COVID-19 Exit Planning Insight: Keep a Journal

/in , , /by Al Statz

Al StatzThere’s no shortage of information out there right now on how company owners and CEO’s are responding to COVID-19. [By now, leaders have taken steps to survive and fight another day. Most now understand what business will look like for them until restrictions are lifted, and they’re formulating plans to thrive again post-pandemic.] With few companies going to market during this crisis, our insights will focus on exit planning, acquisition opportunities and non-elective sales for a while.

Today we have a simple but powerful suggestion for owners who wish to sell in the next three to four years: Keep a COVID-19 Journal.

Why a COVID-19 Journal

When you sell a business, the buyer’s financial diligence usually focuses on the past three years. Like it or not, what happens during this COVID-19 disruption will generate lots of pointed questions. It’s unavoidable. Your M&A advisor / investment banker will help you tell your unique story, but you’ll need to have the supporting facts and data.

Keeping a COVID-19 journal means tracking and documenting key events, management decisions and business performance data, in real time, during this crisis. Key events and decisions are those that will have a substantial impact on current or future business performance or risk. Decisions should be well documented, including timing, rationale and expected results.

The more data and details you have the better your story can be told. Don’t try to remember it all. Some of this data may not be captured in or stored by your ERP system. For example, you may need to be manually recording weekly RFPs, quoting activity and order backlog.

Examples of Key Events and Decisions:

Financial/Liquidity

  • draw-down on the credit line
  • renegotiated bank covenants or asset-base
  • cancelled all company credit cards
  • sold surplus assets to generate cash
  • other key cash preservation actions taken
  • government subsidies received and how accounted for

Customers

  • change in key customer payment terms or collections
  • major order cancellations
  • downstream verticals shut down and aided by crisis
  • customer loss or gain due to or during the crisis
  • impact on orders, sales and accounts receivable

Marketing & Sales

  • implementation of new remote/online sales strategies
  • implementation of new marketing initiatives
  • RFP inquiries and quoting activity

Suppliers

  • renegotiated payment terms
  • changed payment practices
  • notified that critical components unavailable
  • major order cancellations
  • major supply chain interruptions and changes
  • renegotiated lease or mortgage payments
  • impact on accounts payable

Employees

  • salary reductions, job-sharing, furloughs and layoffs (and severance paid)
  • major staff redeployments
  • organizational restructuring
  • new hires/rehires – impact on payroll

Products & Services

  • diversified (new product line or service) to generate sales
  • decision to stop replenishing certain inventory (to preserve cash)
  • major resource shifts
  • suspension of a product development initiative

Strategic/Operations

  • shifts in target markets, products, services or customers
  • major re-positioning or change in business model
  • permanent operational changes made
  • a new strategic alliance
  • acquisition of a distressed competitor

Action Steps

Start your journal today and cover historical events as best you can. Assign someone to take detailed minutes of weekly or daily executive team meetings and compile KPI’s. Schedule time each day to summarize key events, decisions and performance metrics.

One of my clients finds writing this journal to be “therapeutic, amid the chaos”. And he’s looking forward to telling his unique COVID-19 story to prospective acquirers (and their lenders).

As a result of this surprise economic crisis, acquirers may be adding “Evaluate the potential impact of future unpredictable business disruptions” to their acquisition due diligence check lists. We’ll soon find out.

If you are wondering what information to include in your COVID-19 Journal, Exit Strategies Group’s M&A advisors and valuation experts can provide invaluable insights. Don’t hesitate to call if we can help you prepare your journal, make a strategic acquisition, or prepare for a post-pandemic exit.

Previous COVID-19 M&A Updates:

The Seven Stages of Selling Your Business

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

Seven Steps in the M&A sale process:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

M&A Advisor Tip: Organize Your Financials

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

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

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

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

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

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

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

Selling Your Business to a Family Office

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Business owners looking to sell their business, or attract an investment partner, may want to add family offices to their outreach strategy. These private family firms, established by high net worth families to manage their wealth, can offer unique advantages.

While family offices aren’t new, they have become more active in M&A in the last decade. In the past, family offices may have looked to private equity firms as a resource to grow their wealth, but new trends have many family offices investing directly in private businesses.

For a family office, direct investment can offer several benefits such as higher returns, greater control, and the ability to invest in industries that best fit their family expertise. By the same token, family offices can prove attractive to certain business owners and sellers. Here’s why:

Patient Capital

Private equity firms typically have five to seven years before they need to resell their investments and deliver a return to investors. But family offices aren’t limited to specific timelines and can hold their investments longer.

That buy and hold strategy can be a good fit for business owners looking to take some chips off the table without exiting entirely. A longer investment period gives them more time to grow the business with support from their new, prestigious partners. Sellers concerned about employee job security, community presence, and legacy issues may also prefer a longer time-frame.

Industry Specialists

These families made their fortune in business, and they tend to invest in the industries they know best. For business owners looking to retain a portion of their business, these buyers can provide untold value in terms of connections, influence, and expertise.

Less Controlling

Some family offices have a reputation for being somewhat hands off. They’ll provide resources to help your business grow, while generally taking a more flexible approach to oversight.

Often, family offices aren’t interested in replacing management. This can be good for owners who will retain equity and continue to lead. But it means that sellers looking for a fast exit may not be the right fit (unless you’re leaving a proven leadership team behind).

The takeaway is that family offices can offer a better fit for business owners looking at a variety of exit options. If you’re selling, talk to your advisor about adding these groups to your target buyer list.

Be aware that these groups can be hard to reach on your own. Many family offices operate under the radar. They don’t actively promote themselves or announce they’re searching for acquisitions. What they do is build relationships with advisors known to present quality investment opportunities.

To access these groups, work with an M&A firm with widespread industry connections, a large buyer database, and access to exclusive M&A research tools.

Contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com for further information on what these family offices are looking for and how to best approach them.

The Four P’s of Selling a Business

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Marketers sometimes talk about the four p’s (product, placement, price, promotion) of marketing. Known as the “marketing mix,” the emphasis a company puts in each area can have a direct impact on sales and profits.

And while selling a business is not like selling a product, we can use this idea to think about how certain factors impact a company’s value and sale readiness. The right mix will make your company more desirable to buyers and more likely to attract multiple competitive offers.

People

Human resources plays a critical role in your business’s saleability. As an owner, you need to be replaceable. Ideally, your business should continue to operate and grow even if you aren’t a part of day-to-day operations.

In the lower middle market, you’ll gain extra value by having a management team or key employee group that can run the business with little to no input from you the owner. Buyers want to know they can maintain your success even after you’re going.

When talking up your business to would-be buyers, talk up your people. Say “they did that” or “we did” whenever possible, instead of highlighting your own solo contributions.

It may seem counter intuitive, but the less your company needs you, the more it’s worth. Because if you truly are the only one with all the magic dust, your business is a risky proposition and will be harder to sell.

Performance

Generally, buyers want a business with a stable record of profits and preferably a growth trend. They will typically look at the last three years of financial performance, paying attention to the last 12 months.

A business is generally worth a multiple of its cash flow, specifically EBITDA adjusted for the owner’s salary and benefits. Drive cash to the bottom line, and avoid hiding unnecessary perks inside your financials, particularly in the last few years before a sale.

Look at cash-related issues like working capital, capital expenditures, fair market rent, and fair market payroll. If you’re underpaying yourself in terms of rent, your cash flow might not reflect the new owners cash flow. And if you’re working 80- hour weeks (longer than any paid manager could be expected to work), your current salary might not be an accurate reflection of the necessary replacement salary.

Cash flow is one of the most important numbers buyers will use when valuing your business. Make sure yours is accurate and tells a good story.

Potential

Buyers want a growth story and a vision for the future. They want you to sell them on the company’s growth potential.

You may be proud of what you’ve built, but it doesn’t do any good to tell would-be buyers that the business is doing “the best it possibly can.” That means there’s no where to go but down. Spend some time thinking about growth opportunities and what you might do if you had more energy, more capital, or were willing to take on new risk.

If you don’t have a vision for growth, talk to an advisor. Different buyers bring different assets and advantages to the table.

Price, aka Value

Not every company can go to market without an asking price. But for the ones that can, a no-price strategy gives the seller an advantage.

Ask two professional valuation experts to determine your business value, and you’ll probably get similar numbers. But ask two or more buyers to value your business, and their target price may vary significantly. That’s because your business is worth more or less to different buyers, depending on their motivations, resources, and business synergies. How they value your business will depend, in part, on how badly they want to reach their goal.

For further information on this subject or to discuss a current M&A or business valuation need, contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.

M&A Advisor Tip: Drive Cash to the Bottom Line

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We all like to save money on our taxes. But hiding personal expenses in your tax return can do more harm than good. Most businesses are purchased as a multiple of cash flow (roughly EBITDA less capital expenditure needs, less increases in working capital as the company grows). If buyers and lenders can’t find your personal expenses in the financials or if the adjustments are so severe they border on tax evasion, they’ll be suspicious and possibly scared off.

It’s in your best interest to drive cash to the bottom line in the last 2-3 years before a sale.

Take a hit on taxes for a few years to get a much larger return when the company sells.

For further information on this topic or to discuss a potential business sale, contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.

M&A Advisor Tip: When the Kids Don’t Want the Business

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Many business owners are surprised to find out their kids don’t want to take over.

Maybe the kids never wanted it. Or maybe they changed their mind after working in the business for a while. Either way, some business owners get caught having to make quick decisions about transferring their company to a third party.

Our advice: Talk to an M&A advisor, EVEN IF you plan to sell to your kids.

It can take years of planning to position a business for a successful sale, internal family transfer, or management buyout. Working with an advisor gives you options and a backup plan. We can help you create a transition plan that fits your goals … and your kids’ goals.

For further information on this topic or to discuss your exit options confidentially, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

M&A Advisor Tip: What Does It Feel Like When You Sell?

/in , /by Exit Strategies

“Immense satisfaction tinged with loss.” That’s how one business owner described selling his business.

After putting years of hard work into building a business, many owners have a hard time letting go. Emotions run high, and those emotions can lead to some regrettable decisions.

As advisors, part of our role is to help you make sound choices when it comes to selling your business. We can help you sort through your emotions and your goals to find the right buyer to carry on your legacy, at the right time.

Smart preparation and planning make it easier to find the right fit. It doesn’t matter if you’re not ready to let go yet. Let’s start the conversation today.

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

5 Ways to Make Your Business More Sellable, Right Now

/in , /by Al Statz

It was time. After 30 years running their small 25-employee company, Frank and Martha were ready to retire to the Oregon Coast. To their surprise, after a 12-month listing with a business broker, there were just a few interested parties and no offers. Instead of enjoying retirement, Frank and Martha are now a year older and no closer to retirement. For them, preparing to sell was an after-thought.

Regretfully, this scenario plays out often. Many small companies aren’t in shape to sell. This post offers tips for building a more marketable company.

5 Ways to Make Your Business More Sellable

  1. Clean up financial reporting. Nothing scares buyers away like poor financial statements and back up data.  If you don’t have the resources to do this work in house, find a CPA or fractional CFO to help with this.
  2. Build a team. Often, businesses are too dependent on the owner(s). If buyers are unsure about a company’s ability to prosper under new leadership, they won’t buy. Buyers want to see a capable and committed management team. Stay bonuses can help.
  3. Diversify the customer base. Companies with a few clients that represent a majority of revenue are tough to sell. Contract manufacturers often have this problem. A business may not survive losing its top client, let alone continue to pay down acquisition debt. A good rule of thumb is to keep top clients below 20% of revenue.
  4. Document, systematize and automate. The more confident buyers are that a business will continue to run smoothly under their watch, the more likely they will buy and the more they will pay. Most companies have opportunities in this area.
  5. Quality of earnings. Buyers and lenders discount or shy away from businesses with declining or uneven earnings. They also don’t want to see deferred capital spending or excessive working capital needs that put a drag on future cash flows.

These are some of the most common recommendations we give to company owner clients. Every business has its own unique levers to pull.

I realize these recommendations are easier said than done. Just know that failing to prepare for a sale can result in no deal, or selling at a substantial discount and not having enough money to enjoy retirement or prolonging retirement for several years.  See my recent post on Why Business Owners Should Prepare to Sell Now.

At Exit Strategies we counsel business owners before taking their businesses to market. After an initial assessment, we sit down with owners to create simple plans to improve sale-readiness and value. When our clients are ready, our senior M&A brokers guide them through the sale process. As a result we have one of the highest success rates in our industry.

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Al Statz is the founder and president of Exit Strategies Group, a leading M&A advisory and business valuation firm with offices in California and Portland Oregon. If you are interested in selling your company in the next few years, call Al at 707-781-8580 or Email him.