Is it the right time to sell your business?

Business owners often ask, “When is the right time to sell my business?” The answer is some version of “A good time to sell is when there is a seller’s market, and the owner and the business are prepared”. Simple enough, but there is a lot to unpack in this response.

Don’t Try to Time the Market

A seller’s market exists when, because of economic conditions, demand for viable businesses is higher than the supply of businesses on the market. There are some universal economic metrics that drive demand for businesses like low interest, tax rates and high corporate cash reserves and earnings rates. When investors are confident about the business environment, they are more likely to pay premiums for their investment targets.

However, local and industry specific factors are often more important to the creation of a seller’s market. A mature industry that begins to consolidate may create an industry-specific seller’s market that doesn’t exist in other industries. The rise of private equity has driven consolidation in many industries. Also, when a regional competitor embarks on an acquisition growth strategy it may create a localized opportunity for owners in the same industry to sell.

It is wise for a business owner to pay close attention to these market signals. However, owners can’t control supply and demand in the marketplace and are generally better off not trying to time the market. In the second quarter of 2020, the market for small businesses came to an abrupt halt, dashing the hopes of many owners that were ready to retire. But by the fourth quarter of the same year the market returned stronger than before. No amount of prognosticating could have anticipated those market changes.

Business Preparation is Key

The preparation of the business is more important to the success of the business sale than the state of the marketplace, and it’s something that the business owner can control. A well-prepared business is more likely to sell in a soft market, than a poorly prepared business in a strong market.

It’s been estimated that 80% of US small business owners don’t have a written transition plan and 50% have no plan at all. A key component of the transition plan is preparing the business for succession. Many books have been written and teams of professionals deployed to help business owners prepare their businesses for sale. Conceptually, the buyer of a business is investing with the confidence that the future earnings and growth potential enjoyed by the seller can be transferred to the buyer. To make the business attractive, the owner must then mitigate the risks in the business and to fortify its opportunities for growth.  The specific measures necessary to prepare the business vary widely.  Some critical areas for consideration are:

-What are the growth prospects of the business? Is there a viable pathway to achieve growth?
-What constitutes the goodwill of the business? Is the goodwill persistent and can it be transferred to a buyer?
-Is the business’ intellectual property sufficiently protected?
-What is the owner’s role in the business? How easily can the owner be replaced?
-Does the remaining management team have the experience and resources necessary to operate the business efficiently?
-Is the business properly staffed for its size and to recognize its growth potential?
-What supplier and customer risks exist? How can they be addressed?
-Do the business assets have deferred maintenance or unfunded capital expenditures?

There are times when a business is clearly not ready to be placed on the market. The business may not be performing because of loss of an important client, vendor, or key employee or because of an acute business issue that the business is facing like a lawsuit or a loss of facility lease. These red flag issues should be resolved by the owner, before trying to sell their business.

The process to identify and address the specific issues faced by a company may take 3-5 years, so it’s important to plan ahead. But the owner of a company that has been properly prepared for sale, may be rewarded with a price premium, while an unprepared business may sell for a discount, or not at all.

The Owner is Motivated, but not Compelled to Sell

Lastly and most importantly, the owner needs to be psychologically ready and financially prepared to exit their business. Most owner’s only own one business in their life and selling it is momentous. For some, the business is tightly intertwined with their personal life and identity. However, there inevitably comes a day when the owner no longer wants to or no longer can be involved in the business.

Owner’s end up selling for a variety of reasons, for some it’s poor health, for some its divorce from their life or business partner. These personal challenges can make the process of selling the business more difficult and may put the owner at a disadvantage during negotiations with a buyer. The best reasons are because the owner realizes that there is something that they would rather be doing with their time or assets like retirement or another venture. Ideally, they are personally motivated, but not compelled to exit.

Even if the owner is determined to sell, they may hesitate to do so if they haven’t determined that the proceeds from the sale are sufficient to support their retirement or pursue other ventures. Professionals can help with this analysis. Business appraisers can help to anticipate the proceeds from selling the business. While a financial planner can help an owner estimate the amount needed to support their retirement.

Ultimately, determining the right time to sell their business requires the owner to plan ahead and prepare the business for the time when market conditions are adequate, and the owner is personally motivated. Exit Strategies Group helps owners to plan for and execute their business exits. If you’d like help in this regard or have any related questions, you can reach Adam Wiskind, Certified Business Intermediary at (707) 781-8744 or awiskind@exitstrategiesgroup.com.

Market Pulse – Quarter 4, 2021

Seller’s Market

Presented by IBBA & M&A Source

A seller’s market occurs when demand exceeds supply. There are more interested, active buyers than there are quality deals on the market. In a seller’s market, buyer’s compete in order to win deals. This typically translates to increased values and more favorable deal terms for the seller.

In Q4 2021, seller market sentiment rebounded, setting a new peak in all but the $5M-$50M sector.

“Business confidence, and competition, is high. It’s amazing how fast we rebounded to record levels,” said Anthony Citrolo, managing partner of The NYBB Group. “This is the strongest upwarad swing we’ve seen in any 12-month period.”


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.

M&A Tip: And the economist says…”Sell!”

Economist Steven Chiavarone presented at CIA partner’s annual State of M&A conference in February. As he pointed out, there have been 11 rate hike cycles since 1970 of three hikes or more. Of those, nine were followed by a recession. (The other two were followed by a stock market crash and the Mexican peso crisis.)

He had about 50 minutes more of economic analysis for us, but his takeaway advice was this: “If you are a seller, sell.”


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

M&A Advisor Tip: Avoid key-man risk

Business owners should ask themselves, if I became incapacitated, could my business run without me? If the answer is no, buyers will be concerned about the business’s ability to operate when you’re gone.

If you can’t get away for at least a week of vacation at a time… if you hold key customer relationships… if you’re solely responsible for an essential business function… buyers will see risk, and rightly so.

To get the most value in a sale, you need to build a business that can operate without you. Better yet, try to eliminate key-man risk throughout the organization so that business operations can continue no matter who gets sick or quits unexpectedly.


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

$1.1 Billion Sets New Record for C.I.A. Members

Cornerstone International Alliance (C.I.A.) members completed 146 business transactions in 2021, representing more than $1.1 billion in combined transaction value.

Cornerstone International Alliance is comprised of 25 industry-leading M&A and investment banking firms in the U.S. and across the globe, focused exclusively on serving businesses in the lower middle market. Exit Strategies Group is a founding member of the Alliance and our CEO Al Statz serves on its board.

“This is an incredible accomplishment and a testament to our member’s expertise, the strength of the organization and the global network it creates,” said Nick Olsen, Managing Director of Cornerstone International Alliance. “The members’ combined experience, resources and collaborative efforts are generating a new level of value for their clients in the lower middle market, and we’re excited about what’s ahead in 2022.”

The Alliance members typically work with business owners whose companies have $500,000 to $10 million in EBITDA or $5 million to $150 million in revenue; the primary services provided include business sales, acquisitions, and valuations.

“We’re always striving to find ways to help one another through networking and the sharing of best practices, which is the goal of the organization,” explains Al Statz, CEO of Exit Strategies Group. “All CIA member firms have a track record of success and high integrity. And together we are actively working to set the standard for M&A excellence in the lower middle market.”

Founded in 2018, C.I.A. members have completed over 3,600 business transactions.

M&A Advisor Tip: Perks & business value

Business owners take a number of perks from their business, from the standards like auto expenses, memberships, and insurance plans to extras like entertainment, vacations, or an additional family member on the books.

Perks are a way for owners to be further compensated for their hard work. However, they can complicate valuing a business. When preparing your business for sale, your advisors will “normalize” your financials to account for these extras.

Be aware of providing products or services for cash – or perks that can’t be adequately tracked and proven in your books – can diminish the value of your business. When planning to sell, talk to your advisor about the tax benefits / value tradeoff of certain perks and consider where it would be better to drive cash to the bottom line.


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

M&A Advisor Tip: Value = Risk vs. Reward

Buyers value your business based on risk (real or perceived) and future cash flow. Consider potential business risks. What could prevent your company from realizing your forecasted earnings? Think talent, customers, suppliers, competition, cash flow.

Strategize ways to reduce risk in each area, e.g. cross training, outsourcing, succession planning, customer diversification, backup suppliers, etc. The more you do to take away potential pain points, the more attractive your business will be.


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

Exit Strategies Group Celebrates 20th Anniversary

I’m proud to announce that 2022 marks a new milestone for Exit Strategies Group – our 20th year in business!

I really appreciate those entrepreneurs and professional advisors who put their faith in us in those early days, and I thank the hundreds who have relied on us since.

We have grown slowly and steadily since 2002 through an interesting range of market conditions. Today we have a team of 14 accomplished professionals committed to providing the very best M&A advice / execution and business valuation services to owners of family owned and closely-held companies. Though still focused on California, we are now completing deals and valuing companies throughout the U.S.

I am happy to say that I still enjoy the same aspects of the business that I did when I started Exit Strategies Group. All of us find it extremely gratifying to help owners achieve successful business sales, mergers, acquisitions, estate plans, buy-sell transactions, management buyouts, buy-ins, stock ownership plans, retirements, corporate restructurings, and other important financial transactions.

Please join us in celebrating 20 successful years of service! And join us as we continue to serve, grow, adapt and have fun in the years ahead.

Sincerely,

Al Statz, Founder & President, Exit Strategies Group, Inc.

When selling your business is your succession plan

How old are your key employees? This is becoming one of the key issues buyers care about when acquiring a business. It’s not a case of agism – buyers would love for your senior employees to stay. It’s about risk and how soon the business’s pivotal people are going to retire.

Right now, 10,000 Baby Boomers turn 65 each day. In 2020, 3.2 million Boomers left the workforce, and this trend is likely to continue. A survey from the New York Federal Reserve suggests nearly half of Americans are likely to retire before 62. The labor force is aging-out, and analysts predict this “demographic drought” is only going to get worse.

When business owners want to retire, they can no longer count on the buyer to find their replacement. If selling the business is your entire exit plan and succession strategy wrapped in one, you could be risking its value. Many buyers want your next wave of leadership tee’d up and ready to go. Because buyers know they may not be able to find those people on their own.

For example, we were recently working with a machine shop in which the business owner and one engineer were the only people handling sales and estimating. The owner was already halfway out the door, and the engineer planned to stay for only about another year.

They do specialized, one-off and low production run jobs, which means estimating is not something that can be readily standardized. Without either of these two people, sales cannot happen. That’s a critical risk, and it’s not something every buyer is willing to take on.

Here’s a bigger example: Wipfli recently conducted a survey of business owners in the construction industry and found that nearly 90% plan to transition ownership in the next 10 years, and half expect to transition in the next five.

This is an industry facing critical talent shortages. According to the National Center for Construction Education & Research, a third of the construction workforce will retire by 2026. That means a shortage on the jobsite and in the C-suite. Those business owners need to start shoring up their succession plans now if they want to retain business value.

There are a large number of family-owned and privately held businesses out there with owners approaching retirement age, and no one ready to take over. The M&A market is booming, but those leadership gaps are keeping some business owners from maximizing their value or even being able to sell their company during these great times.

Now more than ever, leadership and succession planning can protect your business value. However, if you simply don’t have the energy or expertise to add that to your to-do list, there is another option that can help get your business sold at top value: a multi-year transition period.

There are all kinds of ways to structure a deal for owners who intend to stay on – consulting or employment contracts, equity positions, performance incentives. It can be a great way to alleviate the pressures of ownership while taking advantage of growth opportunities using your new partner’s resources.

Buyers want to see a strong management team in place. If you don’t have that, an extended transition gives the buyer assurances that the business can continue to operate as-is for a set period of time. It also gives them a long-lead time to find and cultivate new leadership.

If you’re thinking about exiting in the next five years, talk to your advisors about ramping up your succession plans. As part of those conversations, consult with an M&A advisor and find out all your options for exit – including ways to incentivize key employees with equity positions and how to protect value when you don’t have a successor in place.


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

M&A Advisor Tip: The Case of the Missing Successor

Businesses are facing talent shortages at all levels – at the front lines and in the C-suite. In some industries, like construction, talent issues can complicate exit plans. At some point, there may not be enough leaders left to take over for all the owners who want to exit.

Now more than ever, succession planning can protect your business value. Buyers are looking for companies with a strong management team ready to lead.

If you’re thinking about exiting in the next five years, talk to us about your options – including ways to incentivize key employees and how to protect value when you don’t have a successor in place.


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