Case Study: Chairs and Tables
Background
You are the 60-year-old CEO and owner of Chairs and Tables Corp. ("CAT), which has just received an unsolicited offer to be acquired by a large competitor. CAT is a small manufacturer of high-quality wooden kitchen furniture, a very cyclical business. Over a long period of time, much larger competitors have continually found ways to squeeze your margins with their economies of scale. However, after some bleak years in the recent past, things have rebounded nicely, and today everybody is making money. You believe that your company would also be an attractive acquisition candidate for several other large competitors.
You are tempted by this offer because you have decided that you don't want to face the next inevitable downturn. Each one is worse than the last because industry consolidation keeps creating ever larger and more efficient competitors. The idea of a sale starts you thinking about your personal goals. You wonder if you should just sell out and retire, or, if not, if the current Business Model for CAT is the best one to meet your goals of today.
You retain the Chesterfield Group to help you think through the process of sorting out your goals and developing a Business Model to meet them.
Goals
You realize that many factors have conspired over the years to change your goals. After some considerable discussion, you settle on the following:
- You want to rid yourself of the ongoing pressure of operating CAT, although staying involved in some pressure free way would be interesting, if it could be arranged.
- You are willing to give up the future upside potential of CAT as the price for the chance to rid yourself of the downside associated with the cyclical risks. That said, you certainly don't want to give away the basic value of CAT today.
- Your family situation is such that you have no need of the large cash in flow that the sale would bring, and, in any event, the benefits of a sale would be severely diminished by taxes. Instead, you would like to "convert" your company both the assets and the business itself into a long term income stream.
Strengths
The reason that CAT is considered an attractive acquisition candidate is that it is making money and, while small, has built up a good reputation within its geographic area. It has real value.
Constraints
You want to exit the business without selling it and also in a way that rewards you for the clientele, goodwill and reputation that you have built up over the years.
Analysis of Alternatives
An entirely new business model is called for here. Although partnerships and joint ventures—and even some types of licensing or outsourcing agreements—might be a way to go, we determined that a lease made the most sense. CAT continues to own the actual manufacturing facilities; however, it leases them to one of the larger competitors (as it turns out, the very company that offered to buy CAT!), together with all other aspects of the business. CAT becomes a landlord, receiving fixed rents over a long term and leaves the impact of the business cycles good and bad to the new operator.