Buying Out a Partner’s Interest in Your Company

Paul Sullivan reported on Friday at The New York Times Online that, “The best strategy for buying out partners is, not surprisingly, to have an arrangement set up in advance, advisers say.

“Rick Marcatos, senior vice president at UBS Wealth Management, said that there should be legal documents that discuss just how any buyout would occur. “To not hamper the company, you can do some payment structure — ‘I’ve been given 12, 18 months to pay you back,’’ he said.

“But, of course, that requires planning at a time when entrepreneurs are scrambling to bring their idea to life. When a buyout isn’t so clearly delineated, the options are more complex.”

In his Times article, Mr. Sullivan pointed out that borrowing is an option, as is “mezzanine financing.”

“[Mezzanine] financing looks like debt but the mezzanine lender has the right to convert it to equity. That conversion happens when the company is doing better than expected, since it increases the return for the lender,” the article explained.

Mr. Sullivan also noted that, “Short of turning to a private equity firm, there are family offices and other private lenders willing to acquire companies and give the founders the opportunity to sell some portion of their company yet remain involved.”

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U.S. Supreme Court: Populism and Business

Noam Scheiber reported in Saturday’s New York Times that, “The Supreme Court vacancy created by the death of Justice Antonin Scalia highlights a growing rift between the country and the nation’s highest court on questions of economic power and support for big business.

“And that gap, legal experts say, is unlikely to be significantly narrowed by the kind of justice President Obama — or the next president, Democrat or Republican — is expected to nominate.

“Americans have grown substantially more populist in their outlook over the last 15 years, according to some measures of public opinion, like whether they are satisfied with ‘the size and influence of major corporations,’ and whether the government should ‘redistribute wealth by heavy taxes on the rich.’ Indeed, if the presidential primaries are any indication, there is perhaps no more potent force in American politics today than economic populism.”

However, the article noted that, “At the same time, some argue that the Supreme Court under Chief Justice John G. Roberts Jr. has become perhaps the most business-friendly court in recent history. A 2013 study by Lee Epstein of Washington University in St. Louis, William M. Landes of the University of Chicago Law School and Judge Richard A. Posner of the federal appeals court in Chicago ranked justices according to their rulings in cases involving business. The findings, which Ms. Epstein and Mr. Landes updated through the 2014-15 term for this article, show that six of the 10 most business-friendly justices since 1946 sat on the Supreme Court at the time of Justice Scalia’s death.

“President Obama has given little indication that he is likely to reverse this trend. Both of his previous nominees, Sonia Sotomayor and Elena Kagan, have been relative moderates on matters involving business, despite some progressive opinions in specific cases.”

Saturday’s article added that: “A variety of factors can help explain the demise of economic populism on the Supreme Court, where it once had a solid constituency. In recent decades, business interests, led by the U.S. Chamber of Commerce, have played a much more active role in the confirmation battles over Supreme Court justices.

“There is also the increasing partisanship of the United States Senate, which can prompt a Democratic president to select more moderate nominees in the hope of winning Republican votes.

“Most important, however, may be a broad pro-business consensus within the upper ranks of the legal profession, one that has been more than two generations in the making.”

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Stock-Based Compensation- When Stock Value Falls

Miriam Gottfried reported in today’s Wall Street Journal that, “Stock-based compensation isn’t a real expense—or so tech companies would have investors believe. But as Twitter shows, that story falls apart when a company has to reset its compensation to reflect its fallen stock price.

“The micro-messaging service has been offering additional restricted stock units to employees of every rank with the goal of keeping them from defecting. That is diluting existing shareholders who have already endured a 64% drop in its share price over the past year.

“In doing so, the company becomes a telling example of the double whammy investors face when the value of Silicon Valley’s most common compensation currency, stock, takes a dive. When that happens, ‘there is a potentially dangerous feedback loop, in which more stock must be issued to make up for the downfall in employee expectations of the stock price versus the market,’ as Sanford C. Bernstein analysts recently noted.”

The Journal article explained that, “And Twitter serves as a reminder of the importance of factoring in stock-based compensation when valuing a company—even when management prefers to back it out.

“Before its latest move, Twitter’s stock-based compensation already was unusually high—247% of pro forma earnings in 2015, versus 46% for Facebook and 26% for Google parent Alphabet, according to Bernstein.”

Today’s article also quoted Warren Buffet: “Excluding stock-based compensation is ‘the most egregious example’ of ‘managers telling their owners to ignore certain expense items that are all too real,’ [Mr. Buffet] wrote.”

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Potential U.S. Supreme Court Nominee Still Won’t be Considered by Senate

Washington Post writer Mike DeBonis reported yesterday that, “Senate Judiciary Committee Chairman Charles E. Grassley, who holds the power to take action on Obama’s coming Supreme Court nomination, reiterated Thursday that he is determined not to act on any nominee and criticized Democrats for ‘misguided logic’ in applying political pressure to him personally.”

The article added that, “On the Senate floor Thursday morning, Majority Leader Mitch McConnell gave Grassley a vote of confidence amid the barrage of Democratic attacks, highlighting Grassley’s ‘passion for letting Iowans and the American people be heard.'”

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GMO Labeling Bill Could be on Senate Floor Next Week

Politico’s Morning Agriculture publication reported today that, “Supporters of Senate Agriculture Chairman Pat Roberts’ state GMO labeling preemption bill are getting more confident that enough Democrats will get on board to move the measure before the Easter recess, possibly even next week. The vote ‘count is getting better on our end,’ a supporter of the bill told Morning Agriculture, adding that despite what some Democrats have said about the measure, ‘statements don’t matter. Votes matter.'”

A summary and discussion related to Sen. Roberts’ bill can be found here.  Recall also that an alternative GMO labeling measure, which was co-sponsord by Sen. Jeff Merkley (D., Ore.) has also been introduced in the Senate.

Senator Merkley discussed this issue on the Senate floor both Wednesday and yesterday; respective transcripts of his remarks can be found here and here.

 

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University of Missouri: Gloomy Farm Income Projections

The Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri released its U.S. Baseline Briefing Book today.

The FAPRI report noted that, “Lower agricultural commodity prices have contributed to a sharp reduction in net farm income. The outlook for the next several years suggests continued pressure on farm finances is likely.”

The report added that, “Projected corn prices average $3.75 per bushel for the 2016/17 marketing year, up only slightly from 2015/16. Corn prices average less than $4.00 per bushel for the 2017-2025 period.

“Other crop prices also remain well below recent peak levels. Soybean prices average $8.73 per bushel in 2016/17, while wheat averages $4.97 per bushel and upland cotton averages 56.9 cents per pound.”

“With farm income well below recent peak levels and if interest rates increase as forecasted, there will be continued pressure on farm finances and farm real estate values,” the report said, while adding that, “Crop insurance net outlays are projected to average about $8 billion per year for fiscal years 2017-2025.”

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Senate Ag Committee Chairman Discusses GMO Food Labeling Bill

Senate Ag Committee Chairman Pat Roberts (R., Kan.) was a guest on yesterday’s AgriTalk radio program with Mike Adams, where the conversation focused on GMO labeling issues and Senate action on a GMO labeling bill that passed the Senate Ag Committee last week.  (In part, the bill amends the Agricultural Marketing Act of 1946 by providing definitions for the national voluntary bioengineered food labeling standard).

Below is an unofficial transcript of the AgriTalk discussion.

Recall that an alternative GMO labeling bill has also been introduced in the Senate (ensures that consumers can find GMO ingredient labeling on food packaging), and that Secretary of Agriculture Tom Vilsack has also weighed in the issue (thinks mandatory labeling necessary to get 60 votes in the Senate).

The editorial boards at both The New York Times and The Wall Street Journal have also recently expressed strong, and opposite, opinions on GMO labeling.

Unofficial AgriTalk transcript (audio replay here (MP3- 10:00)):

Mike Adams: Mr. Chairman, thank you for being with us. Let’s get right to your GMO labeling bill. How are things going in trying to come up with a compromise bill? How close are you?

Sen. Ag. Comm. Chairman Pat Roberts: Well, the good thing is that the leader has said that we’re going to take up this bill next week. Certainly before the break, we have to. Last week, the Senate Agriculture Committee voted on a 14-6 bipartisan vote to pass the Chairman’s mark–my mark–on the Biotechnology Labeling Solutions. So we passed the bill in the Senate [Ag Committee]. We are now working with my colleagues on the other side of the aisle to see if we can’t get a bill that, well, that can pass the Senate. So that’s where we are, and we will continue. We have to address the labeling concerns as soon as possible. We have to provide certainty well before July when the Vermont state labeling all would go into effect.

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USDA Report- “Local Foods and Farm Business Survival and Growth”

In the most recent USDA online magazine Amber Waves, Nigel Key indicated that, “The market for local foods continues to expand in the United States. Farm operations with direct-to-consumer (DTC) sales of food increased from 116,733 to 144,530 between 2002 and 2012. Consumers have more opportunities to purchase food directly from producers, with 8,268 farmers’ markets operating in 2014, up 180 percent since 2006. DTC marketing—where producers engage with consumers face-to-face at roadside stands, farmers’ markets, pick-your-own farms, onfarm stores, and community-supported agricultural arrangements (CSAs)—is a substantially different business model from traditional marketing and is one that could help some farmers survive and prosper in a risky and competitive business environment.

“This article [“Local Foods and Farm Business Survival and Growth“] compares the farm business survival and growth rates of farms with DTC sales to those who market through traditional channels, such as grain distributors, processors, and wholesalers. Data show that farmers with DTC sales are more likely to remain in business than other farms but increase in size (measured by sales) more slowly. These differences in survival and growth rates could be explained by attributes of DTC marketing that result in different debt-to-asset ratios, farm income risk, and labor requirements, or possibly by differences in off-farm employment opportunities or preferences for farm versus nonfarm work.”

The USDA article pointed out that, “What is it about DTC marketing that seems to enhance farmers’ chances of remaining in business? One advantage for DTC farms may stem from having lower rates of machinery purchases and land ownership than farms using traditional marketing. According to data from the 2012 Census of Agriculture, farmers who marketed directly to consumers owned $20.82 worth of machinery per dollar of sales, compared with $31.10 for those who marketed through traditional channels. And farmers selling directly to consumers owned $240 worth of land per dollar of sales, compared with $309 per dollar of sales for other farmers. Because they did not need to purchase as much machinery and land to achieve a certain level of sales, farmers with direct sales did not need to leverage as much of their wealth to obtain financing. Furthermore, Census data reveal that farmers with direct sales had annual interest payments of only $7.85 per $1,000 of owned assets, compared with $10.55 for farmers with no direct sales. A lower debt-to-asset ratio should indicate a better ability to repay loans and has been associated with a lower risk of small business failure.”

Concluding, the Amber Waves article explained that: “Higher survival rates and slower growth for farms with direct-to-consumer sales may also stem from different attitudes toward farm versus nonfarm work. Researchers have found evidence that nonfinancial benefits from self-employment may encourage small business owners to remain in business despite earning less income. There is also evidence that the nonfinancial benefits to farming (e.g., greater autonomy, independence, and lifestyle factors) are substantial. It is possible that farmers who sell directly to consumers derive greater nonfinancial benefits from their work—perhaps they enjoy interacting with their customers. This would provide a greater incentive for them to remain in business even with lower business expansion possibilities.”

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Farm Equipment Manufacturers to Supreme Court on State Auto Law

The Associated Press reported earlier this week that, “Lawyers for John Deere and other farm and heavy equipment managers are taking their case to the U.S. Supreme Court following a state court decision that rejected most of their challenges to New Hampshire’s Auto Dealers Bill of Rights law.

“The law, signed by Gov. Maggie Hassan in 2013, was expanded to include manufacturers of tractors and yard and garden equipment. Hassan said it leveled the playing field between manufacturers and dealers, but a judge barred it from taking effect after Deere and others filed suit.

“Those manufacturers say the law looping them into protections designed for automobile and truck dealers unconstitutionally interferes with their equipment dealer contracts. They said they were improperly lumped in with auto manufacturers. The state Supreme Court rejected most of their arguments in December.”

The AP article stated that, “The manufacturers asked the U.S. Supreme Court last week to halt enforcement of the law so they can petition the court to review their case by the end of March.

“‘The equipment industry does not operate in the same way as the motor vehicle industry,’ lawyers for the manufacturers wrote. ‘It sells different products for different uses to different individuals and entities, and it contracts differently with its distributors and dealers.'”

This week’s article added that: “The state had argued that the law is a merger of regulations that dealt separately with automobile manufacturers and farm and tractor manufacturers. It bars manufacturers from terminating contracts with dealers without just cause, limits mandatory upgrades to facilities and requires proper reimbursement for warranty work done by dealers.”

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Open-Source Start-Up Issues

Wall Street Journal writer Elizabeth Dwoskin reported last week that, “On a sunny November day, representatives of roughly 75 well-funded startups gathered at San Francisco art gallery for a first-time meetup.

“Each of the companies in attendance was building a business based on distributing open-source software, which means that any developer can distribute, modify, or openly share the product code.

“The companies met that day to address one of the most vexing questions in the industry: how to profit off technology that is free. Open source has been a powerful engine of innovation, but early efforts to capitalize on it by providing technical services around it haven’t generated dazzling profit.”

The Journal article explained that, “Open-source projects underpin services offered by companies such Facebook Inc., Twitter Inc., and Uber Technologies Inc, and open-source-based operating systems such as Linux power many corporate servers, financial trading platforms, and Android phones. However, companies that offer such software as their primary product by and large have found it rough going.

“Since most open-source firms don’t have a product to sell, they historically made money by selling technical services—essentially tech support and consulting services—that help companies take advantage of free tools.”

However, Ms. Dwoskin pointed out that, “Even though established open-source businesses don’t generate the kinds of revenue or profit that investors expect of software companies, there’s been an explosion of funding to open-source startups in recent years.”

Last week’s Journal article added that: “In recent years, engineers from large tech companies have turned many popular open-source projects into companies. In 2014, a group of LinkedIn Corp.’s engineers took their open-source, big-data software, Apache Kafka, and founded Confluent, a startup aimed at commercializing the technology.

“Venture capitalists are eager to fund such companies despite open source’s middling track record for generating profit. They say they see a huge market in spreading the innovations that have helped companies such as Facebook serve massive numbers of customers with unprecedented efficiency to businesses beyond Silicon Valley.”

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