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

/in , /by Al Statz

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 alstatz@exitstrategiesgroup.com.

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

/in , , /by Al Statz

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 alstatz@exitstrategiesgroup.com.

Use Equity Incentive Plans to Boost Exit Value

/in , /by Al Statz

Closely-held business owners often use equity and equity-like programs to attract and retain key employees and incentivize them 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 strong proponent of utilizing these types of incentive plans as part of an exit strategy. Let’s break this down.

Why profit sharing for key contributors?

  1. Sharing company profits with key employees incentivizes them to work harder and smarter, think more holistically about the business and be more productive.
  2. 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.
  3. The company can track, calculate and compensate employees on the performance of the whole company or a business unit (e.g. regional office) when appropriate.

Often, profit sharing is 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?

  1. Equity plans encourage longer-term thinking and behaviors that increase enterprise value.
  2. Allows employee to defer compensation into the future, assuming there is an exit strategy.
  3. Creates incentive to stay, if the company increases in value.
  4. Allows the company to conserve cash needed for growth (vs immediate compensation).
  5. Rewards employee for betting on a new or unproven company, if applicable.
  6. 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 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

/in /by Exit Strategies

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 alstatz@exitstrategiesgroup.com.

M&A Advisor Tip: Management Cross-Training

/in /by Al Statz

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?

/in /by Exit Strategies

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
/in , /by Exit Strategies

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

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

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

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

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

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

/in , /by Louis Cionci

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?

/in , /by Adam Wiskind

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

/in , /by Exit Strategies

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.