Valuing a Business in the Time of COVID-19

/in , /by Joe Orlando

Joe OrlandoBusiness owners and investors alike are asking themselves the same questions in the current COVID-19 environment.  Are there opportunities in downturns? If so, when do you know when buy and sell? What are my illiquid assets worth?

A former boss and one of the best bond traders I’ve ever met frequently used a popular trader’s phrase that predicting when a market will bottom and turn is “like trying to catch a falling knife.” A recent article revisited this phrase in the context of today’s market and the human decision-making process. As the article suggests, the big takeaway from Nobel Prize-winning psychologist Daniel Kahneman’s book Think, Fast and Slow is that “in critical situations that rapidly unfold…we tend to rely on our intuitions.” However, Kahneman suggests that when we are losing money fast, “we’d be better off…by slowing down and taking the time to analyze not only the market situation unfolding but our response to it.”

Responding to Market Data

In publicly traded markets, there is no short supply of data to analyze in determining a proper response. Volatile markets generate gigabits of trading data that money managers, traders and research analysts can tap into to assess markets and responses in the form of buy/hold/sell recommendations. But what about small private companies? With data limited to their own operating metrics and year over year change, how can an owner operator analyze the market situation and how to respond to it. Following Kahneman’s advice we suggest you slow down and analyze before acting.

A Private Company Response

The most prevalent approach to value is capitalizing current or discounting forecasted cash flows. This approach is based on three key inputs;

  1. Cash Flows – or the benefit stream to a business owner.
  2. Growth – or the rate at which these cash flows are expected to grow or decline.
  3. Risk – or the impact outside forces have on receiving these benefits over time.

These three inputs have different relationships. All other inputs being equal, the increase in cash flows increases value. The same is true for growth. Risk has an inverse relationship to value as the increase in risk lowers value. So as an owner operator or business manager, a quick assessment of the impact of this market on value depends on the flow of these three inputs. If you are lucky enough to benefit from the demand of essential products in this market, both cash flows and growth (at least in the short-term) are likely up. Some if not most of that increase in value is offset by an increase in risk as the world ponders a strange question of when to “reopen” its economies.

The Next Layer of the Onion

A quick assessment by the seasoned owner or manager is the difference between growth and stagnation, deep losses versus breakeven and, ultimately, success and failure. These quick assessments are needed every day as these three key inputs constantly update. As valuation experts, Exit Strategies Group also believes that there is “value” in a formal valuation of a business at a specific date. The value of this formal approach increases in chaotic times and a deep dive of a business by an independent, third-party appraiser at a relative low in a company’s valuation history has many benefits. The most important of these benefits is an answer to the question, “what is my business worth today in is COVID-19 market.”

Unique Valuation Opportunities and Needs

We believe that in addition to answering this question, a formal business valuation (either a full or limited scope analysis and report) exposes unforeseen or unnoticed risks and conversely “nuggets of value” in the form of intangible assets that fuel the business and its growth. But this deliverable of an opinion of value of 100% or 1.0%  has additional and unique uses amid this COVID-19 crisis;

  1. Gifting – Down markets give owner operators and investors a unique opportunity to pass value to the next generation or your favorite charity at a low price that limits the use of a lifetime gift tax exemption and maximizes the benefits of estate planning.
  2. Option Plans – The IRS in its IRC 409A statute requires that a valuation of equity securities used to price options be updated every year or when there is a “material change” in the business. Usually, for venture backed companies, this material change within the one year window is a new financing round. However, in times of market downturns, there is a unique opportunity to price new options or reprice existing options at a lower price. For companies that rely on this stock-based compensation to woo new hires, this opportunity allows these companies to reset the price and restart the clock for another year.
  3. Exit Strategies – In our conversations with owner operators in this market that had plans to sell the business before COVID-19, we have sensed both frustration and acceptance of the fact that either retirement just got pushed off a few more years or the quality of that immediate retirement has taken a hit with an expected decline in the selling price. A current valuation will help you decide whether to proceed with a sale or stay the course. For those who want to maximize exit value in the next 2-5 years, now is the time to identify key risks to mitigate and “nuggets of value” to invest in.
  4. Bankruptcy – A recent blog on our site talks about valuing a business in bankruptcy. An assessment of the value of your business may suggest that it is time to take advantage of Bankruptcy Code of the US and reorganize your company and renegotiate with your creditors to develop a plan to come out of this down time with a stronger balance sheet and capital structure, even at the cost of diluting ownership. Less of something is worth more than all of nothing.

When Should I Start the Valuation Process?

Again, perfect market timing is a myth and trying to predict when your business’ value will bottom and turn is “like trying to catch a falling knife.” Any valuation requires significant due diligence on the part of owners and managers so the time to start is when you have the time to dedicate to this process. If you or your team are currently slow based on the demand of your products and services, now may be the best time to dedicate that down time to this process. If you are going gangbusters supplying essential products and services, your time now is better spent running your business. If the above benefits don’t coincide with your current situation but may soon, then later (or in the next 6-12 months) is a better time to engage.

Regardless of your timing, give us a call and let’s talk through your situation and what may make the most sense for you in this market.

Exit Strategies values control and minority ownership interests of private businesses for tax, financial reporting, strategic purposes. If you’d like help in this regard or have any related questions, you can reach  Joe Orlando, ASA at 503-925-5510 or jorlando@exitstrategiesgroup.com.

M&A Advisor Tip: Planning for Death or Disability
/in , /by Exit Strategies

The Wall Street Journal recently ran an article about CEOs accelerating succession plans and backup management strategies in the wake of COVID-19.

It’s a question every owner should be asking (now and always): What happens if you are unable to manage your company?

No one likes to think about all the what-if scenarios in life. Most business owners have no plan for exiting their business at all, much less exiting in the face of conflict or tragedy. Talk to your advisors and have a written plan for your business in the event you’re incapacitated.

That plan should include a current estimate of value, life insurance on behalf of the business, and temporary management appointments.

For further information on contingency planning for private business owners, or to discuss a current business sale, acquisition or valuation need, contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.

Begin with the Knowns and Unknowns

/in , /by Exit Strategies

The world feels like it’s turned on its head right now. People are anxious, with good right to be. There’s so much we can’t predict about the weeks and months ahead. When planning your response, begin with what you know and what you don’t know.

What we know:

We’re in a pandemic, and social distancing can flatten the curve, meaning slow the rate by which the illness spreads. And, at this point, we can probably say this pandemic will be linked to an economic recession.

Start by responding to what we know. If you’re a business owner or in another position of influence, this begins with supporting social distancing efforts and following guidance from the CDC. For many, this means finding creative ways to keep your employees engaged and working so you can keep paying them for as long as possible.

Whether you’re shoring up remote work operations, or innovating your business model, remember your employees are anxious. Many of them are trying to balance work and childcare. Others are alone and will be feeling the isolation more keenly.

Now is the time to practice compassionate leadership. You can’t really know how much this situation is affecting each employee – who has vulnerable family members, who is most economically at-risk, and who has underlying mental health issues that will make this situation more difficult to bear.

Prioritize social connection as part of your workday. Plan virtual coffee meetings or happy hours via conference call. Managers, make it a point to check in on employees. Find out how people are doing, and not just in terms of work and technology. Ask how they’re feeling. Find out how the separation from the office is affecting them and what else is raising their anxiety.

Communicate. Rumors fly in uncertain times. Give your employees clear, reliable information. If you don’t know what your plan is yet, it’s okay to say that. Employees need to hear from you, and even those “we’re still considering our options” messages can head off misinformation.

What we don’t know:

The unknowns are many. We don’t know how long this situation will last. We don’t know the depth of the economic impact. So how do we respond in uncertain times?

Madison, Wisconsin based futurist Rebecca Ryan recommends scenario planning. Map out your worst fears, your highest aspirations, and your reasonable expectations (what feels most plausible over the next 18 months).

Do this together with your leadership team. Part of the value, as Ryan explains it, is stating your assumptions to the group. Which possibilities are you putting in the plausible zone, rather than the best- and worst-case scenario boxes?

Any scenario is possible, so spend time on each. Try to imagine how your business will respond to each possible future. A few weeks or months from now, you will have more information and can revisit your scenarios again.

If you tend toward pessimism, this kind of scenario planning may help lift you up out of fear by forcing you to imagine positive outcomes. That slight lift, that shift in perspective, can be extremely beneficial in times of stress.

But more than that, scenario planning helps you make thoughtful decisions in uncertain times – times when informed decisions aren’t always possible.

 

COVID-19 Exit Planning Insight: Keep a Journal

/in , , /by Al Statz

Al StatzThere’s no shortage of information out there right now on how company owners and CEO’s are responding to COVID-19. [By now, leaders have taken steps to survive and fight another day. Most now understand what business will look like for them until restrictions are lifted, and they’re formulating plans to thrive again post-pandemic.] With few companies going to market during this crisis, our insights will focus on exit planning, acquisition opportunities and non-elective sales for a while.

Today we have a simple but powerful suggestion for owners who wish to sell in the next three to four years: Keep a COVID-19 Journal.

Why a COVID-19 Journal

When you sell a business, the buyer’s financial diligence usually focuses on the past three years. Like it or not, what happens during this COVID-19 disruption will generate lots of pointed questions. It’s unavoidable. Your M&A advisor / investment banker will help you tell your unique story, but you’ll need to have the supporting facts and data.

Keeping a COVID-19 journal means tracking and documenting key events, management decisions and business performance data, in real time, during this crisis. Key events and decisions are those that will have a substantial impact on current or future business performance or risk. Decisions should be well documented, including timing, rationale and expected results.

The more data and details you have the better your story can be told. Don’t try to remember it all. Some of this data may not be captured in or stored by your ERP system. For example, you may need to be manually recording weekly RFPs, quoting activity and order backlog.

Examples of Key Events and Decisions:

Financial/Liquidity

  • draw-down on the credit line
  • renegotiated bank covenants or asset-base
  • cancelled all company credit cards
  • sold surplus assets to generate cash
  • other key cash preservation actions taken
  • government subsidies received and how accounted for

Customers

  • change in key customer payment terms or collections
  • major order cancellations
  • downstream verticals shut down and aided by crisis
  • customer loss or gain due to or during the crisis
  • impact on orders, sales and accounts receivable

Marketing & Sales

  • implementation of new remote/online sales strategies
  • implementation of new marketing initiatives
  • RFP inquiries and quoting activity

Suppliers

  • renegotiated payment terms
  • changed payment practices
  • notified that critical components unavailable
  • major order cancellations
  • major supply chain interruptions and changes
  • renegotiated lease or mortgage payments
  • impact on accounts payable

Employees

  • salary reductions, job-sharing, furloughs and layoffs (and severance paid)
  • major staff redeployments
  • organizational restructuring
  • new hires/rehires – impact on payroll

Products & Services

  • diversified (new product line or service) to generate sales
  • decision to stop replenishing certain inventory (to preserve cash)
  • major resource shifts
  • suspension of a product development initiative

Strategic/Operations

  • shifts in target markets, products, services or customers
  • major re-positioning or change in business model
  • permanent operational changes made
  • a new strategic alliance
  • acquisition of a distressed competitor

Action Steps

Start your journal today and cover historical events as best you can. Assign someone to take detailed minutes of weekly or daily executive team meetings and compile KPI’s. Schedule time each day to summarize key events, decisions and performance metrics.

One of my clients finds writing this journal to be “therapeutic, amid the chaos”. And he’s looking forward to telling his unique COVID-19 story to prospective acquirers (and their lenders).

As a result of this surprise economic crisis, acquirers may be adding “Evaluate the potential impact of future unpredictable business disruptions” to their acquisition due diligence check lists. We’ll soon find out.

If you are wondering what information to include in your COVID-19 Journal, Exit Strategies Group’s M&A advisors and valuation experts can provide invaluable insights. Don’t hesitate to call if we can help you prepare your journal, make a strategic acquisition, or prepare for a post-pandemic exit.

Previous COVID-19 M&A Updates:

COVID-19 M&A Update: Survival Mode

/in , /by Al Statz

As of 4/6/2020

The fact is, no one knows when this public health crisis will be resolved or when commerce will return to normal.

The fact is, most businesses are struggling. They have scaled back or stopped operating. Leaders have taken quick decisive action to stem losses and preserve cash. They are taking advantage of government assistance. Luckier ones are less affected; some are thriving. Indeed, these are unprecedented times.

Affected company leaders are taking stock.

Business owners and management teams are taking care of their employees first, as they should, and reaching out (by email, phone and video conferencing) and staying close to customers and suppliers. They are remaining calm, intentionally limiting their media intake. They are monitoring KPI’s and dashboards more frequently than ever – hourly or daily instead of weekly or monthly. They are getting a handle on what business is going to be like until restrictions are lifted.

And they are looking ahead.

They are formulating strategies to strengthen their market position and thrive when we come out the other end of this. They are revising their quarterly and annual business plans and executing on those plans. Many are working on systems, marketing, policies and procedures, and picking up some of those “B” projects that fell by the wayside.

Exit Strategies Group is here for you. Please don’t hesitate to call us if we can help you navigate this crisis, or just to touch base.

All the best to you, your families and your companies,
The Team at Exit Strategies Group

Three Questions to Ask for Growth

/in /by Exit Strategies

This is the time of year when business leaders make resolutions, update strategic plans, and generally take stock of their organization. I’m planning to do a similar assessment, but this year I’m going to look in the mirror.

I’m going to reach out to 15 to 20 people and ask these three questions:

  1. What two things should I continue to do?
  2. What two things should I start doing?
  3. What two things should I stop doing?

I’ll put these questions to several of my team members, some close personal friends, and a few people in my professional circle. And I expect I won’t like all the answers. But I’m going to trust that I will get fair and honest feedback.

Blind Spot Detectors

One of the tenets I’ve always adhered to in business is that ‘you don’t know what you don’t know.’ My goal with this exercise is to help uncover some of those blind spots. What can’t I see?

Most days it feels like I’m driving down the (proverbial) highway at 90 miles an hour. I know I need a better view of what’s around me, so these three questions are going to be my blind spot detectors. The answers just might help me avoid a few scary near-misses and perhaps, even, a company-killing accident.

Fresh Thinking

Researchers tell us that multiple perspectives are the key to innovation. Maybe I’ll uncover some new path we should be taking as an organization. Or just as likely, I’ll get people telling me to stay the course – to give ideas enough time to take root and sprout before I head off to take on the next “big” idea.

In business circles, this feedback tool is generally known as the SSC or SSK (start, stop, continue/keep) process. The exercise can be used in any area of your life, in your role as a business leader, coach, partner, parent, etc. See this Forbes article for more information.

You can use the exercise for company-wide analysis as well, asking employees and customers what the organization should start, stop, and what you should preserve.

Either way, whether we ask the question of ourselves or of our organization, I expect the magic truly comes from how we respond. I’m sure I’ll struggle with some negative feedback. But If we can accept the answers with grace, humility, and perhaps even transparency, we can improve communication and trust.

When I started my business, I created a board of professional advisors who served as my sounding board and helped guide my decisions. Today, I look to my management team and outside consultants for similar insight.

In 2020, I’m going to add fresh voices to the mix. And I’m fully confident that those voices – even the critical ones – will be a pivotal part of my personal and professional growth.

Al Statz can be reached at 707-781-8580 or alstatz@exitstrategiesgroup.com.

Building Value Means Building Leaders

/in , /by Exit Strategies

It’s the New Year, that time when many business owners make a fresh resolve to develop their business. For some, that means updating equipment and driving sales. But others will focus on something more personal and possibly more pivotal: developing their leaders.

GF Data shows that a solid management team will increase the valuation multiple. For smaller businesses, the quality of your management team can be an even bigger factor, influencing whether your business sells at all.

Here are five ways to develop your managers and bring out their best:

1.  Coach, Don’t Rescue

A lot of leaders are “rescuers.” We care about our people and we want to see them succeed. But instead of onboarding correctly or coaching, we take over for them every time they have a problem.

Try coaching your team member to a solution. Help them find the courage to voice their own suggestions.

Questions like, “What do you think you should do?” often yield “I don’t know” answers. But a simple reframing can take the pressure off and encourage people to share their own thinking. If you’re trying to get someone past “I don’t know,” try one of these approaches:

“Suppose you did know. What’s a possible answer?”
“What if you knew you couldn’t fail?”
“Who’s the smartest person you know? What do you think they would do?”
Getting people to reframe the answer from someone else’s perspective can take away some of the discomfort we all feel about being wrong. What’s more, it helps them stretch and develop their own capabilities and confidence.

2.  Set a No-Penalty Zone

Create an environment where it’s okay for people to make mistakes. Begin by setting boundaries (wide boundaries, preferably) around decisions and actions they can take on their own. As long as people are acting ethically and in adherence to your corporate values, support the choices they make.

You can always coach people and explain why you would have made a different decision, but don’t impose any negative consequences. It’s better to have a proactive team than people who sit in a state of paralysis waiting for you to sign off on a course of action.

3.  Assess Your Team

Behavioral assessments can go a long way toward employee retention and development. From MBTI to DiSC, Strengths Finder, and others, tools like these can help your team identify their unique gifts and areas for improvement.

Invest in a business psychologist or other professional facilitator to take your team through the assessment. With the right guidance, the results can help improve team dynamics and equip you to be a better coach to each individual on your team.

4.  Give them a Voice

Give people a place at the table. For a long time, I made the vast majority of my business decisions based on what I thought was best for the company. But over the last few years, I’ve gotten better at listening to my internal team.

My management team has helped me challenge my assumptions, develop new initiatives, and most critically for me, stay the course on a promising business plan instead of following my next big idea.

5.  Get Out

We’re working with a husband and wife team who haven’t taken a vacation in five years. That’s not great on many levels. I don’t know if they haven’t developed their people or if the issue is more about an emotional, personal need for control.

If that sounds familiar, start slow. Take a long weekend away. Leave early on Fridays. Build up your ability to step away. As you leave your team in charge, their confidence will grow, and so will yours.

In terms of value, the ideal goal is to work yourself out of the business. Get yourself to a place where you can take extended vacations. Transition your role from working IN the business to working ON the business.

Buyers want businesses with transferable value. That means you need a leadership team that can sustain operations and, better yet, drive growth, without your direct involvement. If the business can’t survive without you, its value declines.

At the end of the day, building out your management team is a critical investment in your business. If it makes your life easier in the process (and it will), that’s just a nice side bonus.

For further information on what buyers look for in a management team, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

5 Ways to Make Your Business More Sellable, Right Now

/in , /by Al Statz

It was time. After 30 years running their small 25-employee company, Frank and Martha were ready to retire to the Oregon Coast. To their surprise, after a 12-month listing with a business broker, there were just a few interested parties and no offers. Instead of enjoying retirement, Frank and Martha are now a year older and no closer to retirement. For them, preparing to sell was an after-thought.

Regretfully, this scenario plays out often. Many small companies aren’t in shape to sell. This post offers tips for building a more marketable company.

5 Ways to Make Your Business More Sellable

  1. Clean up financial reporting. Nothing scares buyers away like poor financial statements and back up data.  If you don’t have the resources to do this work in house, find a CPA or fractional CFO to help with this.
  2. Build a team. Often, businesses are too dependent on the owner(s). If buyers are unsure about a company’s ability to prosper under new leadership, they won’t buy. Buyers want to see a capable and committed management team. Stay bonuses can help.
  3. Diversify the customer base. Companies with a few clients that represent a majority of revenue are tough to sell. Contract manufacturers often have this problem. A business may not survive losing its top client, let alone continue to pay down acquisition debt. A good rule of thumb is to keep top clients below 20% of revenue.
  4. Document, systematize and automate. The more confident buyers are that a business will continue to run smoothly under their watch, the more likely they will buy and the more they will pay. Most companies have opportunities in this area.
  5. Quality of earnings. Buyers and lenders discount or shy away from businesses with declining or uneven earnings. They also don’t want to see deferred capital spending or excessive working capital needs that put a drag on future cash flows.

These are some of the most common recommendations we give to company owner clients. Every business has its own unique levers to pull.

I realize these recommendations are easier said than done. Just know that failing to prepare for a sale can result in no deal, or selling at a substantial discount and not having enough money to enjoy retirement or prolonging retirement for several years.  See my recent post on Why Business Owners Should Prepare to Sell Now.

At Exit Strategies we counsel business owners before taking their businesses to market. After an initial assessment, we sit down with owners to create simple plans to improve sale-readiness and value. When our clients are ready, our senior M&A brokers guide them through the sale process. As a result we have one of the highest success rates in our industry.

*          *          *

Al Statz is the founder and president of Exit Strategies Group, a leading M&A advisory and business valuation firm with offices in California and Portland Oregon. If you are interested in selling your company in the next few years, call Al at 707-781-8580 or Email him.

Corporate Social Responsibility in Mergers and Acquisitions

/in , , /by Al Statz

Like it or not, and irrespective of our personal political ideologies, corporate social responsibility has gained in popularity in the past decade. In this article, we’ll discuss what Corporate Social Responsibility (CSR) is and what it means for private business owners from an exit strategy perspective.

The Four Pillars of CSR

CSR is often thought of as having four pillars: the community, the environment, the marketplace and the workplace.

  1. Community. This pillar refers to the manner in which a company contributes to the greater community. Contributions can range from simply providing good jobs for people in your local community to donating money for a new playground or public art project.
  2. Environment. People around the globe are becoming more environmentally conscious. Increasingly, consumers want to know that the companies that they patronize have sound environmental practices. These practices range from recycling, to using low-emission high-mileage vehicles, to using biodegradable packaging. The more your company can demonstrate how it is protecting the long-term health of our environment, the more customers will be attracted to your product or service.
  3. Marketplace. Proper corporate social responsibility includes adopting fair treatment policies towards suppliers and vendors, contractors and shareholders. It’s critical to view all stakeholders in the company as partners. The marketplace aspect of CSR means rejecting any exploitative business practices that you may have in favor of fairer and more equitable business practices.
  4. Workplace. With respect to workplace, CSR encourages the implementation of fair and equitable treatment of employees. It makes sense that having a healthy, financially secure and committed workforce with a strong corporate culture and a safe work environment improves the desirability of your company. Profit sharing, medical coverage, retirement and wellness programs are all part of this mix.

Are socially-responsible companies better investments?

In my experience as an M&A advisor, I have to answer yes, all other things being equal. It’s not the most important factor, but today’s acquirers prefer to buy companies with a culture of social responsibility. Owners considering selling or recapitalizing should plan for this. Being able to demonstrate a strong CSR track record should serve to increase buyer and investor demand and therefore selling price.

Our M&A advisors to small businesses have noticed that older (baby boomer) owners in particular are surprised by the importance of good CSR practices to the younger generation of buyers. With the advent of social media, its easier than ever for them to get a sense of your company’s social responsibility.

It may be time to to gather your management team to explore the value that CSR can bring to your organization and assess your CSR performance. Here is an HBS white paper on Why Every Company Needs a CSR Strategy and How to Build It.

*          *          *

Al Statz is Exit Strategies Group’s founder and CEO. For further information or to discuss a current need, confidentially, Al can be reached at 707-781-8580.

M&A Advisor Tip:  What Buy-and-Build Means for You

/in , /by Exit Strategies

Private equity firms have increased their use of buy-and-build investment strategies.

A buy-and-build strategy involves bolting together several smaller companies into a larger business enterprise that will likely sell at a higher multiple. See our post on the size effect. This trend is affecting many industries, from healthcare clinics to niche business service companies.

The uptick in buy-and-build acquisitions could mean more buyers and more competition for your business than you expect. Contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com to learn more about consolidation trends in your market.