Private Equity is Open for Business

We stay in regular contact with  private equity groups from around the country to monitor M&A market activity. Currently, the message we are hearing is that these firms are “open for business.”

Private equity firms are in the business of buying, building and selling businesses. It’s how they deliver investor returns. They don’t have time to sit back and wait things out. The clock is ticking as they work to meet investor expectations within fund deadlines.

These firms are pretty good about tracking and studying their deal flow. They have data, going back years, on the volume and quality of potential deals that they see.

What we’re hearing, from multiple private equity firms, is that the number of good, quality companies coming to market is down anywhere from 50 to 80% over a year ago. That means the law of supply and demand is working in sellers’ favor.

We know that some buyers have pulled out of the market. Based on what we and our peers are seeing, I’m estimating that 25% of buyers have left the market. But compared to the number of new sellers who are not going to market, we still have a demand/supply imbalance.

That competition has kept valuations and deal structures strong. Previously, we predicted sellers would be sharing much more of the risk through increased earn outs and other alternative deal arrangements. And we are seeing a bit of that, but not to the degree that we expected 3 to 6 months ago. In fact, according to the latest Market Pulse Report sponsored by IBBA and M&A Source, Q2 median selling prices in the Main Street market came in anywhere from 89 to 92% of benchmark. Meanwhile, lower middle market companies in the $5 million to $50 million range achieved the highest values at 100% of benchmark.

What we’re seeing in M&A is somewhat mirroring a phenomenon in the home buying market right now. Fewer sellers are listing their homes, but buyer demand is still high. According to data from Zillow, new for-sale listings are down about 25% over a year ago but house values are up 4.3% year-over-year.

To clarify, sellers that are faring well in the M&A market are those who have been relatively unaffected by COVID-19 and those who were able to recover quickly. Essential businesses and those who have otherwise remained resilient are still having success in the M&A market.

As one example of the competitive dynamics at play, we recently took a technology distribution business to market and within 45 days had 8 written indications of interest on the table on similar terms to what we would have expected 12 months ago. And deals are getting done. A peer organization of ours in Pennsylvania just sold a company with $4-5 million EBITDA at an eight-multiple (above the 2019 market average) with 80% of cash at close.

So if you’re thinking you have to wait out the market to sell, talk to an M&A advisor before you count yourself out. If you have a quality business, it’s easier to get attention right now. Private equity and corporate buyers have fewer businesses to consider and more time on their hands to evaluate acquisition opportunities.

The right businesses are still selling with strong values and favorable deal structures. The window has not closed for high quality companies; in fact, you may be able to benefit from the current market dynamics.

For further information or to discuss a potential sale, contact Al Statz, 707-781-8580 or in our Petaluma, California office.

Gifting Window for 2020 May Be Closing

With a Global pandemic and prospects of a sustained recession with double digit unemployment coupled with West Coast wildfires and East Coast hurricanes, I would say that everyone in these United States is looking forward to ringing in the New Year on January 1st. But before the ball drops on a socially distanced crowd in Time Square, you should think about other changes that may occur as we put 2020 in our rear-view mirrors. Specifically the possibility of tax legislation if the party in power shifts in the Executive and Legislative branches of our government.

Proposed Changes

With no political bias intended, it makes sense for everyone to consider what changes to individual and corporate tax policy a Democratic president and a possible Democratic majority in the both chambers of Congress may enact. Bay Area business and real estate attorney Hubert Lenczowski, reminds us that “under a 1984 court case, Congress can enact retroactive tax legislation in an emergency”, thus limiting a individual or corporation the ability to act prior to the effective date.[1] In a Tax Planning Alert letter penned in late August, 2020, he notes that the following proposals have been identified by Vice President Joe Biden as his legislative agenda for tax policy:

  1. Extend the 12.4% social security tax on earnings over $400,000;
  2. Restore the 39.6% tax rate on ordinary income over $400,000;
  3. Cap the tax benefit of itemized deductions to 28% or less;
  4. Tax capital gains as ordinary income for those with income over $1,000,000;
  5. Eliminate the deferral of gain on like-kind exchanges of real estate;
  6. Apply estate taxes to estates exceeding $3,500,000;
  7. Apply gift taxes to transfers exceeding $1,000,000;
  8. Repeal the step-up on basis at death; and
  9. Increase the corporate tax rate to 28%.

Governor Newsom has already fired the first shot for California introducing AB1253 “which, if enacted, would increase the California income tax rate retroactive to January 1, 2020 by another 1% on income over $1,180,000; 3% on income over $2,363,000, and 3.5% on income over $5,900,000.”[2]

A “Use it or Lose it” Opportunity

Before any change to Federal and State tax legislation takes place, we believe that it is time to reconsider the following advantages currently available to those looking to gift ownership in businesses and assets before the clock strikes midnight on January 1st;

  • Lifetime Transfers – The current $11,580,000 exemption on lifetime transfers and bequests that allows married couples to make tax- free lifetime gifts up to double that amount, or $23,160,000. Even without a change in the current Republican government, current law stipulates that this exemption is temporary and will reduced to approximately $6,500,000 per person in 2026.[3]
  • Depressed Values – While the stock indices are at record levels, most operating businesses have been feeling incredible pain from COVID-19 shutdowns leading to record unemployment and negative GDP growth. The sunshine hiding behind these storm clouds is the opportunity to gift business ownership and other illiquid at significant haircuts to values seen only six months ago.
  • IRS Announcements – The “IRS has announced that transfers that take place during our current favorable transfer tax structure will not cause more estate or gift tax in future years as a result of the limits being reduced by tax legislation. In effect, right now we have a ‘use it or lose it’ opportunity to transfer a significant amount of assets under very favorable conditions.”

Tax strategies take time to develop and execute. It makes sense now to talk to your estate planning specialists to determine if these opportunities will work for you and your family. Putting in place a coordinated gifting plan now has the potential to save you and your estate millions of dollars in taxes and transfer more ownership to the next generation under the current temporary exemptions without any gift tax. While you are at it, it’s probably a good time to lock down your health care directive and power of attorney so that it mirrors your current wishes. Regardless of the above tax considerations that you can control, this pandemic has reminded us of risks beyond our control. It’s a tough conversation to have with family but it is one that they will see as a blessing when tough health and financial decisions need to be made.

Exit Strategies values control and minority ownership interests of private businesses for tax, financial reporting and 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


[2] Ibid.

[3] Ibid.

Assignment for the Benefit of Creditors: Alternative to a Bankruptcy Sale

When the goal of a financially distressed business owner is to sell with minimum publicity, free of unsecured debt and potential liability for directors and management, the most advantageous exit path may be an Assignment for the Benefit of Creditors (ABC). Most buyers won’t acquire the assets of an insolvent entity unless the assets are “cleansed” through an ABC or bankruptcy process. Typically, the board of the troubled entity has decided that a rapid sale is in the best interests of the company and its creditors, and it is aware of a handful of likely strategic buyers. This article briefly explains how an ABC works and its advantages and disadvantages.

How does an Assignment for the Benefit of Creditors work?

In an ABC, the shareholders of a troubled company (the “Assignor”) voluntarily assign the title, custody and control of its assets to an independent third party (“Assignee”) of their choosing who acts as a fiduciary to the creditors of the business.  The Assignee’s role is to similar to that of a bankruptcy trustee. They are responsible for selling the assets of the business and distributing proceeds to creditors. The business may continue to operate and can be sold as a going concern if the Assignee believes that will maximize value to creditors. If creditors are paid in full, any surplus proceeds will go to the shareholders.

Advantages of an Assignment for the Benefit of Creditors

  1. Faster than a bankruptcy process, which preserves business value.
  2. More flexible, efficient and cost-effective than bankruptcy.
  3. Company management can select an Assignee with appropriate experience and expertise.
  4. A sale is less likely to be challenged since the Assignee acts on behalf of creditors.
  5. The business can continue to operate to maximize value.
  6. Not secret, but much quieter than a bankruptcy case.

An ABC often involves an auction sale process, which maximizes sale proceeds and protects buyers. They can even be prepackaged, which means there is a 3-way negotiation between a seller, a proposed assignee, and a buyer or buyers. The ABC happens and is immediately followed by the sale closing.

ABC’s do have some disadvantages. Because, in California at least, the ABC process is nonjudicial, there is no court supervision and no court order, so there is less certainty for buyers. Also, relative to bankruptcy, an ABC requires the cooperation of secured creditors and counterparties to leases and contracts.

This is the fifth in a recent series of articles from Exit Strategies’ senior team with insights on valuing and selling distressed businesses. See Insights.

Al Statz is President and founder of Exit Strategies Group, a leading California-based M&A advisory firm with decades of experience selling companies in all conditions. For further information, or if you are interested in exploring the potential sale or acquisition of a financially troubled business, contact Al Statz at 707-781-8580 to discuss your needs, circumstances and options, confidentially. 

M&A Advisor Tip: COVID-19 Era Due Diligence, Part 4

M&A buyers are still active in the midst of this uncertain business environment. However, they are mindful of added risks caused by COVID-19.

These are some financial questions that are likely to come up in future due diligence in light of COVID-19:

  1. Did the business utilize any government relief, debt deferrals, or rent reductions?
  2. In terms of government relief, was the business accurately entitled to that relief and did they meet requirements for debt forgiveness?
  3. Did the business take on new debt that would impact the viability of an acquisition?
  4. Are revised financial projections reasonable?
  5. What is the financial condition of the business’s key customers?
  6. Are there risks to collecting on accounts receivable?
  7. What is the seller doing, if anything, to reduce or renegotiate operating expenses?

Business owners looking to sell soon should review their current practices now, so they’re prepared to address buyer concerns.

Read our previous posts on coronavirus era M&A due diligence:

For further information or to discuss a current M&A need, contact Al Statz, 707-781-8580 or in our Petaluma, California office.

Recapitalization Pros and Cons

When we talk about recapitalization, we’re talking about a partial sale of a company that allows the owner to liquidate some of the value they have in their business. Typically, this involves selling a part of your equity (usually 70-80%) to a third-party, however some business owners do sell just a minority stake.

Recapitalizations are a standard investment tool for private equity firms. They have investor dollars they need to put to work and a timeline in which they’re expected to deliver returns. So they buy businesses with the intent of growing them and/or repackaging them with synergistic businesses for resale approximately 5 to 7 years down the road.

Using this playbook, they generally prefer to buy businesses with an active owner or strong management team in place. You or your existing leadership team will continue to run the business day-to-day while the private equity investor provides resources and assistance to fuel new growth.

Advantages of a Recapitalization

Liquidity: As a business owner, you may have all your financial resources tied up in the business. A partial sale allows you to take some chips off the table, securing your financial future.

Professionalize the business: Recapitalizations can have the effect of increasing management rigor. Your investment partner may help you implement new reporting practices, processes or management software. While these tools help you remain accountable to your new partners, they can also help the business make more informed, data-driven decisions.

And because private equity excels in developing businesses for resale, they understand how to make a business more attractive to buyers and position it for even greater value in a future sale.

A partner for growth: If you see a clear growth opportunity in front of you, but are not prepared to take on new debt or risk at this stage in your life, an investment partner can provide the resources to fuel growth plans.

For example, one business owner in the physical therapy space grew his business from one clinic to 50 over the course of 20 years. After partnering with private equity, the business doubled to 100 locations in just two and a half years.

He got to do what he loved, integrating new clinics, while the investment team focused on acquisitions. When he sells his remaining equity in the business, his minority stake will likely sell for a much larger value than what he received in the initial sale.

Potential disadvantages:

No fast exit: If you are burned out, this is generally not the right approach for you. In a recap model, the investors are typically looking for a business leader who will stay for roughly five years. That doesn’t work if you don’t have any gas left in the tank.

This approach could work, however, if you have a strong management team. Equity can be transitioned to management, creating a new group of minority owners motivated to drive success.

Loss of control: While you will still run the day-to-day business, you will no longer be the primary owner and decision maker. Your investment partner will be involved in all significant financial and strategic decisions.

So before you partner with an investment firm, make sure you feel like your goals align with their intentions. And talk to other business owners they’ve partnered with in the past, to find out how well the relationship worked out.

Pressure to grow: If you’re being recapped late in the life of an investment fund, your investors may need to show returns in just a few years. That could lead to a situation in which you’re pressured to grow quickly.

You could find your investors are more interested in short-term returns than long-term strategic growth. Then again, if your investor is looking to sell quickly, one concentrated push with a faster exit might appeal to you.

At the end of the day, recapitalizations can be a great tool to grow your business and increase your overall value. Finding the right partner takes careful consideration and due diligence. But with the right fit, you can often accomplish more and reap greater rewards than with a traditional full sale.

For further information on recapitalization contact Al Statz at 707-781-8580.

M&A Advisor Tip: COVID-19 Era Due Diligence, Part 2

M&A buyers are still active in the midst of our uncertain environment. However, they are mindful of added risks caused by COVID-19.

These are some technology-related questions that are likely to come up in future due diligence due to COVID-19:

  1. Do employees have the ability to work remotely – without frustrating workarounds?
  2. Does the IT system have sufficient capacity to support remote operations?
  3. Are further developments necessary to sustain a long-term virtual environment?
  4. Are security measures sufficient in a time of increased scams and attacks?

Business owners looking to sell should review their current practices now, so they’re prepared to address buyer concerns.

For further information or to discuss a current need, contact Al Statz, 707-781-8580 or

M&A Advisor Tip: COVID-19 Era Due Diligence, Part 1

M&A buyers are still active in the midst of uncertainty. However, as you would expect, they are mindful of added risks caused by COVID-19.

Talent-related questions that may come up in future due diligence due to COVID-19:

  1. Did layoffs or other cuts impact the business’s ability to retain key employees?
  2. Did the business comply with state and federal laws related to layoffs and furloughs?
  3. How is employee health and well-being managed?
  4. Are policies and practices sufficient to protect employee safety?
  5. Do employees have the ability to work remotely – without frustrating workarounds?
  6. How well does company culture support engagement and accountability in a remote environment?

For further information on business sales, mergers and acquisitions in the midst of coronavirus or to discuss a current need, contact Al Statz, 707-781-8580 or

Use Equity Incentive Plans to Boost Exit Value

Closely-held business owners often use equity and equity-like programs to attract, retain and incentivize key employees to boost profits and build enterprise value. These plans provide value to the employees through current profit sharing and/or future equity appreciation. I am a big believer in utilizing these types of incentives as part of an exit strategy. Let’s break this down.

Why profit sharing for key contributors?

  • Sharing company profits with key employees incentivizes them to put forth more effort, think more holistically about the business and be more productive, this quarter or this year.
  • For the company, profit sharing shifts compensation from a fixed to a variable expense and aligns the employee’s short-term interests with its own.
  • The company can track, calculate and compensate employees on the performance of the whole company or a smaller business unit (e.g. regional office) when appropriate.
  • Often, profit sharing all that is needed to attract and retain top talent. However, by itself, profit sharing isn’t an incentive to create value for company shareholders.

Why equity appreciation incentives for key contributors?

  • Equity plans encourage longer-term thinking and behaviors that increase enterprise value.
  • Allows employee to defer compensation into the future, assuming there is an exit strategy!
  • Creates incentive to stay, if the company has increased in value.
  • Allows the company to conserve cash needed for growth (vs immediate compensation).
  • Rewards employee for betting on a new or unproven company, when applicable.
  • Helps company compete for talent, both with private “tech” companies that grant stock options, and with public companies that promise more opportunities for career advancement but rarely offer equity appreciation incentives except to the very top executives.

Equity Incentive Plan Options

These plans include “Qualified” Incentive Stock Options and Non-Qualified Stock Option plans. Qualified means the plan qualifies for favorable tax treatment by the IRS.

Stock Appreciation Rights (“SAR”) plans grant a right to employees to receive compensation if and when the company is sold, based on the increase in value over some base value (strike price). The employee pays ordinary income tax on the gain when realized. The rights typically vest over some period and are subject to continued employment. SARs do not pay dividends and holders receive no voting rights. It is common (but not required) to have both a profit-sharing plan and a SAR plan.

Phantom Stock plans are similar to a SAR plan. One key difference, I believe (I am not an expert in this), is that phantom stock plans usually pay dividends on the vested portion (like actual shares), which effectively adds a profit sharing component.

I’m barely scratching the surface of this subject. If you are considering creating an equity incentive plan for key employees, it is critical to work with an attorney that specializes in this area. Jonathan Rubens, a partner in the San Francisco-based law firm of Moscone Emblidge & Rubens LLP, is one of the best. Read Jon’s article: Equity Incentive Compensation and Succession Planning Part I: Stock Options and other Structures for the Closely-Held Business

When your ultimate goal is to sell the company, you have to think about how potential buyers will view the plan(s). It is exceedingly difficult to take benefits away from key employees and keep them happy. The buyer will likely have to continue a profit-sharing plan or replace it with some other form of compensation. This just means that your plan has to produce the desired effect – an incremental boost in sales, earnings and net cash flow. You have to get this right!

Al Statz is President and founder of Exit Strategies Group, a leading California-based M&A advisory, valuation and exit planning firm with decades of experience. For further information or to discuss your exit plans, confidentially, contact Al Statz at 707-781-8580.

Selling to Competitor Not Only Option

Many business owners have preconceived ideas about who will buy their business. A lot of owners think their most likely buyer is the competitor down the street. Maybe that was true, once upon a time. But the M&A world has changed dramatically-and continues to evolve.

Today, when we talk about selling your business, we’re really talking about a wide breadth of options. This is not an all or nothing scenario — you can sell all of the business, or just some of it. You can sell it all but stay on as an employee or a consultant. You can sell to a private equity firm and to your kids at the same time. There are many options.

And local competitors are usually not the only buyers at the table. According to the Market Pulse Report sponsored by IBBA and the M&A Source, if your business is valued around $2 million, there’s a 30% chance your buyer will come from more than 100 miles away. And if you have a $5 million business, it’s about 75% likely your buyer will come from outside that radius.

How well do you understand the exit options available in today’s market? Here’s an overview of seven common exit strategies and the pros and cons of each:

  1. Sell 100% of your business to a 3rd party. Pros: You can typically sell for a higher value in a competitive auction-like environment. And you get to move on to your next chapter without any business responsibilities hanging over your head after you transition out post sale. Con: It can be emotionally challenging to let go of something you’ve invested so much of your life in.
  2. Sell the majority of your business/recapitalization. Some owners sell but retain an equity stake in the business. Pros: Allows you to take some chips off the table and diversify your assets. By keeping a share of the business, you get an opportunity to stay involved and help a new owner grow. Later, you could gain even higher returns when the business sells again.Cons: You may struggle with not  being the chief decision-maker anymore.
  3. Sell to your children. Pros: A business transfer to children or other family members is a great way to ensure your culture and legacy remain intact. You get to share a valuable asset with people you love and will probably have ongoing opportunities to stay involved. Cons: Your children may not want the business and may feel pressured to take on something that they have no real interest in. Selling to your kids typically involves a gradual payout, oftentimes over 7-10 years, meaning tension and loss if business performance declines.
  4. Management buyout. Pros: Selling to leadership has similar advantages as selling to family. You share a valuable asset with people you’ve come to know and respect, and you know the business will be in the hands of people you trust. Cons: Here too, the risks are the same. Your management team may struggle to raise enough funds. These deals often require a high level of seller financing, meaning you could be deferring your total compensation for 7-10 years. And if business performance declines, you might not get paid.
  5. Divestiture. Selling off a product line or division can diversify your investments and alleviate some of the pressures of ownership. Pros: You maintain strategic focus on your core business. Cons: You may have to make talent adjustments if employees were working for multiple business units. Plus, your remaining business will have to absorb fixed costs that were previously shared.
  6. Shutdown. Pros: By selling off your assets, you can eliminate debt and put a cash reserve in the bank. This is the simplest option and can be executed immediately, without waiting. Cons: Liquidating your assets may generate far less value than you could have received for an ongoing operation. This option also results losses of both jobs and legacy and residual impacts on the community.
  7. Death or disability. Pros: None. Cons: Leaves your grieving family with significant burdens and responsibilities. Often results in a significant decline in value before the business is sold.

Advance planning can make or break a business transition. Think about how you might want to exit your business someday, then talk to an advisor about how to make that happen. An M&A advisor can provide an accurate business valuation, show you how to increase that value, and help you shape a strategy that best fits your overall goals.

For further information on exit options or to discuss a current business sale, acquisition or valuation need, contact Al Statz, 707-781-8580 or

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