C) Financial Matters:
Management fees
Base Salaries and Performance-driven/Non-performance Bonuses
Upside and Downside Participation
Debt to Equity Ratios and Key Financial Metrics
Changes in Financial and Investment Strategy
Quality and Sources of Deal Flow
Target IRR’s
Due diligence and Site Visits on Portfolio Companies
D) Legal Matters: The following legal issues must be examined:
SEC and Investment Advisor Compliance
Copies of Management Agreements
Copies of Offering Memorandum and Offeree Documents
Legal review of fund’s website
Outside advisors
Section 33-07: Family
And Closely-Held Businesses
A) Introduction
When acquiring or investing in a family-owned or closely-held business, there are certain key issues to be
raised and documents to be reviewed in connection with effective due diligence. In addition to the document
review, careful observations should be made as to family dynamics, in particular between active and non-
active family members, the organizational culture and impact of the patriarch/matriarch, the formal and infor-
mal governance and decision making process, family business advisors and the existence of a family business
succession plan. The impact of an investment or acquisition and the controlling owners trust and estate plans
should also be examined as these issues are often closely intertwined in family and closely-held companies.
B) Buy-Sell Agreements: The following aspects must be carefully examined before purchasing or investing
in a family business or a closely-held business:
Governance and potential deadlocks
Unanimous consent process
Impact of withdrawal, Retirement and Disability
Termination of the Relationship
Buy-out clauses and short-term arrangements
Transfer Provisions and Right of First Refusal
Impact of Key-Man Insurance
Payment Terms
Tag-along and Drag-along provisions
Resolution of Disputes
C) Family Business Succession Plan
a) Family Business Council Policies
– Usually, the family business has in place developed written state-
ment of policies and procedures – essentially a set of operational by-laws. The following aspects must
be examined:
Statement of mission and values of the family and business
Rights and responsibilities of ownership
Overview of long-term corporate strategy and positioning
Governance mechanisms – compositions of the family board of directors and membership criteria
Executive-team succession issues
Training and mentoring of the next generation
Dividend and distribution policy
Executive-team salaries and bonuses
The establishment and recruitment of an outside board of advisers
Building trust through knowledge-distribution of periodic reports
b) Family Business Succession Plan
A family business succession plan is typically in place in sync with
the business plan and the pre-planning process. Examine the following aspects in the target’s family
business succession plan:
A strategic summary of the company’s position in the market place (its strengths, weaknesses,
opportunities and threats)
A set of projected revenues, earnings and net worth for the next three to five years
A plan for the transition of ownership and control to designated family members, which includes a
clearly defined timetable, statements of responsibility and authority and an organizational structure
A clear explanation and elaboration of not just who will be the successors, but why and how they
have been selected as described in the succession plan.
The game plan for educating and training successors
Legal considerations like:
Who is eligible to participate in the next generation of ownership
Are there existing shareholder and buy-sell agreements (or any other legal documents affect-
ing the company’s ownership and control) that have been amended as a result of the implemen-
tation of the family business continuity plan?
Has the company’s charter been amended to create multiple classes of stock or to distinguish
between voting and non-voting stock?
Are there any key agreements with vendors or customers that will be affected by the develop-
ment and implementation of the succession plan?
Has the plan considered the emotional and social ramifications of the choices made regarding
future leadership?
Overall, does the plan preserve and build the family’s financial net worth?

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