businesses.

While, in our business, we are often involved in a transaction related to a business we are working with, more often we have to deal with the fact that emotion can often offset years of good work and ultimately destroy the businesses value.

Emotions Are The Reasons Why …

On the transaction side, emotions are why so many business owners don’t do their last deal.   Allowing the sale of a business to be the final end of years of risk taking, relationships, and community status is often more than an owner is willing to face.   As a result, death is the event that triggers transfer of controlling interest to, in many cases, ill prepared family members with little or no ability to manage the business.  Eventually any capital that would have been realized from the business becomes depleted and, in the worst cases, the business liquidated.

Some Of The Biggest Problems …

Some of the biggest problems we see are where internal family issues effect the performance of the business or where the owner of a successful business assumes that because they have been proven knowledgeable in the business, they are knowledgeable about everything.

In one case, we work with a family business that employed a number of family members as well as non-family employees.   The managing family member and owner was devoted to the family members regardless of their contribution or detriment to the business.   When a family member who had caused considerable problems within the business prior to a long medical leave wanted to return, other, more productive family members threatened to leave.   While this was occurring, the company was considering a necessary major restructuring which was required to insure the survival of the company.   Torn between family members, the owner has been unable to make a decision regarding family and survival of the business.

Another client example is a manufacturing company which had suffered considerable financial losses.   Multiple family members serve as the senior management team.   The family members have had difficulty making the key business decisions to reverse the situation as their business experience is limited to a single company and each of their views were based on their individual versions of the cause of the problems.   Instead of being able to make consensus based decisions based on strategic initiatives and the competitive landscape, the focus was on blame and who received or lost precious resources    As a result, the group could not make the necessary decisions required to improve profitability.   This was only rectified when the family realized the effect that the current structure would have on both dividends and capital preservation and revised both the company’s internal structure and Board of Directors.

The Owner Believed His Expertise Extended To … 

In the case of an engineering and manufacturing company, the engineer owner, who had received product patents in his field, believed that his expertise extended to other business areas as well.   As a result, the company made a number of missteps that resulted in; building an inventory base that wasn’t supported by the business level, assuming too much debt, much of it at distressed interest rates and entering into an equity agreement with individual investors that was unfavorable to the owners and future investors.   As a result, despite growing sales and respected products, the company’s future is in doubt.

A family or closely held company can be a tremendous source of satisfaction and income; often to multiple generations.   But owners must remember that, despite other goals the ownership may have, the ultimate purpose of any business is to have earnings.   It is only that which allows the other goals to be met.

In business, earnings need to triumph over emotion.  


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