M&A Advisor Tip: Management Cross-Training

Management Cross-training and Succession Planning 

A strong and committed management team has long been one of the attributes buyers look for in a business. And now, in the era of COVID-19, buyers will be increasingly interested in issues of cross-training, management succession, and leadership development. Buyers will be looking at how the business could be impacted if health issues or quarantine requirements prevent certain team members from working.

Review your management succession plans, leadership development and cross-training efforts now to alleviate concerns about key talent.

For further information on management development and succession planning in the context of a business sale or acquisition, or to discuss a current need, contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.

Is COVID-19 the ultimate cure for one-more-year-itis?

I was talking to a business owner who shared how her teenage kids remember the Great Recession and the financial impact it had on their household. Now they’re seeing their own economic upheaval, in the form of lost summer job (income) opportunities. In good times and lean, money issues have always weighed heavily on her mind. So, she can’t help but wonder how this will impact her children’s financial mindset.

I have similar thoughts, but I’m not thinking about my kids. I’m thinking about our country’s business owners. How will the COVID-19 pandemic affect their psyche?

I believe entrepreneurs tend strongly toward optimism. After all, 19 times out of 20 when I ask an owner about their sales projections, they expect growth. It is a good attitude to have, especially when you consider the strength needed to run a business.

But that optimism is also why so many business owners succumb to what I like to call “one-more-year-itis.” That’s the condition that leads owners to delay selling their business, even in a strong M&A market, even when the after-tax proceeds from a sale would more than fund their dream retirement.

Unfortunately, most small business owners don’t plan ahead. For the smallest businesses valued at less than $500,000, roughly 72% of owners do no planning at all before putting their business on the market. Even for larger businesses over $5 million, only about 25% plan more than a year in advance.

But as we come off the longest bull run in U.S. history to find ourselves in wholly unprecedented conditions, I have to wonder how long our country’s entrepreneurs will remember this struggle.

If there’s any benefit, perhaps more business owners will think strategically about their financial future. Instead of waiting to hit a certain age, or waiting for some trigger in their life, perhaps we’ll see more business owners planning to exit on their own terms.

Doing that means keeping tabs on how much your business is worth and creating a plan for your financial future, and selling when these numbers line up.


For further information on M&A market conditions or to discuss a business sale, valuation need or exit strategy, contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.

M&A Advisor Tip: Planning for Death or Disability

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.

Controlled Private Short Sale using UCC Article 9: a Winning Alternative to Bankruptcy Sale

Louis Cionci, ABVAs a business sale advisor with Exit Strategies Group, I help business owners obtain the best price and terms available in the market during a sale process.

We sometimes encounter situations where the owner would like to sell the business, but the business is in a distressed position with the following characteristics:

  • the fair market value of a business is less than the outstanding debt on the business,
  • the business cash flow does not support the current debt service
  • the asset value of the business is less than the debt owed on the business.

When a business is in a distressed position, there are few attractive exit options for an owner. Typical options include bankruptcy reorganization or liquidation. However, for a distressed but otherwise viable business, there is another exit option available that often produces a better financial outcome for the seller. That sale option is a UCC Article 9 Controlled Private Party Short Sale.

In this type of a sale, the business is sold to a single purchaser of the business with the intention of continuing to operate the business and the first position creditor agrees to accept the sale proceeds as satisfaction of their debt.

Winning Outcomes for the Exiting Owner

This structured sale process creates several winning outcomes for the exiting owner:

  1. A successful exit option for the owner when there was none
  2. Avoidance of bankruptcy
  3. Avoid taking on additional expensive debt
  4. Preserve the business and employee jobs the owner created
  5. Earn from the new company through an employment agreement
  6. The ability to resolve personal guarantees on subordinated creditor debt
  7. The structured sale process can be completed in 45-60 days

My goal is always to obtain the best exit strategy possible for my business owner clients. For company owners facing financial distress, this type of structured sale may offer the best exit option.

For more information on the Article 9 short sale process, or buying or selling a business, Email Louis Cionci at LCionci@exitstrategiesgroup.com or call 707-781-8582.

Can you sell a distressed business?

We’ve been getting this question from more business owners over the last few weeks. As with many important questions, the answer is, “it depends”.

Financial distress occurs when a firm can’t generate enough profit to meet its immediate or long-term financial obligations. If your business is consistently accumulating debt, has unseasonable and sustained increase to accounts payable, or is falling behind on payroll taxes, it is likely distressed.

Buyer’s Perspective

The potential to sell a distressed business depends on the ability to attract a buyer that believes that, based on their skills, resources and synergies, they can address the cause of distress and create a profitable future for the business. A strategic investor would look to profitably integrate the target business into their own operations. Strategic investors that can take advantage of synergies are more likely to buy a distressed business than financial buyers. However, there are well-funded “distressed investors” that specialize in acquiring and turning around distressed businesses, in good times and bad.

When assessing an opportunity to acquire a compromised business, savvy buyers will consider many factors including the cause, severity and duration of the distress. The causes of financial distress fall loosely into four categories.

Four Categories of Distress

Often, financial buyer prospects will not be able to address “unmanageable” issues any better than the current business owner. This makes the business inherently difficult to acquire and turn around.

However, even in an extreme event like a world-wide Covid 19 pandemic, there are exceptions. For example, a strategic buyer may be able to redeploy the assets of a whiskey distillery that lost its restaurant and bar customers to manufacture a product in exceptionally high-demand, like hand sanitizer. A good broker or intermediary can help to identify these opportunities and bring buyer prospects that can capitalize on them to the negotiating table.

Manageable causes of distress may be event-driven (like loss of a key customer) which often results in an acute crisis for the business. Or there they may be systematic causes of distress (like poor cost structure) which slowly impairs the business over time, as per the diagram below. Left unresolved severe distress will eventually lead the business to bankruptcy.

Path to Bankruptcy

Generally speaking, the less enduring and less severe the distress, the easier it will be to find a buyer that can turn the business around. Initiating the sale process early enough is critical. Waiting too long is a common mistake.

The likelihood of selling a distressed business depends on the circumstances. If you own a business showing signs of distress and are considering selling, please contact me at awiskind@exitstrategiesgroup.com or (707) 781-8744 for a confidential, no-obligation assessment of your situation.

M&A Advisor Tip: You are Not Stuck with Your Business

Worried about a recession? Burned out? No energy to do this all again?

You are not stuck. Businesses sell in all market conditions, including in uncertain times like these.

Yes, we’re coming off a period of peak demand in M&A. Buyers were lined up for quality opportunities. And they stretched their target parameters in order to find something that would fit. But many of those buyers are still active.

There are buyers out there who will see this pandemic as an opportunity to get out ahead, while their peers wait-and-see. We might be in a temporary hold, but buyers will be back soon.

If you don’t have another recession in you, talk to us. You may have better options than you think. Solid businesses that were successful before the pandemic will certainly be successful again. Owners of distressed businesses should act as soon as possible.

For further information on today’s M&A market conditions to discuss a potential business sale or acquisition, contact Exit Strategies Group CEO Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

 

COVID-19 Exit Planning Insight: Keep a Journal

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:

The Seven Stages of Selling Your Business

Smart preparation and planning can help you build a business that’s ready to sell when you are. Ideally, you’ll start preparing for sale early in your business life-cycle. The more you know about what buyers want, and what you can expect from the market, the more options you’ll have to exit your business and maximize value upon exit.

Seven Steps in the M&A sale process:

1. Status and strategy:  The first step is to check in with yourself and your business. Are you ready to sell? Is the timing right in terms of market conditions and business performance? Does the value of your business match your goals? What are your exit options and how might different scenarios affect your readiness?

We recommend a status and strategy check every couple of years. A regular Estimate of Value can provide important benchmarking information. It’s an affordable tool to ensure your business is on track to hit your value milestones. If not, we can show you how to unlock hidden value in your company while you still have ample time to make adjustments.

2. Valuation enhancement:  The value enhancement stage is really part and parcel of status and strategy. Sometimes we may suggest some changes that would make your business more salable and increase its value in the marketplace.

Depending on your goals, this might be a six-month period of minor changes or a multi-year strategy to make your business more desirable to buyers who will bring the most value. In an ideal world, we’d talk to business owners years before they actually wanted to exit.

Early planning allows you to better time the market so you can exit during a market peak. The more time we have, the more room we have to make meaningful changes that impact business value.

3. Preparation:  Before going to market, we work with the seller in an intense period of preparation and information gathering. We’ll recast your financials to highlight your cash flow and incorporate projections to show where the company is going. And, depending on your business, we may also recommend select pre-due diligence activities to uncover issue areas that might be of concern to buyers.

At this stage, we’re also doing exhaustive buyer research. Businesses in the lower middle market often have an enormous pool of potential buyers. Some of these potential buyers come from your contact lists, some come from our global network, and others from our sizable investment in data mining tools that allow us to target the most relevant, qualified set of possible buyers.

4. Going to market:  As we go to market, we’re focused on getting in front of the right buyers at the right time, telling your story, and protecting your confidentiality. It’s all timed and carefully packaged in a sensitive mix of marketing and preliminary negotiation that should, ideally, bring multiple buyers to the table in a competitive auction environment.

Part of the marketing process involves pre-qualifying would-be buyers, securing nondisclosure agreements, and tracking information access via a secure data room. At this stage, we’re carefully weeding out the tire-kickers and smoking out “buyers” who are more interested in competitive intel than a legitimate acquisition.

5. Negotiation:Generally, sellers get better results when negotiating with multiple qualified buyers. The market is hot and buyers know there will be competition for the best deals.

The key is to control the process with respect and professionalism. We provide clear, consistent timelines and expectations. There’s a lot of activity out there right now, and buyers will pass over deals with inexperienced advisors who might waste their time.

Purchase price is only one point of negotiation. Deal structure, financing, employment contracts, working capital, reps and warranties are just some of the bigger issues that factor in. We will negotiate with multiple potential acquirors until you find the best fit for what is important to you.

6. Due diligence to closing:  At this stage, your target buyer has a period of time to complete due diligence and confirm they want to proceed with the deal. Together, both the buyer and the seller teams will be working through legal and financial requirements to ensure everyone is on the same page, appropriately protected, funded, and ready to close on schedule.

7. Post-closing transition:  After closing, you’re usually involved in a transition period. How long you’re staying and in what capacity will have been hammered out in earlier negotiations, based on the type of buyer and deal structure you approve. Post-closing commitments may involve transitioning relationships, explaining trade secrets, and otherwise helping set the new owners up for success.

Sellers routinely tell us how surprised they are at how much time the sale process took and how glad they are they didn’t try to run a sale process on their own. The final year before a transition is a critical time when strong business performance matters most.

At the end of the day, you want to exit your business with peace of mind and satisfaction, knowing you got what you wanted and didn’t leave money on the table. Sellers who start planning early can sleep easy at night confident that they did the best thing for their business and their family.

It’s never too early (or too late) to have a conversation about maximizing value in your business. For further information contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.

M&A Advisor Tip: Organize Your Financials

Buyers that pay top dollar usually expect to see clear, well-organized financial statements prepared according to generally accepted accounting principles (GAAP) and reviewed by a reputable CPA firm. If your business has more than $10 million in revenue, you should probably start investing in annual financial statement reviews at least three years prior to selling. Or, have a transaction-oriented CPA firm complete a “quality of earnings” report prior to going to market.

For a referral to a good CPA firm for your company or to receive further information, contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.

M&A Advisor Tip: Know when it is time to sell.

When you no longer have the fight, get out of the ring.

Burnout is the second leading reason business owners sell, after retirement. Many business owners hold on too long, long after their drive has gone. When that happens, the business stops growing or even starts going backward – and the value of the business declines.

The best time to sell is when you’re energized and motivated by your work. If you see burnout on the horizon, find ways to reduce your burden or start preparing to sell your business.

For further information contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.