August 21st Seminar: How and When to Exit Your Business for Maximum Value

Are you considering retirement or exiting ownership and wondering if you’re going about it the best way? Will your business sell for maximum value? Please join us for an exclusive, limited-seating breakfast seminar in Roseville on Tuesday August 21, 2018 for business owners contemplating their exit. Learn the ins and outs of successful exit strategies and how to maximize value when you sell. This free, educational seminar is sponsored by Exit Strategies Group and Exchange Bank, a local community bank serving northern California since 1890.

You’ve spent years creating value in your business and you deserve to make a full-value exit on your terms and time frame. You’ve heard about hugely successful deals and horror stories of deals gone wrong. But what separates them? Not just luck.

What is the value of your business today? Is that enough to retire or fund my next endeavor? Is the timing right to maximize value? What are my exit options and how do I select the right option? What should I be doing to prepare for an exit? How far in the future should I plan? What can I do to make my company more attractive to buyers? How can I position it to attract strategic buyers? How do I present my financials properly? How do I avoid financing a sale? How do I get more value for all my years of hard work and ensure a successful sale when I’m ready to sell?

If you’ve asked yourself any of these questions, this seminar is for you. This fast-paced 2-1/2 hour live session will provide practical answers regarding:

1) How companies are valued and what factors influence the price buyers pay
2) How to prepare yourself and your company for a better sale outcome
3) The current state of the market for business sales
4) Pros and cons of different types of buyers for your company
5) Steps and important tools in an M&A sale process, and mistakes to avoid
6) How experienced professionals level the playing field with sophisticated buyers
7) The criteria banks will use to qualify your business for buyer financing
8) How to maximize proceeds and reduce financial risk in a sale

SEMINAR DETAILS

• Date: Tuesday, August 21, 2018
• Time: 7:30am – 10:00am (check-in and continental breakfast start at 7:00am)
• Location: Exchange Bank, 1420 Rocky Ridge Dr. Suite 190, Roseville, CA 95661
• Presenters: Senior advisors from Exit Strategies Group and Exchange Bank
RSVP Required:  CLICK HERE TO REGISTER ONLINE  Or, contact Mike Lyman at 916-476-2611 or mlyman@exitstrategiesgroup.com. We will call you to confirm your reservation. For privacy, we allow only one company per business type. Register early. The seminar is free and seating is limited.

We hope to see you on August 21st. If you cannot attend but would like to be notified of future seminar dates, receive our monthly newsletter, or discuss a business sale or valuation need, please contact Mike Lyman at 916-476-2611 or mlyman@exitstrategiesgroup.com.

About the Sponsors:

Founded in 2002, Exit Strategies Group, Inc. is a full-service Northern California-based merger and acquisition brokerage firm serving $1-50 million revenue company owners.  Exit Strategies also appraises businesses for MBO, buy-sell transactions, ESOP, estate and gift tax, litigation support and other uses.  With 12 seasoned professionals and 4 California offices, Exit Strategies combines the expertise and resources of a large firm with the close senior-level attention of a boutique M&A practice.

Founded in 1890, Exchange Bank consists of 18 branches.  Exchange Bank is an SBA PLP lender with decades of experience.  Dedicated SBA M&A lending professionals committed to outstanding customer service and fast turnaround.

 

Avoid These 6 Common Deal Breakers in the Business Sale Process

Finding a willing buyer for your business is worth celebrating, briefly. In my experience, a majority of owner-negotiated “deals” fall apart before reaching the closing table.  In this post I will discuss several common deal breakers that I’ve seen, mostly involving differing expectations and poor preparation, and how you can avoid them.

But first I want to be sure you know what a Letter of Intent (LOI) is. An LOI is a non-binding agreement between a buyer and seller that memorializes major deal terms and steps to closing. It is entered in to BEFORE due diligence, legal documentation and escrow processes. Done properly, an LOI does a lot to align the expectations of each party, which is critical to consummating a sale. Deals also dissolve when a buyer negotiates terms with certain expectations, and later finds reality to be different.

So, what are these deal breakers?

Ambiguous Deal Terms

There is probably no larger risk to a deal than agreeing to ambiguous or contradictory deal terms. Writing an effective Letter of Intent can be tricky because it is negotiated early in the sale process, prior to disclosure of all pertinent information about the business. Nonetheless, the Letter should at minimum include assumptions used to negotiate deal terms, the deal structure with purchase price, a timeline and conditions to close. Additionally, it may include no-shop and confidentiality provisions and other terms to protect the buyer and seller’s interests. Regardless of the Letter’s content it should be clear, comprehensive and sufficiently detailed to anticipate future surprises.

Poor Record Keeping

The Due Diligence process provides an opportunity for the buyer to confirm that the information previously presented to them about the business is true and correct. A company with poor record keeping practices may have a difficult time providing evidence that they are in compliance with applicable laws, have enforceable contracts with suppliers and customers and accurate financial statements. Without accurate and complete records, buyers are uncertain of what risks they are acquiring and will be reluctant to close the deal.

This is particularly true for financial records. A seller should be prepared to provide prospective buyers with clean and verifiable financials for a minimum of the past three years. A special case is if the owner has claimed personal expenses that he has run through the business and wants to “add-back” as part of establishing the value of the business. These expenses should be well documented to be acceptable to prospective buyers.

Prior to taking the business to market it is well worth conducting a pre-due diligence exercise so that any weaknesses in record keeping are identified and corrected.

Misrepresentation of Facts

Business owners are anxious to sell the potential of their businesses. However their enthusiasm can lead them to put a positive spin on information at the expense of accuracy. The first time a buyer discovers something factually incorrect about an owner’s claims their suspicions will be triggered. If more inaccuracies are revealed, confidence in the deal can be eroded. Even if the exaggerations don’t add up to much, many buyers will walk away for fear there are larger surprises hidden in the shadows.

Unaddressed Business Risks

All businesses confront risks that a buyer will learn about either during due diligence or later. For example, a strong new competitor is entering the market or a key employee is retiring. If a buyer perceives that the seller is either not addressing or has not disclosed these risks they may lose interest in acquiring the business. An owner that confronts these risks head-on will be well regarded by prospective buyers and will improve their chances to close a deal. Even if an owner may not have had the time, people or cash to mitigate the risk, a buyer prospect may be able to bring fresh resources to the table and turn what was a problem into an opportunity.

Business Erosion

A buyer forms expectations about the future performance of the business based on the financial information provided to them. A buyer is generally willing to pay a fair price for the business based on those expectations. However, if between the time that a deal is struck and the transaction closes, the financial performance of the business suffers a buyer might get cold feet or want to renegotiate terms.

The sales process can consume a lot of time and energy. The role of the intermediary is to assure that the process stays on track while the owner remains focused on running the business and maintaining its performance.

Deal Fatigue

A deal that takes too long to complete is at risk of never being completed. Typically, upon signing a Letter of Intent there is a level of excitement about the prospect of a completed deal. The enthusiasm helps to carry the process during the emotionally challenging due diligence phase.

However, enthusiasm often fades if the process doesn’t continue to move forward. When either party is uncertain of the deal or is otherwise distracted they may be slow in responding to requests for information or completion of tasks. Deal fatigue can also occur when one party makes unreasonable demands or aggressively tries to renegotiate the terms of the deal. The most painful negotiators bring up the same points repeatedly. Eventually one party or the other will walk away.

There are effective strategies to combat deal fatigue: 1) screen buyers to assure that they are serious about and capable of completing the deal 2) disclose upfront material information about the business 3) write clear deal terms that don’t lend themselves to renegotiation 3) develop a deal timeline that compels both parties to keep the process moving forward.

The difference between a done deal and a busted deal is often a matter of setting and meeting both buyer and seller expectations. Employing an experienced intermediary to manage the sale process will help you avoid common deal breakers and address the inevitable biases and personal feelings of parties involved in a high stakes transaction.

Adam Wiskind is a Certified Business Intermediary in Exit Strategies Group’s North San Francisco Bay Area office. He can be reached at (707) 781-8744 or awiskind@exitstrategiesgroup.com.

Go on Vacation … An exit strategy for small business owners

Do you plan to sell your business in 1-3 years? 3-5 years? 5-10 years? If so, here’s a simple preparedness test. Take a vacation!

Ask yourself, “What would happen to my business if I left for a 3-week vacation?”  Some scenarios:

  1. Business grinds to a halt.  Since you do most of the work yourself, when you take a vacation sales drop 50% or more.
  2. Outbound selling stops.  Like many business owners, you are the main salesperson. When you’re gone, your staff takes orders and works off existing backlog. Not disastrous, but when you return, your sales funnel is empty and future sales suffer.
  3. Most everything continues.  All company processes continue uninterrupted. You return to full email and voicemail boxes and a stack of work to catch up on. Many issues have already been handled, but there are some that only an owner can resolve.
  4. Wait, you were gone?  A savvy owner has built her business into an engine that keeps on chugging in her absence. People, processes and procedures are in place so that everything is business as usual when she is gone. (I currently have a client whose business continued to grow uninterrupted when he was out for months due to a debilitating injury.)

When buyers look at a business, they think a lot about risk. Price is one thing, but risk can be more important. Which of the above businesses is least risky to a buyer? Obviously #4. And the lower the risk the higher the earnings multiple buyers are willing to pay.

So, test your situation. Take a short vacation. What happens? Based on the results of your test, start fixing the problems. Put the processes and procedures in place so that business continues when you are gone. You may need to grow. You may need to hire. You may need to replace your spouse (who goes on those vacations with you) so that only one key person is out when you are out.

After that, take longer and longer vacations. See what happens and continue to fill the gaps.

At the very least, get your business to scenario 2, ideally 3 or 4.  In a perfect world, by the time you sell your business, you can step into retirement without a hitch. All because you started retiring earlier.

Roy Martinez can be reached at 707-781-8583 or jroymartinez@exitstrategiesgroup.com

Can I Sell My Business (C Corp Stock) Tax Free?

In some cases yes!  Congress has long recognized that small businesses investment is an important driver of the U.S. economy.  Back in 1993, to encourage capital investment in small businesses, they created a rule that eliminates federal income tax on some (later revised to all) of the gain on the sale of certain C Corporation stock issued after August 10, 1993. This article introduces the Qualified Small Business Stock (“QSBS”) tax break for for business owners who are contemplating a future sale.

QSBS Requirements

To qualify for this tax break, your stock has to be deemed Qualified Small Business Stock per Internal Revenue Code Sec. 1202. Here’s a summary of 1202’s requirements:

  1. The business must be a domestic C Corporation
  2. Is a small business, defined as assets of less than $50 million
  3. The stock was issued after 8/10/1993*
  4. The stock was acquired at original issuance
  5. The stock has been held for 5 years or more at the time of sale
  6. The business is NOT engaged in professional services that are dependent on the reputation or skill of one or more employees, financial services, farming, mining or resource extraction, hotels, restaurants or other similar businesses

*Depending on the issue date of the stock, 50%, 75% or 100% of the gain (up to $10 million) may be excluded from federal income tax. The gain exclusion is 50% (subject to a 7% Alternative Minimum Tax (“AMT”) add-back) for stock acquired between August 11, 1993 and February 17, 2009. Stock acquired between February 18, 2009 and September 27, 2010 is eligible for 75% gain exclusion (subject to 7% AMT add-back), and stock acquired after September 27, 2010 receives a 100% exclusion, without an AMT add-back.

Andersen Tax offers a more complete list of QSBS requirements.

The QSBS tax break was made permanent by the PATH Act (Protecting Americans from Tax Hikes Act) of 2015. In case you’re wondering, the recent Tax Cuts and Jobs Act of 2017 did not alter QSBS rules, but the reduction of the federal corporate tax rate to 21% affects the magnitude of the QSBS benefit relative to a sale of assets. It is my understanding that California’s Franchise Tax Board no longer allows an exclusion on the gain of QSBS.

M&A Perspective

When a C corporation sells its assets rather than its stock, Sec. 1202 doesn’t exclude the gains that occur inside the corporation. So, even if you hold QSBS stock, you may not be able to get off tax free.

Acquirers of private businesses generally prefer to buy assets, not stock. For buyers, buying assets reduces their future tax bills, improves their cash flow, and reduces potential legal liabilities. When asked to buy stock and forgo these benefits, buyers usually expect to negotiate a meaningful price discount. However, given the magnitude of the QSBS tax break, especially when eligible for 100% exclusion, a seller of QSBS could give a buyer a significant price discount and still come out well ahead (relative to selling assets).

Fortunately, the reduction in the corporate tax rate to a flat 21% under the Tax Cuts and Jobs Act of 2017 makes a C Corp asset sale more palatable. The corporation will have to pay 21% on the gains, but the shareholder, when they receive the remaining sale proceeds through a liquidating dividend, can use Sec. 1202 to avoid tax on that cash. The overall tax effect is closer to that of an asset sale by an S Corp or LLC.

Do you have QSBS?

The prospect of selling qualified small business stock is compelling; however determining whether your C-Corp stock qualifies as QSBS and claiming this benefit is tricky.  Work with a CPA who is well-versed in QSBS requirements and who can calculate and compare your after tax proceeds under various deal structures. For another slick C-Corp tax maneuver, see my blog on personal goodwill.

If you intend to sell your business some day, please be aware that tax minimization strategies can have a major impact on how much money goes into your pocket. Some strategies can take 5 years to implement, so get your M&A and tax advisor involved early on.

*  *  *

Exit Strategies Group’s M&A advisors are dedicated to staying abreast of tax minimization strategies in business sale, merger and acquisition transactions.  Al Statz is founder and President of Exit Strategies and is based in Sonoma County California.  For further information on this subject or to discuss selling a company, contact Al at alstatz@exitstrategiesgroup.com or 707-781-8580.

May 10th Seminar: How to maximize the value of your business upon exit.

Are you starting to think about retirement, but don’t know how best to transition out of your business? Consider attending a free breakfast seminar hosted by Exit Strategies Group and Exchange Bank on how to maximize the value of your business upon exit.

  1. This 1-1/2 hour seminar will answer the following questions:
  2. What are the value drivers that determine how much my company is worth?
  3. What can I do to prepare my company for sale? What should I not do?
  4. What are the steps in the sales process?
  5. What is the current state of the business sales market?
  6. What criteria does a bank use to qualify my business for a bank loan?
  7. How do I maximize the proceeds from the sale of my business?

The Details

May 10th, 2018 7:30 am to 9:00 am in Santa Rosa. A continental breakfast will be provided.

Space is limited.  For your privacy, only one company per industry will be allowed to attend. To reserve a spot, RSVP to Adam Wiskind, awiskind@exitstrategiesgroup.com or call (707) 781-8744.

About the Sponsors

Exchange Bank was the #1 Community Bank SBA Lender in Sonoma County in 2017, and is a Preferred SBA Lender and a Top Ranked SBA Lender in the San Francisco District/Greater Bay Area.

Exit Strategies Group is a full-service mergers and acquisition brokerage firm serving private companies with $1-50 million in revenue. Exit Strategies also offers expert business valuation services for many reasons including exit planning, buy-sell agreements and litigation opinions.

If you are unable to attend but would like information on maximizing the value of your business, please contact Adam.

How Do I Sell My Personal Goodwill?

The concept of goodwill in a business sale is familiar to most business owners. The more the better, right? Personal goodwill (versus enterprise goodwill) on the other hand is less familiar, and trickier to deal with. If your company is structured as a C-Corporation, you should know about personal goodwill and how its existence could put more money in your pocket when it’s time to sell. Here’s how this works.

The C-Corp Dilemma

Sellers of C-Corps prefer to sell the stock of their companies because it is more tax efficient than selling assets; yet the reality is that most business sales are structured as asset transactions. Why? Because, for buyers, buying assets reduces their tax bill, improves their cash flow, and reduces potential legal liabilities. Astute buyers that are asked to forgo these important benefits (i.e. when they are asked to buy stock) will expect a substantial price discount. Some will just walk away.

With an S-Corp on the other hand, which is a pass-through entity, selling assets (vs. stock) usually isn’t a much of problem from a tax perspective. In some cases, selling assets can even be to a seller’s advantage.

But for C-Corps, selling assets is a big disadvantage. Here’s a simple example. Assume that the combined federal and state C-Corp income tax rate is 29%, and that the combined individual capital gain tax rate is 28%. In an asset sale, for every $1.00 of transaction price (above book value of assets), C-Corp shareholders net only 51¢. Could this happen to you?


Exit Planning Tip:  

If you own a C-Corp and your expected holding period is 5 years or more, talk to your CPA about electing S-Corp status so that you can avoid the possibility of being double taxed when you sell.


Does the Goodwill Go Home at Night?

Goodwill value is that portion of a business purchase price that exceeds net tangible asset value. Personal goodwill (“PGW” for short) differs from enterprise goodwill in that PGW represents the value of an owner’s personal service to that enterprise, and is considered an asset owned by that person, not the business. PGW value is usually the result of an individual’s outstanding reputation and close personal relationships with customers or suppliers, or exceptional rainmaking or technical mastery, and other unique abilities that produce economic benefit for the business.

When PGW is present, the success and value of a business are largely dependent upon one or two individuals, usually the owner(s) in a small business. Without the key individual(s), the business may have little value. In other words, the goodwill goes home at night.

Personal Goodwill Presents a Tax Savings Opportunity

In asset sales of small owner-operated corporations, there can often be two sellers: (a) the business entity, and (b) an individual selling his or her personal goodwill. Selling PGW creates a tax savings opportunity for C-Corp owner-operators.

Using the same tax rates as above, for every $1 of purchase price that can be allocated to personal goodwill, the seller’s tax savings is 21¢. This is because the $1 allocated to PGW does not get taxed at the C-Corp level (is not “double taxed”). Suppose that in a $2 million transaction, $800K can be allocated to personal goodwill. This reallocation puts $168K more in the seller’s pocket.

NOT an Afterthought

Allocating part of the purchase price to personal goodwill has been an arrow in our quiver for the past decade or so; however, it cannot simply be a post-closing purchase price allocation. Rulings in multiple tax court cases demonstrate that PGW is under attack by the IRS.

When a C-Corp seller is considering allocating a portion of a purchase price to personal goodwill, these are some of the norms for supporting the existence of PGW apart from enterprise goodwill, and making it hold up to IRS scrutiny:

  1. There should be a separately negotiated PGW purchase agreement. As brokers, we plan for this with the seller and buyer, before an offer is made, and coordinate with the parties’ attorneys, CPA’s and lenders.
  2. The amount allocated to PGW should be based in economic reality. An independent personal goodwill valuation should be obtained to finalize the amount. This could cost $6-10k.
  3. There should be a significant and separately paid for covenant not to compete with the seller personally.
  4. The buyer should have a written employment/consulting agreement with the seller, for an extended term (say 18-24 months) with reasonable compensation. Otherwise, how could the seller’s PGW be transferred?

Selling any business with high personal goodwill is challenging. When goodwill goes home at night, valuation and marketability are generally reduced. Having a C-Corp structure adds yet another layer of difficulty and expense because of double taxation. Working with an experienced M&A broker, transaction attorney and CPA is extremely helpful when buying or selling this type of business.

Exit Strategies Group’s professionals dedicate themselves to staying abreast of tax strategies and potential pitfalls for private business owners as they plan and carry out business sale, merger and acquisition transactions. Don’t hesitate to call — the earlier we are involved the more impact we can have.

Al Statz is founder and President of Exit Strategies and is based in Sonoma County California. He can be reached at alstatz@exitstrategiesgroup.com or 707-781-8580.

What is my best exit option?

The answer to this question is different for every business owner depending on goals, facts and circumstances. When deciding the right way to exit business ownership, owners should understand and weigh all of their options. This article summarizes eight common exit options and their pros and cons. Some are more common than others. All options should be put on the table when selecting your exit path.

Eight Common Exit Options

  • Option 1.  Transfer to Family
  • Option 2.  Sell to Other Shareholders
  • Option 3.  Sell to Management
  • Option 4.  Sell to Employees using an ESOP
  • Option 5.  Sell to a Third Party
  • Option 6.  Recapitalize
  • Option 7.  Go Public
  • Option 8.  Liquidate

Click here to read the details.

Another option is to not exit ownership and scale back your hours, and either hire and retain capable managers to run the company for you, or milk the company to support your lifestyle while it naturally declines in profitability and value. For some businesses and some owners, this is a perfectly good exit strategy. In the end, you decide what’s best.

However, from my perspective having worked closely with business owners for a long time, the failure of many California business owners to adequately plan their exit often yields tragic results. Misinformation, procrastination and poor planning lead to missed legacy, wealth and retirement goals. Whereas, thoughtful preparation and implementation of an exit plan increases shareholder value and allows owners to exit on their own terms and time frame. The process can be fairly complicated and requires specialized expertise that few owners have.  If you want to exit your business in the next five years, now is the time to plan.

If you’d like help assessing your business and circumstances and creating an exit roadmap, or want help carrying out a sale or other exit option, connect with Exit Strategies’ president Al Statz at 707-781-8580 or email alstatz@exitstrategiesgroup.com.

Protect your Trade Name and Protect your Business Value

From my experience as an M&A Broker, I can tell you that your company’s trade name will be a valuable asset to most prospective buyers of your business.  Your trade name, which identifies your company’s brand and distinguishes its reputation with customers and suppliers, is worth strengthening and protecting if you plan to sell your company some day.

It may surprise you that the name of your business, even if it’s not officially registered, receives some legal protection as a trademark. Protection for unregistered marks is based on common law and the federal Lanham Act. Generally the first documented use of a trade name within a geographic area receives some measure of protection.

But the value of your trade name can be threatened if you don’t safeguard it. When a competitor starts to use a name similar to yours it can cause confusion in the market place and impact your business. For an asset as valuable as the name of your business, it’s wise to proactively protect it.

In California, any company doing business in the state under a fictitious name must register that name in the county where the business operates. Once registered, you as the owner will be able to sign contracts and engage in financial transactions under the fictitious name (also known as Doing Business As or DBA). California follows the first use rule when determining the ownership of a trademark. Fictitious name registration can also be useful to document how long you have been using your business name, in case it’s ever contested. However, fictitious business name registration does not necessarily protect your trade name throughout the state or in other states where you are doing business.

Registering your business’ name as a trademark at the state or federal level is the surest way to shelter it from unauthorized use and provide assurance to potential acquirers that they too would be able to benefit from the goodwill that the name generates.

The Secretary of State maintains the trademark registry for the State of California. Registering your trademark at the state level is generally easier and less expensive than a federal registration. However, there are some real benefits to registering through the United States Patent and Trademark Office. Federal registration is a more robust protection because it:

  • Makes it easier to bring infringement matters to federal courts
  • Increases remedies for trademark infringement
  • Has priority over state registration. If a federally registered trademark was in use before a state registered trademark, the federal registrant can stop the state trademark owner from using the mark. If the state mark was in use first, the mark’s use may be restricted to the state where it was registered.

Possibly the most attractive benefit of registering a trademark at the federal level is that after five years of not being challenged the trademark can become eligible for “incontestability”. Incontestable trademarks are, under normal circumstances, immune from being challenged.

To protect the value of your trade name (and your brand) it is worth considering federal trademark registration, especially if you plan to sell your business someday.
Most businesses also have an online presence. It is equally important (and in some cases far more so) to protect your trade name through marketing channels on the web and social media. At minimum you should acquire through Google or GoDaddy any domain names associated with your business.

Even if you don’t choose to utilize them, many owners will also want to claim their trade name and related monikers in Facebook, Instagram and other social media sites frequented by their clients. As with trademark registration, when you are looking to sell your business a prospective buyer will appreciate that you have diligently protected your business’ trade name and that you can transfer those protections as an asset of the sale.

For more information on protecting and maximizing the value of your business in a sale, email M&A broker Adam Wiskind at awiskind@exitstrategiesgroup.com or call 707-781-8744.

Please note that this article does not constitute legal advice on your situation! For legal advice, please contact an attorney with appropriate experience. If you need a referral to an attorney we would be happy to provide a recommendation.

Don’t Let Key Employees Hijack Your Exit Strategy

In building a successful company, owners usually invest in hiring and developing managers and key contributors that become vital to the company’s effective operations. These people are considered “key employees”. When the time comes for the owner to exit his or her business, these key employees are usually valuable “assets” in the eyes of potential buyers.  Unfortunately, if a business owner has failed to take certain steps, key employees can derail a successful sale or ownership transfer.

Here are some observations and suggestions with respect to key employees that can help enable a successful exit:

  • Ask all employees to sign a multi-year non-compete and non-solicitation agreement. While not always enforceable, they make employees pause and potential buyers more comfortable.
  • Ensure your key employees are sufficiently incentivized to facilitate rather than undermine your exit. For example, grant minority shares, stock options or stock appreciation rights, or offer them stay bonuses so they would profit from a sale.
  • Cross-train your key people to reduce reliance on single individuals. And if your business can afford it, develop a bench of qualified staff beneath key employees so someone can step up should an unexpected vacancy occur.
  • Carefully decide when and how much of your plans to divulge to key employees. Employees often react negatively to the prospect of a company being sold and may start seeking employment elsewhere. Assuming you’re planning to sell to a third party, most owners wait as long as possible to inform key employees of your plans, and, when you do, give them only the information they need. If possible, assure them they will be valued and wanted by the new owners. If the terms of the intended sale don’t allow you to do that, be ready to offer key employees a stay bonus that extends beyond the sale closing.
  • Involve an exit planning advisor who can help you position your company for a successful management transition. He or she can help you build transferable enterprise value, minimize key person risks and discounts, and avoid many common pitfalls along the way.

Click on this link to read a tragic key employee sabotage story:  When Key Employees Stall Your Exit

Could this happen to you? Don’t take chances with your retirement!

For further information on incentivizing key employees or for help with an exit strategy, M&A or business valuation, feel free to contact Jim Leonhard at 916-800-2716 or jhleonhard@exitstrategiesgroup.com.

Is Your Company an Employee Stock Ownership Plan (ESOP) Candidate?

Employee Stock Ownership Plans (ESOPs) have compelling competitive, financial and legacy benefits. For business owners weighing their exit options, a leveraged ESOP may be feasible if the owner, company and employees possess certain attributes:

Owner Attributes

  1. Owns 30% or more of corporate stock
  2. Has a low basis in the stock
  3. Looking to reduce involvement in the company long term (5+ years) or shorter term if successor(s) are in place to take over
  4. Concerned with employee welfare and wants to reward them by transferring an interest in company stock to them
  5. Wants to sell shares on a tax-deferred basis
  6. Willing to sell for fair market value and forgo the possibility of obtaining a price premium through an M&A sale process

Company / Employee Attributes

  1. Mature, non-cyclical business with strong operating performance (revenue and net margins), past and projected
  2. A balance sheet strong enough to absorb ESOP acquisition debt
  3. Adequate cash flow from operations to cover capital spending needs and debt service for ESOP acquisition and other borrowings
  4. Adequate payroll, say $1,000,000 or more per year
  5. 20+ employees
  6. A participatory management culture, and open and effective communications between employees and management
  7. Strong executive leadership and management bench to succeed long term

ESOPs are costly to set up and comply with IRS and DOL regulations. They are not for everyone. ESOP is a complex area that is not well understood by most CFO’s, attorneys, CPAs and M&A advisors. Be sure to work with specialists.

Use these rules of thumb if you are considering transferring ownership of your company through an Employee Stock Ownership Plan. To find help determining the feasibility of an ESOP for your California company, feel free to contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.