Entrepreneurial Finance

Eds Dilemma: To hire his daughter or not? Case Observations (For purposes of the Winter 2010 offering of Entrepreneurial Finance only do not distribute)

Transition Planning: Step 1 -- Establishing Objectives

Objective 1. Provide for the family 2. Maintain the value of the business over the transition period 3. Prepare for the future 4. Maintain family harmony 5. Minimize Tax

Eds Priority
Highest given hard work over many years, expensive homes and lifestyle High given uncertainty over whether he will be able to retire soon

High given concerns that Luke and Nancy cannot share decisionmaking in the long term Debatable as family had many past feuds and Ed argues with Luke & pays special attention to Nancy Not crucial but still important given corporate structure

Transition Planning Step 1 Establishing Objectives

Merski Holding Sole Shareholder: Ed Merski

Niagara Paving Sole Shareholder: Merski Holding

Niagara Manufacturing

Manufactures & sells asphalt to Niagara Paving

Sole Shareholder: Lydia Merski

Niagara Transport Leases trucks to Niagara Paving Shareholdings of children of Ed and Lydia Merski: Luke 60%; Maria 20%; Nancy 20%

Transition Planning Step 2 -- Assess the family

Stanislaw (Deceased) Gertrude (78)

Ed (58) Lydia (56)

Donna (56) Ferris

Jacob (54) Sara (50)

Pam (52) (Divorced)

Larry (50) Rose (45)

Kurt (46) Irene (43)

Karen (42) Ron (46)

Maria (37) Matt (42) Luke (36) Barb (39) Nancy (27) Allan (30)

2 unmarried sons

1 married son; 1 married daughter

2 sons (1 married); 1 daughter

3 daughters (2 married)

2 daughters

2 sons; 1 daughter

Transition Planning Step 3 -- Assess Business

Ed Merski President Greg Seppi Paving Crew Head Marcus Giampolo Asphalt Repair Head

Luke Merski General Manager

David Jones Sales Manager

Judy Holt Office Manager

Paving Crews (30)

Asphalt Manufacturing Staff (10-20)

Asphalt Repair Staff (4-10)

Sales Staff (2)

Clerical Staff (5)

Transition Planning Step 3 -- Assess Business

Key Success Factors and related crucial roles (individuals responsible for those tasks are listed in brackets): Negotiations with suppliers (Ed) Relationships with customers (David and Ed) Timely delivery efficient logistics management (Luke) Effective management of internal operations (Luke) Union negotiations (Ed) Major capital expenditures (Ed) Invoicing and Collections (Judy) Financing (Ed)

Transition Planning Step 3 -- Assess Business

2001 2002 2003

Sales growth Gross margin as % of sales Net income as % of sales

n.a. 24.5% 2.0%

9.1% 24.2% 2.5%

25.0% 24.7% 4.0%

Under Eds leadership, Niagaras gross margins have been 4% higher than its competitors

With a 25% income tax rate and $15 projected sales level, Eds leadership means $15 million *4%*(1-0.25) or $450,000 in higher after-tax profits annually
company is highly liquid (2.5 current ratio) and most of debt is the shareholders loan Longevity of key non-family members-David Jones and Judy Holt

Current Transition Plans

Retirement Planning Ed will retire from business in a few year at which time Luke will take control of business Estate Planning Dont know contents of will but it appears that the Luke will eventually be left a 60% controlling position in Niagara with each of his sisters receiving a 40% interest Current market value of Niagara is approximately $10 million (80% of book value of $12.2 million) Thus, value of Lukes inheritance will be three times that of each sister $6 million versus $2 million Disability Planning?

Impact of Eds Decision to allow Nancy to join Niagara

Decision Impact Allow Luke may be unhappy Nancy to if he is concerned that Nancys new active position in the Join company will reduce his slice of the inheritance Niagara if Nancy exerts too much control and influences the company in directions not to Lukes liking, including pushing for takeover of competitor which would increase expected net income by ($300,000-4.5% of $2.5 million loan)*(1-0.25) or $141,000 annually but increases uncertainty of income Lukes concerns may be offset if Nancy can make significant contribution to company outside of Lukes sphere of activity and if Nancy can handle and keep David with the company Dont allow Luke will eventually gain control of company in which case David will likely leave. It is unclear that Luke can run Niagara on his own. Nancy and possibly Lydia will be unhappy

What roles can Nancy take in Niagara?

Role Negotiations with Suppliers Negotiations with Customer Union negotiations Office Management Assessment Nancy has worked with a supplier but in an e-commerce role

Nancy has no experience but likely able to work with David (given her confident positive personality) Nancy has no experience but aspires to improve relations here Some past experience (her ability to interact with Judy Holt is unknown)