M&A Advisor Tip: Be ready when you are ready

When a business owner says it’s time to sell, I ask, “How fast do you want to be out?” The answer I hear most is, “Yesterday.” But sellers underestimate how long the process takes. Once we sign our engagement agreement with the business owner, it takes about 9 to 12 months to sell. After that, expect a six-month to one-year transition.

In an ideal world, you’d be working with an advisor 2-3 years before you put your business on the market. Plan ahead and there are several things you can do to maximize value or better position your company for sale. The more you plan, the more options you will have at the time of your exit.

Figure out what you want and then work the numbers backwards. Start talking with your advisors now, so when you’re ready, you’re ready.

For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.com. Exit Strategies Group is a partner in the Cornerstone International Alliance.

Seller’s Market Sentiment Back to Pre-Covid Levels

What a difference a year makes! Sellers of $1M+ enterprise value businesses have an advantage, with roughly 2/3 of M&A advisors and business brokers calling it a seller’s market for these larger businesses. Confidence is rising across all sectors.

Market Pulse Survey – Quarter 1, 2021 Presented by IBBA & M&A Source

Al Statz is the CEO of Exit Strategies Group. For more information on exit planning or to discuss a potential M&A or business valuation need, contact Al at alstatz@exitstrategiesgroup.com

Put Time into Planning Sale of Business

Over my 19 year M&A advisory career, I have met many business owners who spent more time planning their children’s wedding, their 50th wedding anniversary, or even their fantasy football draft, than they spent planning for the sale of their business.

According to the quarterly Market Pulse Report, we know that when it comes time to sell their business, less than half of all business owners plan ahead. That means that most owners wait for some type of trigger event before they go to market. Those triggers are unplanned and unpleasant in nature, stemming from a family health issue, conflict, or burnout.

According to Christopher Snider, CEO of the Exit Planning Institute, 50% of business owners exit because of one of the “Dismals Ds”: death, divorce, disability, distress, disagreement.

Unfortunately, that often means business performance is on the decline. Or, at the very least, it means the business owner hasn’t made specific changes that will better position their company for a sale or transition.

Selling a well-prepared business is a completely different experience than selling due to a Dismal D trigger event. You have more leverage, and the process is less stressful as you are proactively executing a strategy versus reacting to an event in your life. With planning, you’ll be able to walk away from the closing table feeling satisfied and confident that you made the right choices.

It’s true that you may still be able to sell your business without planning. But the more you plan, the more options you have when you want to exit. When a business owner is well-prepared with an attractive business, they typically receive more offers. That gives you more leverage in the sale negotiations.

The holy grail is when you have prepared the business, you are emotionally ready, and the M&A market is robust. If you can pull that off, it’s typically a win in terms of valuation and deal structure. Plus, the sale process will go faster and smoother, reducing the inevitable emotional turmoil for you.

Not everyone achieves such perfect timing, but your chances are significantly better if the sale is part of a planned exit strategy. Whether you’re 10 months or 10 years away from exiting your business, take time now to truly think about how and when you will leave.

Have a conversation with an M&A advisor. It doesn’t mean you have to sell right away. But you become better educated about your exit options, the importance of timing, and how the process works.

Al Statz is the CEO of Exit Strategies Group. For more information on exit planning or to discuss a potential M&A or business valuation need, contact Al at alstatz@exitstrategiesgroup.com

M&A Advisor Tip: Confidence in Numbers

Most of our clients have CPA Compiled or Reviewed financial statements, and some go a step further with Audited statements. Reviewed financial statements are acceptable, and you can do even better with Audited statements a year or two before you sell.

With validated financial accuracy, you increase buyer confidence, shorten due diligence, and help get your company sold. We’ve had buyers tell us they’ll bid a quarter to a half to a full turn more on price/earnings multiples for a business with Audited financial statements.

As your business grows, a quarter turn can make a big difference in the purchase price that far exceeds the additional cost of an Audit.

For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.com.
Exit Strategies Group is a partner in the Cornerstone International Alliance.

Valuation of Intangible Assets

As a follow-up to our posts “Profit from Intangible Assets in a Business Sale” and “Understanding the Value of Intangible Assets”, this post offers answers to the question, “How do you value intangible assets?”

In one of these posts, we looked at a simple example for valuing the Bayer tradename associated with its sale of aspirin using a simple capitalized earnings approach to a likely royalty stream. While the valuation of intangible assets is the subject of a dedicated course of study and professional certification, I will try to simplify these methodologies and offer other approaches to give you a general idea on how these assets are valued.

Approaches

The same approaches to estimate the value of a business are applied to intangible assets. These are: i) the income approach; ii) the market approach; and ii) the cost approach. Selection of an approach depends on the situation and the characteristics of the intangible asset. The most common approach when valuing intangible assets is the income approach, while the less common applied is the market approach.

The income approach is a general way of determining a value indication of a business, business ownership interest, security, or intangible asset by using one or more methods through which anticipated benefits are converted into value. A method within the income approach is the discounted cash flows (DCF) method, based on the present value of the forecasted cash flows during the expected life of the asset.

The market approach determines a value indication of a business, business ownership interest, security or intangible asset by using one or more methods that compare the subject to similar businesses, business ownership interests, securities or intangible assets that have been sold.

The cost approach estimates a value indication of an individual asset by quantifying the amount of money required to replace the future service capability of that asset. [1]

[1] American Society of Appraisers – ASA Business Valuation Standards.

Illustration

There is one technique that it is especially useful within the income approach. It is called the “with” and “without” method, since the objective is to extract the value of the intangible asset that it is in the company by determining the value of the business with and without the intangible asset. The difference between the two values is the value of the intangible assets.

Let me illustrate this technique with a simple example. Assume that you own a business and the buyer wants you to sign a non-compete agreement that says that you can’t compete within the industry (or geographic area) for three years. You agree. Therefore the value of the business is the value “with” the non-compete. The “without” scenario has you not sign the agreement with the expectation of competing day one after the deal closes. This competition will impact the buyer in many ways from a decline in revenues, the possibility of losing other staff, and the need to go out and replace you with someone else, likely through a recruiter. All of these costs add up and the buyer, in the “without” scenario suggests that the impact to the value of the business is $500,000 in lost profits and increased costs over the three year period they hoped to have you not competing. Therefore, the value of the non-compete intangible asset is the difference in value between the “with” and “without” scenarios. That is exactly how it works when dealing with an intangible asset.

Other applications of this technique are applied to estimate the value of employment agreements, franchise agreements, and key knowhow (formulas and other intellectual property) and processes and technologies developed internally.

In many ways, this approach highlights the overall theory of intangible asset value as a subset of the enterprise value. This concept is true in identifying specific income streams associated with certain intangible assets like technology and customer relationships. In thinking of your business as a portfolio of these tangible and intangible assets, some have low risk (real estate or fixed assets) while others have significant risk (technology, drug development; i.e intangible assets).

Other methodologies using the income approach include the Relief from Royalty (see our Bayer tradename example in our prior post), and the Excess Earnings (see above in terms of carving off income streams to an asset). Understanding these methodologies and the fact that every intangible asset has a “charge” that you need to apply to the other intangible assets, including the estimation of a discount rate that considers additional risk are fundamental when valuing intangibles. These concepts may be the subject of another blog.

Exit Strategies values intangible assets as well as 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 Victor Vazquez, ASA, MRICS at victor@exitstrategiesgroup.com.

Exit Planning Pitfalls for Property Managers [#1 of the series]

Everyone knows the three most important things in real estate are location, location, and location. For property managers, it’s documentation, documentation, and documentation. Experienced property managers are all accustomed to continually documenting the relationship with tenants. Where they sometimes fall short is in maintaining their formal contractual relationship with property owners. That can become a problem when it’s time to transfer control of the business.

As a former corporate lawyer, I feel compelled to give the standard disclaimer about this not being legal advice. Always get advice from your own lawyer. Also, I will offer my evergreen pro tip: free advice is worth exactly what you paid for it. If you don’t believe me, observe how your lawyer’s opinion evolves between an initial, off-the-cuff oral opinion and a letter to document that oral advice.

Trust but Verify

Property management businesses are built on a high degree of trust between the property owner and the manager. Real estate is an expensive enterprise that’s far riskier than most people realize. Funds generated by the property flow through the pocket of the manager. Many spending decisions can get made by the manager without owner pre-approval. Owners need to trust the manager to give them so much control over what happens with the property and the money it generates.

As a result, the property manager will occasionally, over time, allow trust to take the place of a regularly updated, tightly drafted long-term contract with the owner. And sometimes they might not even realize that happened. Strong management contracts are at least as important as tenant documentation. When it’s time to transfer control, management agreements are even more important.

Preserve Business Value

Whether you sell the business or transfer control to family or business partners, at some point the management agreements will become the most important contracts you have. If your documentation isn’t examined with exit planning in mind, what you have the ability to transfer might not be of much value to anyone else. It’s an unpleasant but entirely avoidable situation.

You need to consider how valuable your formal contractual relationships will be to someone who takes over the business from you. This might not be something your lawyer took into account when drafting or revising your management agreement. There might be other aspects of your agreements that deserve scrutiny through the exit planning lens.

The investment you make in having an exit planning specialist examine and discuss the terms of your agreement with you is time well spent.

Summary

The transferable value of your property management business is directly related to the quality and content of your management agreement. Audit the agreements with owners regularly. Don’t let your agreements get stale. Keep your standard owner agreement forms up-to-date, and make sure they are appropriate for how your business might operate in the future.

For a confidential review of your business for exit planning purposes, contact Charles (Chip) Trimmier (DRE #02068566). You can reach him directly by calling 650-447-9385 or emailing ctrimmier@exitstrategiesgroup.com. In addition to being a M&A advisor, Chip is the former owner of a property management company and received a CCRM certification from the California Apartment Association.

 

Ten Commandments of Successful Business Exits

Business owners contemplating a sale may be asking the question: What are the most important principles to achieve a successful business exit? Listed below are ten practical directives to help you make better exit planning decisions and achieve a successful sale.

I. I shall plan ahead.

II. I shall not depend on miracles

III. I shall prepare my business

IV. I shall not wait for perfect timing

V. I shall help buyers buy

VI. I shall have buyers competing to buy

VII. I shall keep my eye on the ball and my lips sealed

VIII. I shall not go it alone

IX. I shall use experienced professionals

X. I shall not let time kill my deal

For expanded explanation of these ten practical directives to help you make better exit planning decisions and achieve a successful sale, click here to download the pdf:

Ten Commandments of a Successful Exit • Exit Strategies Group, Inc.

For more information on the business sale process or exit planning, email Louis Cionci at LCionci@exitstrategiesgroup.com or call him at 707-781-8582

Market Pulse Survey – Why business owners are selling

The following chart shows the reasons business owners decided to sell their businesses in 2020. As in the past, owner retirements led the way.

These are the results from the Market Pulse Survey conducted in the 4th quarter of 2020. Each quarter, the M&A Source and IBBA (International Business Brokers Association), in partnership with Pepperdine University’s Private Capital Markets Project, publish the results of a survey of North American lower middle market M&A advisors and business brokers, called the Market Pulse Survey.

Feel free to contact Al Statz with any questions, at 707-781-8580.

Spring cleaning is good for business

It’s time for spring cleaning, at home and at work. I only wish my clients did a regular Spring cleaning. It would make due diligence and the whole business sale process a lot smoother. Here’s what I mean:

  • Clean financials: I harp on this a lot. Messy numbers and casual accounting practices create headaches when it comes time to sell. Audited financials, on the other hand, can actually increase a buyer’s offer. Hopefully, you have a good relationship with your CPA. If not, due diligence can be painful for all involved. Answers trickle in, responses drag out, and parties on both sides get frustrated.
  • Clean facility: Neatness matters. Buyers will always comment with pleasant surprise when a facility is clean and organized, with a logical place for equipment and inventory. This goes for office teams too. If you have even one manager who hoards paperwork and lets things pile up, buyers will notice.
  • Digital files: We brought on some new team members a while back and quickly realized our digital recordkeeping needed some help. Now our file systems are better labeled and more intuitive, and that’s going to make work more efficient for everyone. One company I know has even planned a digital spring cleaning as a team. They’ll spend an hour or so going over their file systems, agreeing on things that should be deleted, moved, or renamed.
  • Excess equipment: There’s something about machine shop owners—they love going to auctions and getting good deals. But a lot of that equipment goes unused. Then we have a problem when it’s time to sell, and I have to tell them that their $10 million in asset value is only worth $8 million on an operating basis. Take that unused equipment to auction. That revenue, together with what we can get for the business, will get you closer to your financial goals. There no reason to have excess equipment on the books in a sale.

So take some time to clean and organize this Spring. Get your entire team involved. You’ll all be more productive and you’ll be better prepared when it comes time to sell. Buyers will take note and reward these efforts.

Al Statz is President and founder of Exit Strategies Group, a leading California-based M&A advisory firm with decades of experience selling manufacturing, distribution and service companies in the lower middle market. For further information, or to discuss a potential sale or acquisition, confidentially, contact Al Statz at 707-781-8580.

Avoid the Mistake of Selling on Your Own

One of our former clients, Joe, reflecting on the sale of his company said, “only those of us that have toiled at it know what it really takes to succeed in this business.” How true. Until we risk our own capital, spend years building a team, perfecting products and processes, and manage through multiple business cycles, we can’t fully appreciate what it takes to succeed in a given business.

Similarly, its hard for business owners, who usually sell a business once in their life, to understand the value that a professional M&A advisor brings to the table.

Fortunately, owners can take a lesson from private equity groups who always hire an M&A advisor or investment banker to sell a portfolio company, even when they know the likely buyers. Why? They know they do better financially when an independent M&A advisor runs the sale process. And keep in mind, these are sophisticated operators. Most are former investment bankers! They recognize that their time is better spent on things like business performance and sourcing new investments. They also know that using an M&A advisor helps convince limited partners that they have secured the best deal available in the market.

Why then are owners tempted to sell on their own?

I can save money.

Would you ever file your own taxes, draft your own living trust, manage your own 401(k) or sell your own house to save money? Why on earth then would you try to sell a company on your own? Aside from the probability of making costly mistakes, your time will be better spent optimizing business performance than moonlighting as an M&A advisor. Buyers’ obsession with trailing-12-month (TTM) business performance is hard to overstate.

We don’t provide legal or tax advice, but attorney and CPA hours can easily be 2X when you don’t have an M&A advisor leading the sale process. And the likelihood of closing a deal goes down, so you may spend more on professional fees and end up with no deal. Please understand that I have the utmost respect for M&A attorneys and CPA’s and their critical roles in the process!

Most importantly, the impact an M&A advisor has on price and terms usually covers their fee many times over.

I can negotiate a better deal.

Just because a buyer is willing to pay $40 million, doesn’t mean that they will offer $40 million. You usually only see their best offer if they think they are going to lose the deal to another bidder. It is that simple. Owners who represent themselves usually negotiate with one buyer, maybe two. We bring additional serious buyers to the table, which creates competition.

And signing a letter of intent (LOI) for $40 million doesn’t mean your deal will close at that price. M&A advisors spend a great deal of time and effort informing buyers prior to LOI negotiation to avoid price reductions during due diligence. They make sure that LOI terms are clear and detailed so that you know what you are getting. They clarify overly broad and ambiguous language that buyers will interpret in their favor. Skills like this only come with deal making experience.

More likely than not, you will leave money on the table if you go it alone. Recently we sold a company to a buyer who’s final bid was double their initial offer. Many times, we’ve increased purchase prices 20 to 50 percent through competitive bidding.

I will have more control.

When a buyer approaches you directly, they will have you sign their NDA, dictate discovery and meetings, and control the negotiation process (probably ask you to name a price). As their process unfolds, you will feel more out of control than you’ve ever felt in business, and you will be playing right into their hand.

If the time is right for you to sell, better to take a step back and get an M&A advisor in place to evaluate your situation and run a professional sale process. Someone who will answer your questions, help you prepare, gain control of the process, and advocate for you throughout the process. Someone with years of experience, preferably in your industry, who has either been referred, done a good job for someone you know, or at least has good references.

With an M&A advisor on your team, not only will you get a better deal, but you are more likely to get a deal done, and get it done faster and more efficiently.

I will have a better relationship with the buyer.

The fact is, hiring an M&A advisor preserves your relationship with the ultimate buyer. We do the heavy negotiating, so you don’t have to, and we bring objectivity and expertise to your team.

You may be approached by representatives of a company with whom you have a relationship, and so far they’ve been very cordial. But don’t be fooled. Sure, they’re great people from a solid company, but there’s a reason they want to deal directly with you, not with an M&A advisor. They know they can buy at a lower price and on better terms.

Their strategy is to become your friend, keep competition out, keep you underrepresented, and control the process. Often, only after you have been worn down with discovery, due diligence and negotiations and are emotionally exhausted, do you see their final terms. It is also possible that by then TTM performance has declined because you and your team got distracted, and one or more key employees, vendors or customers has gotten wind of the potential sale, further eroding your negotiating position.

Of course, it is important to like and trust who you are selling to. An M&A advisor provides for that and allows you to retain control, maintain confidentiality, see offers from other buyers, and secure the best deal for you, your partners and your family.

Other than the fact that they will likely pay more, buyers like having a sell-side M&A advisor involved because it makes the rest of the process smoother. For example, the advisor will tee up a Confidential Information Memorandum (CIM) and data room that provides the information they need to confidently bid on the company. And rather than create financial models from scratch, they often just build on the models prepared by the advisor.

Do the right thing, get an M&A advisor.

To improve your financial outcome and have a more efficient transaction process, get an M&A advisor involved. The terms of your deal will soon be forgotten by the buyer. For them, time cures overpayment; but you don’t get a second chance to sell your business. You must get it right the first time.

A few years ago, a survey of lower middle market sellers found that the most valuable services provided by M&A advisors (investment bankers) were “managing the M&A process & strategy”, “structuring the transaction”, and “educating and coaching the owner”. Interestingly, the least valuable service was “identifying and finding the buyer”. Here’s a summary of that survey.

Another former seller client, Brian, said something really insightful. He said, “Al, when I hired your firm, I had been CEO of our company for 20 years and was our best salesperson, but thankfully I recognized that selling our company was an entirely different thing.”

Al Statz is President and founder of Exit Strategies Group, a leading California-based M&A advisory firm with decades of experience selling manufacturing, distribution and service companies in the lower middle market. For further information, or to discuss a potential sale or acquisition, confidentially, contact Al Statz at 707-781-8580. This article was inspired by a post by Al’s friend and CIA colleague Mike Mensch an M&A advisor to insurance agencies across the U.S.