(The Greek Crisis) ATHENS: Politics, Finance and Philosophy

Mr. Joseph P Garske is a retired private investor. He is an invited contributing writer to the www.BusinessThinker.com
He holds a bachelor degree in history from Harvard.

Ancient Athens is looked back upon and celebrated as the birthplace of a new and distinctive Western Civilization. Some of this attribution may, of course, be the enthusiastic embellishment of modern historians

Yet, there is much basis for the aura that still surrounds the city where Socrates in life and in death altered the course of history.

The pre-eminence of Athens is particularly important in the areas of politics and philosophy–two realms which in the eyes of ancient Athenians were inextricably related. But the world has changed a great deal in the intervening centuries, especially in our technologically defined age of Postmodernity.

Popular politics is still a very dominant influence in our time, albeit in forms that might be unrecognizable to the ancient Greeks. However, in the affairs of human thought and action the influence of philosophy has become almost wholly absent.

That is, philosophy in the Socratic sense: A way of life, a willingness to challenge even the most vaunted claim to authority, to fearlessly engage all the great questions of life and existence. Philosophy of this type has virtually disappeared.

Instead, in the present day our manner of living, our questions and reflections have come to be enclosed within a set of fixed limits. Our reality is greatly defined by both our institutions of authoritative learning and a ubiquitous electronic media.

Despite their potential to enhance human understanding, they have both come in many ways to delimit it. Ironically, this tendency to limitation of perspective and  to diffidence in public discussion has been nowhere more obvious than in the recent matter of the Greek financial crisis.

If there is a single overriding determinant of world events today, it is the convulsions and machinations of the global economy. As a transcending presence it operates with an unrestrained technological ability to move capital, mobilize labor and appropriate resources. It lies beyond the control of political leaders as it lies beyond the sovereignty of any national population.

In the Postmodern atmosphere of today our two crucial sources for understanding the global economic regime have become intertwined with the purposes that sustain its growing reach. The sweep of its influence is beyond the scope of academic learning and inaccessible to examination by the popular media. This has occurred for the very reason that they have unavoidably become captive to it.

Public debate on the Greek problem quickly became on many levels merely about parties, policies and personalities–within a framework of values and assumptions that were never questioned. Ironically, this situation raises the possibility that the ancient Greeks might have something to teach us regarding even these matters.

After all, the famous Golden Age of Athens, when philosophy first reached the city, was also a time of wrenching crisis. All the tiny Greek polities existed under the shadow of a gigantic Persian Empire. Its tentacles of trade and diplomacy were transforming Greek life. The result was economic upheaval, incessant warfare and political dependency as the great empire consolidated its program of ecumenical hegemony.

Much like conditions during that ancient period, our world situation has made clear one sobering fact about the time in which we live: Politics on the level of the territorial-state has become compromised, or paralyzed, or perhaps more accurately, servile to the demands of a world financial regime which national leaders are powerless to resist.

Ultimately, the crisis of Greece today–or any number of countries tomorrow–exists as merely part of one great interrelated world phenomenon. If there is to be any possible solution, the first question becomes how to gain perspective on that problem, to understand it in its totality.

The second question would concern by what set of standards and considerations will these crises be resolved. What is the best and lasting resolution for all parties involved?

Possible answers to these questions may be seen in the methods and purposes of the ancient Greek Philosophers. Perhaps what the world needs today is a new Socrates.

That is, someone who stands outside the dominant paradigms and institutions. Someone unbeholden, who enters the conversation guided by more than utilitarian values and assumptions.

In the civic questions he confronted, Socrates began from the premise of an essential humanity shared by all persons–what he called The Soul. His larger purpose always assumed a quality inherent to the universe–what he called The Good.

Is it possible that questions about global finance might be resolved according to these measures? With an eye to the good of all peoples involved?

Such talk, of course, makes us uncomfortable today. Within the argot of political platitude, the collegial refuge of academic abstraction, or the ephemera of timely reportage, such an approach to global questions would seem anachronistic, or even quaint.

After all, this is the twenty-first century. The time of Socrates is long past.

Yet, when we realize the unlikelihood of such ideas being introduced, of anyone in the councils of public debate taking such a stand, we can better understand why the name of Socrates was so widely revered in the ancient world. We can more clearly understand the aura that surrounds his native city, even today.

CLOSING THE DEAL–M&A Series of Articles

Dr. John Psarouthakis is a Distinguished Visiting Fellow-Professor, Institute of Advanced Studies in the Humanities, University of Edinburgh, Scotland. Founder and former CEO, JPIndusries,Inc., a Fortune 500 industrial corporation. He is the Executive Editor of www.BusinessThinker.com

In this article we review the key elements of the purchase agreement. Once you have found the right company, lined up your financing, completed due diligence and agreed upon a price, you are ready to close the deal.


                The Purchase Agreement as a Due Diligence Acquisition Tool

            Although you don’t sign the purchase agreement until due diligence is complete, you should begin work on the purchase agreement at the same time that you begin formal due diligence.  This is very important.

            First of all, negotiations may take some time, and there is no reason for added delay.  More importantly, as mentioned in the chapter on formal due diligence, the negotiation of the purchase agreement document itself might surface problems that the owner forgot about, overlooked, or purposely hid during the course of due diligence.   It is desirable to learn of these problems as early as possible in the negotiations and due diligence process, so that further investigation of them will not delay closing, and, in the worst case, that you have minimized your expenses on due diligence if you decide to walk out of the deal altogether. 

            The warranties and representations section of the purchase agreement holds the owner liable after the close of the deal for expenses or charges that he or she could have foreseen and did not warn you about.  However, from a practical standpoint, you should always assume that it may be difficult, if not impossible to collect damages once the deal is closed.  Therefore, the key purpose of the representations and warranties section is to learn about major problems during the due diligence period and address them in the purchase agreement.  Unsettled lawsuits or other threatened liabilities can then be addressed with appropriate amounts of money held in escrow for a reasonable period of time, based on the specific contingency being protected against.

                                         Elements of the Purchase Agreement

            The four basic sections of the purchase agreement include:

(1) price and terms of the sale; (2) representations and warranties; (3) conditions and covenants; and (4) general statements of law.

            In an asset purchase agreement, assets are transferred from the seller to the buyer in the sales transaction.  This is often the case when a larger corporation divests itself of a particular division.  In a stock purchase agreement, the purchaser may acquire stock ownership in the company rather than assets. Because of the lack of hard assets, a stock purchase agreement is the most common form in service companies although it can occur in other types of industries as well.

            The actual purchase agreement for a medium-sized corporation may be quite lengthy, with about 20-50 pages of narrative in the core document, not counting all the attachments, which may involve other agreements, such as the escrow agreement.  The total agreement is quite lengthy.  Exhibit 14.1 shows a table of contents for an asset purchase agreement.   Exhibit 14.2 shows a sample of a stock purchase agreement. 

            Price and terms, and conditions of the sale  Terms of the purchase agreement cover the sales price, and the amount of cash, stock and assets that will change hands and any earn-out agreements.   This section also describes what is being purchased.        


            Representations and warranties  This section may elaborate further in describing certain aspects of the business, such as financial statements, benefit plans,  patents, etc.  More importantly, it is a statement of guarantee by the seller that everything he or she has told the buyer is true and that he or she has told the buyer everything of significance about the company to be purchased.  How strong the guarantee itself is worded is often a heavily negotiated area.  Disagreement over this section has caused deals to fall apart.  However, it is vital that some language be included to protect the buyer that the company has been fairly and accurately represented.

            Conditions and covenants  This section lists all those items which must be completed by both buyer and seller prior to the close.  For instance, in an asset sale, the seller must comply with the state’s Bulk Sales Act.  Or if the buyer wants to continue with the same insurance policies, the seller promises to deliver such policies prior to closing.  Another example is the transfer of a real estate or equipment lease.  This section is fairly straightforward and a good attorney should be able to help you with all the necessary aspects. 

            General statements of Law  Other technical issues relating to state laws, arbitration procedures and other legal issues need to be included with which a good contract lawyer should be familiar.

                                Types of Set Asides and the Escrow Agreement 

            Set asides are specified sums of money put into an escrow account by the seller at closing to be transferred to the buyer under certain conditions described in the purchase agreement or related escrow agreements.  Two common types of set asides include inventory escrow and escrow for potential liabilities.  

Inventory escrow 

            Some money, often between 20-50% of the value of inventory, is held in escrow for about 30-60 days until an audit is finished, to verify that the dollar amount of inventory promised is indeed in the warehouse and is saleable.  There may be set asides for other price adjustments based on the results of the final audit.  Sometimes an alternative approach is to sign the purchase agreement and then delay the actual closing for a period of 30 days or so, to complete the final audit and then transfer ownership on the day of closing.  Either way, you want to be sure to have a final audit to verify that everything that is included in the contract is physically present.  Inventory moves in and out the door every day so you need an accurate audit as to the value when you actually transfer ownership. 

Escrow for potential liabilities 

             A second type of set aside is included in an escrow for potential liabilities.  You would be wise as a buyer to negotiate this second set aside as well.  Usually an agreed upon percentage of the total price, possibly as high as 10%, may be kept in escrow for up to 24 months or more to cover potential liabilities, such as employee or product related lawsuits or other unforeseen liabilities that can be traced to problems occurring prior to the sale.  Especially in medium sized to larger companies, news media attention seems to bring various lawsuits out of the woodwork that had been dormant for a period of time.  The twenty-four month time span is useful because it is typically during this time that media attention triggers interest by people who believe that this is their golden opportunity to sue the company.  Transfer of ownership also may attract the attention of government bureaucrats.  In theUnited States, you might catch the attention of the U.S. Environmental Protection Agency, the Occupational Safety and Health administration (OSHA), the Equal Employment Opportunity Commission or any of a number of other agencies that monitor business activities. 

            The set aside carries interest in favor of the seller and if nothing comes up within the designated time period, the buyer releases the money to the seller in addition to agreed upon interest.   The escrow agreement clarifies what these funds should cover. You are wise to cover possible liabilities in this way than to assume that you can collect from the seller after the closing.  Without sufficient escrow, you can try to pursue the seller through the courts but collection can be a serious problem in all but the largest corporations, and can be extremely difficult from a private seller.  In addition, you incur the added time and expense of investigating the situation and taking it through the courts. 

            Legally, disclosure is key in determining whether or not the seller is obligated to pay the purchaser for liabilities created prior to the transfer of ownership.  Disclosure laws do not require that the seller discuss problems openly with the purchaser.  Provision of related documentation, even if buried in thousands of other documents is usually considered sufficient.

            Consider the following example. Say, for instance, a former employee who worked for the previous owner sues and wins a two million dollar settlement.  Perhaps you had information that the employee was disgruntled which surfaced during due diligence procedures and requested one million dollars be held in escrow. Because the seller disclosed the problem to you and you agreed to the one million dollar amount, he or she does not owe you the difference.  On the other hand, in company B, suppose that the seller, for whatever reason, had not revealed a problem to you about this one employee.  Then, you are entitled to the extra million dollars.  On the face of it, it may seem better to allow such problems to remain hidden.  However, consider that it may be very difficult to collect such funds.  To reiterate, you are wise to investigate any letters, suits, warnings, or other signs of disgruntled employees or customers prior to closing rather than to attempt to collect from the seller after the fact.  Such information will then be used to establish an appropriately sized escrow account.

                                                        The Closing Dynamic

            Aside from the preparation of the legal documents, the closing may have two affective aspects worth understanding–the fear of closing, and the closing momentum. 

            The fear of closing,  especially within privately owned companies, the seller may have ambivalent feelings toward the sale.  If the business has been in the family for a long time, or the seller is coupling the sale with retirement, a variety of emotions may come into play.  On the other hand, when you deal with corporate sellers, such as the division of a larger corporation, you are not likely to experience this dynamic. 

            Closing momentum  Ideally, you want the momentum of the acquisition process to keep moving forward through closing, so that negotiation does not stall out.  As the private seller nears closing, business ambivalence may give way to the excitement and momentum that builds as they begin to plan for their transition after the sale.  The seller is more personally involved with the consequences of the sale going through or not than in the case when you are dealing with the corporate sale.  Thus, whereas you are less likely to encounter a fear of closing among corporate sellers, you may run into a greater likelihood of the process slowing down or losing momentum as closing approaches.

                                                    RECOMMENDED READINGS  

How to Aquire the Right Business: (John Psarouthakis and Lorraine Uhlaner),  Xlibris 2010.

From Tuller, Lawrence, Buying In, Liberty Hall Press

Review Goldstein, Chapters 9 and 10.

FINANCIAL VIABILITY: Your Yardstick for Organization Achievement, Part 3 (last)

Dr. John Psarouthakis is a Distinguished Visiting Fellow-Professor, Institute of Advanced Studies in the Humanities, University of Edinburgh, Scotland. Founder and former CEO, JPIndusries,Inc., a Fortune 500 industrial corporation. He is the Executive Editor of www.BusinessThinker.com

(see also, in this journal, articles: Dynamic Management of Growing Firms-Parts 1 through 4)

Profit is a yardstick of how well the entire system functions.  When the system runs efficiently, money, time, and other resources are left over; the firm makes a profit.  Some firms watch the short-term costs so closely that long term opportunities are overlooked.  On the other hand, several consecutive quarters of the operating loss caused by recent heavy investment will test survivability.  Profit is what the firm has available to it to combat entropy and the general uncertainty of the environment.

Further, profitability is one powerfully important way to judge the efficiency of different solutions chosen to resolve the seven organization issues of the DSP model.  If coordination can be handled through direct observation by the owner, why waste money on elaborate controls and time consuming meetings with managers? If design of the machine can be done in someone’s basement, why build a laboratory?  The CEO’s challenge is to find the solution suitable to the needs of the firm at a given size and complexity.

As with profitability, cash flow is heavily influenced by the way in which each of the seven organization issues are managed.  Take resource allocation: If too much working capita is tied up in inventory, precious funds may not be available for critical opportunities and emergencies.   Poor response to other issues can also hurt cash flow.  If sales suffer from poor marketing or product selection (a market strategy issue), cash flow suffers.  If sales are strong, but overstaffing is required because of inefficient coordination, cash will be unnecessarily depleted. Poor motivation will have similar results.  Just as with profits, efficient responses to every issue will augment overall cash flow. Poor response will diminish it.

Let’s summarize key linkages between financial viability and the other organizational issues to reinforce their importance. The results are based on two or more years of profits unless otherwise noted.  In this section we also say a little about how effectiveness of the other seven DSP issues are measured.

Market Strategy and Financial Viability

We measured five components of market strategy effectiveness: (1) The CEO’s rating of direction-setting effectiveness; (2) relative size compared to competition; (3) steadiness of sales growth; (4) rate of sales growth; and  (5) total revenues. Notice that size is examined both in absolute dollar terms and in terms relative to the industry.

Market share–not absolute size in dollars–is linked to profitability. Firms that are larger, relative to others in the same industry tend to be more profitable.  This is true despite the fact that absolute size of the firm as measured in total revenues is not positively linked to profitability at all. This suggests that it is market share, not size per se, that predicts profits.

Steady growth is linked to profitability.  Firms which generate steady growth have a higher two-year ROS average than those with peaks and valleys.  Steady growth also contributes in the longer term to a better cash position in the firm.

Faster growing firms are generally more profitable. The rate of sales growth, though sometimes a profit handicap, generally predicts ROS.

CEOs of profitable firms tend to like the way they set company direction.    Finally, CEOs who rate their direction-setting strategy as effective are more likely to report higher ROS and a better cash position.

Chapter 6 explores some of the strategies CEOs use to achieve a higher and steadier rate of growth.

Work Flow and Financial Viability

Work flow is made up of two components:  (1) division of tasks and authority; and (2) coordination–assuring that everyone’s efforts and overall information fit together in a timely way and efficiently.

CEOs who are satisfied with their work flow strategies likely make a profit too. CEOs who rate the strategy for assigning work as more effective are likely to have higher ROS.  Ratings of coordination effectiveness are also connected to profitability and better cash flow.  Effective work flow is one of the most important predictors of ROS for small and medium sized firms.

Resource Acquisition and Financial Viability

Within the resource acquisition issue, we look at all types of resources: capital, information, equipment and supplies, subcontractors, managers, and nonmanagement employees.

Only ability to acquire capital is linked to profits.     The ability to obtain the resources is surprisingly weakly linked to profitability.  Only the ability to obtain capital is linked to profitability, and only during the same year.  Not surprisingly, ability to obtain capital is linked to the firm’s cash position in the same and succeeding years.  Resource acquisition is strongly linked with other aspects of organization effectiveness however besides profits.

Human Relations and Financial Viability

Though they overlap somewhat, we look at five components of human relations effectiveness:  (1) morale: overall job satisfaction and commitment of employees; 2) goal integration: consistency of organization and individual goals; (3) a consistent view of the mission by CEO and managers; (4) a consistent view of values; and 5) how effectively values are shared.

Morale and profits are linked.  Consistent with a

decades-old but controversial hypothesis, we find a clear link between morale and profits.6   The firm’s cash position is also reported to be better in the same year but does not seem to be influenced in following years by the level of morale whereas profitability is also higher in subsequent years.

Companies with strong corporate cultures are more profitable.  CEOs and managers were queried about values emphasized within the firm.  In strong corporate cultures, where CEO and managers report the same values, the firm is more profitable.  Similarly, where CEOs and managers share a similar understanding about the firm’s mission and direction, ROS is higher–though here we find a “lagged” effect, an influence delayed by six months or a year.

CEOs who can communicate their values head more profitable firms.  Finally, CEOs who rate the way in which they communicate their values as effective also tend to run more profitable firms.

Resource Allocation and Financial Viability

We look at resource allocation from a few different angles:  how well people and material are allocated across departments; the quality of budget information (how quickly and accurately you get it); and the effectiveness of the allocation strategy (how well it is working).

Certain aspects of resource allocation are strongly linked to profits, though less so with our measure of cash flow.

Effective resource allocation strategy is linked to profit. CEOs who rate their resource allocation strategy as effective also report higher ROS.  The better able the firm is to assign people to the right departments in the right numbers, according to its managers, the more profitable the firm is likely to be.

Managers (other than the CEO) were also asked to rate the firm’s ability to assign equipment, dollars, and material so that all work groups have sufficient resources to operate.  Though not related to profits, these were positively linked to cash flow.

Public Relations and Financial Viability

Effective public relations and profits are linked. Our focus on public relations was fairly limited in the research study: We asked  CEOs and managers to rate their company’s reputation and image in the community.  This rating is linked to both ROS and cash flow.

Technical Mastery and Financial Viability

Technical mastery and profits are linked.  We identify four components of technical mastery:  technical performance of employees; technical skills of employees; productivity–the firm’s ability to meet schedules and fill customer orders on time; and quality of the services and/or products the firm provides.  All four aspects link to ROS and cash flow.

                          IN SUMMARY

Financial viability is the key to company success.  Few firms survive long without sufficient profits and cash flow.  This chapter reviews different ways to measure profits.  It also provides a quick overview of the linkages between financial viability and the other seven issues of the Dynamic System Planning Model.  In the remaining chapters of Part II, we pay individual attention to each of these seven issues, in turn.


1 Cecil J. Bond, Hands-on Financial Controls for Your Small Business (Blue Ridge Summit, PA: Liberty Hall Press, 1991).

2 James L. Price and Charles W. Mueller, Handbook of Organizational Measurement (Marshfield, MA: Pitman Publishing, 1986), pp. 128-30.

3 Robert D. Buzzell and Bradley T. Gale, The PIMS PRinciples: Linking Strategy to Performance (New York: The Free Press, 1987), pp. 135-62.

4  Bryan E. Milling,  Cash Flow Problem Solver: Procedures and Rationale for the Independent Businessman (Radnor, PA: Chilton Book Company, 1981) and Bond, Hands-on Financial Controls for your Small Business, are two excellent sources that are written in plain language.

5 Buzzell and Gale, The PIMS Principles, discuss pros and cons of ROS and ROI at length, preferring ROI since it “relates results to the resources used in achieving them” (p.25).

6 Rensis Likert, New Patterns of Management (New York: McGraw-Hill, 1961).