The Four P’s of Selling a Business

/in , /by Exit Strategies

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

/in , /by Exit Strategies

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

/in , /by Exit Strategies

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.

How Key Employees Factor into a Business Sale

/in , /by Al Statz

One of the negotiations we get involved with as M&A advisors is retention of key employees. Nearly every private business in every industry has a few “indispensable” employees. Before taking a company to market, we work with clients to evaluate key-person dependence and develop strategies for retaining key employees. This article offers help in identifying key employees in your business.

On one hand, having key employees is a selling feature of a business. But, when critical responsibilities and proprietary knowledge are concentrated in a few key individuals, this represents a business risk to buyers who need these people to stay and be happy and productive. Business deals can grind to a halt over key employee retention if owners fail to plan for this part of the sale process.

An owner’s first instinct is often to downplay the importance of key employees, so as not to discourage prospective buyers. But denial is not a strategy. In today’s market you can expect buyers to investigate key employees and insist on their commitment to the company.  Ask these questions to identify your key employees, before going to market. Buyers will!

8 Questions to Help Identify Key Employees

1. Who are our top sales producers?
2. Who shoulders most of the workload around here?
3. Who designed our top-selling products?
4. Who own patents to important products?
5. Who would do the most damage if they left to join a competitor?
6. If we lost them today, who would be most difficult for us to replace?
7. If we lost them today, who would have the most impact on our top line and/or bottom line?
8. When I leave, who will replace me?

With your key people identified you can develop strategies to mitigate the company’s dependence on them and/or retain them, and decide how and when to involve them in the sale process. Your strategy may include stay bonuses.

It’s always better to have a well thought out exit strategy than to leave things to chance. It helps to work with an experienced M&A broker/advisor like Exit Strategies. Since 2002 we’ve helped well over a hundred sellers strategize and successfully navigate tricky ownership transfer issues like key employee retention.

To learn more or to discuss a potential business sale or acquisition need, give Al Statz a call at 707-781-8580.

Secrets to Business Valuation – a Lesson from Curly

/in , /by Al Statz

Remember that scene from the 1991 movie City Slickers where Curly (Jack Palance) shares the secret to life with Mitch (Billy Crystal) shortly before he dies? Curly holds up his index finger and says to Mitch that the secret to life is to figure out his one thing and then stay with it. Channeling Curly today, I will share with you the three things that determine the value of any operating company, with rare exception.

As M&A advisors and valuation experts, we frequently see similar companies of the same size sell for vastly different sums. Let’s look at a simple illustration. Say Company A and Company B both distribute industrial products in similar markets, both do $30 million in revenue and both go to market at the same time. At the end of a rigorous sale process, Company A sells for $25 million and Company B sells for $15 million.

What caused the difference in the price buyers were willing to pay? It usually boils down to three factors: cash flow, growth and risk.

Cash Flow

At the end of the day what matters most to investors is future cash flow. Net cash flow is influenced by net profits, as well as working capital levels and capital investment needs. Owners can use free cash flow to either pay themselves, pay debt providers or reinvest in the business. Looking at our example, even though Companies A and B have the same revenue, Company A operates more efficiently and generates significantly more cash flow for its investors.

Growth

The second factor is growth — top line and bottom line growth. The more cash flows are expected to grow over time, the more cash flow investors will have at their disposal, and the higher they will value a company. Company A has likely proven – based on its historical financial results and investment record – that they are capable of growing at a faster pace than Company B.

Risk

The third thing affecting valuation is the level and types of risk associated with receiving those expected cash flows. Investors decide how certain they are that a company will continue to perform the way it has or achieve its growth projections. The more certain they are, the more they’ll pay, and vice versa. In our example, Company A may have less cash flow volatility, a stronger leadership team, or more market or product diversification, which would reduce perceived risk and increase certainty of performance.

Valuation theory and actual prices paid support the view that similar companies can have very different values. Acquirers and investors, when deciding how much to pay for a company, quickly look past gross revenue and EBITDA to net cash flows, growth and risk. The sooner a company owner understands and embraces this, the happier they’ll be when they decide to sell.

Exit Strategies values private companies for business owners before they make important decisions about sales, mergers acquisitions, recapitalizations, buy-sell agreements, equity incentive plans, and more. If you are business owner and would like to learn more or discuss a potential M&A transaction or valuation need, confidentially, give Al Statz a call at 707-781-8580.

 

Corporate Social Responsibility in Mergers and Acquisitions

/in , , /by Al Statz

Like it or not, and irrespective of our personal political ideologies, corporate social responsibility has gained in popularity in the past decade. In this article, we’ll discuss what Corporate Social Responsibility (CSR) is and what it means for private business owners from an exit strategy perspective.

The Four Pillars of CSR

CSR is often thought of as having four pillars: the community, the environment, the marketplace and the workplace.

  1. Community. This pillar refers to the manner in which a company contributes to the greater community. Contributions can range from simply providing good jobs for people in your local community to donating money for a new playground or public art project.
  2. Environment. People around the globe are becoming more environmentally conscious. Increasingly, consumers want to know that the companies that they patronize have sound environmental practices. These practices range from recycling, to using low-emission high-mileage vehicles, to using biodegradable packaging. The more your company can demonstrate how it is protecting the long-term health of our environment, the more customers will be attracted to your product or service.
  3. Marketplace. Proper corporate social responsibility includes adopting fair treatment policies towards suppliers and vendors, contractors and shareholders. It’s critical to view all stakeholders in the company as partners. The marketplace aspect of CSR means rejecting any exploitative business practices that you may have in favor of fairer and more equitable business practices.
  4. Workplace. With respect to workplace, CSR encourages the implementation of fair and equitable treatment of employees. It makes sense that having a healthy, financially secure and committed workforce with a strong corporate culture and a safe work environment improves the desirability of your company. Profit sharing, medical coverage, retirement and wellness programs are all part of this mix.

Are socially-responsible companies better investments?

In my experience as an M&A advisor, I have to answer yes, all other things being equal. It’s not the most important factor, but today’s acquirers prefer to buy companies with a culture of social responsibility. Owners considering selling or recapitalizing should plan for this. Being able to demonstrate a strong CSR track record should serve to increase buyer and investor demand and therefore selling price.

Our M&A advisors to small businesses have noticed that older (baby boomer) owners in particular are surprised by the importance of good CSR practices to the younger generation of buyers. With the advent of social media, its easier than ever for them to get a sense of your company’s social responsibility.

It may be time to to gather your management team to explore the value that CSR can bring to your organization and assess your CSR performance. Here is an HBS white paper on Why Every Company Needs a CSR Strategy and How to Build It.

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Al Statz is Exit Strategies Group’s founder and CEO. For further information or to discuss a current need, confidentially, Al can be reached at 707-781-8580.

Consider Your Options When Selling a Business with Real Estate

/in , /by Al Statz

Al StatzWe often get asked how owning a facility (versus leasing one) affects the sale of a company, so I dug through our 17 years of business sale transactions involving seller-owned real estate to look for patterns. And the archives didn’t disappoint. I found five common deal scenarios that shed light on this question.

But first, here’s the short answer. Owning your real property is likely to increase the demand, transferability and selling price of your business. Why? When you control the property, you can offer business buyers more options. Now let’s discuss the scenarios …

5 Real Estate Options Available to Business Owners Upon Exit

Option 1:  Lease and hold the real estate

This is a popular choice with seller clients who want a source of retirement income and will soon have more time to manage investments. They are comfortable leasing and managing a property that they know well, and they believe in the tenant (their business!). If they decide to sell the property in the future, they will likely have a ready buyer. (In a few cases the decision to hold was necessitated by poor tax planning by clients and their CPAs.  Don’t let that happen to you.) When a business is location dependent, astute buyers will want a long term lease. Without one, they probably won’t pay as much for the business or get financing for the purchase.  Leasing also reduces a buyer’s cash needs, which expands the pool of potential buyers for your company.

Option 2:  Sell the real estate in a concurrent transaction

Buyers like to own real estate for the same reason our seller clients do—they see it as a good long term investment. Selling is popular with our clients who want to reinvest in a property or real estate partnership with higher returns, less risk or fewer management headaches, often through a 1031 exchange. Or, they just need or want the cash. This scenario is almost always preferred by both parties when a property has specialized improvements (think nursing home, winery, self-storage) or when relocating the business is risky (think preschool, retail). Buyers will generally pay more for enterprise goodwill (a.k.a going concern value) when they can own and control the underlying property. And sellers usually don’t want to hold onto a special use property because if the buyer fails, they could be stuck without a tenant for quite a while.

Option 3: Lease the real estate with an option to purchase

Sometimes a buyer is cash limited or wants to use the cash available to grow the business. Or, maybe the cash flows don’t support bank financing and the seller has immediate cash needs and can’t finance. Or perhaps business conditions are such that the buyer needs time to decide whether to keep the business in that location. In scenarios like these the best option for the real estate may be a lease with an option to purchase. Sellers can enjoy a few years rental income while the buyer builds cash reserves or stabilizes business performance to the point where banks are willing to lend. Lease-options can be structured in many different ways to align the interests of the parties.

Option 4: Lease the property, then sell it separately as a leased investment

Some business buyers don’t want to own real estate. In my experience, most public and larger private corporations and private equity buyers prefer being able to deduct an entire lease payment rather than just the interest portion of a mortgage payment. For our seller clients, who are looking at a short-term hold, getting the lease terms right is critical. Buyers of leased investments are usually sophisticated investors who are easily turned off by non-market terms. We advise sellers to make the new tenant (the business buyer) aware that they plan to sell the property so that the tenant is happy and cooperative when the property goes on the market.

Option 5: Sell the business, then sell the property, unoccupied and unleased

Our seller clients sometimes go this route to maximize total value when the highest and best use of their property is no longer the existing business use. Sometimes their business has simply outgrown the property. In strategic acquisitions and mergers, facilities are often redundant or sub-optimal and therefore not purchased. I hate to say it, but we’ve sold several California manufacturing and distribution businesses to buyers that rented our client’s facility for a few months until they could transfer operations out of state.  The beauty of this option for sellers is that they will now be able to expose the real property to a broader pool of potential buyers, including owner-users and re-developers.

Exit Strategies only sells real estate when packaged with a business. After selling businesses under options 4 and 5, we refer clients to commercial brokers with better access to private and institutional net-lease investors or owner-occupied buyers.

Other Common Questions

  • Owners of small businesses often ask, should I sell the property first?  The answer is almost always no. As a rule, commercial properties are more marketable than small businesses. For most commercial and industrial properties this holds true with or without a tenant.
  • When maximizing value is a seller’s primary objective, their first question should be, is the total value of my business and property higher if I sell them as a package or sell them separately? Every situation has to be evaluated on its own merits.

I’ll finish with a quick story …

A number of years ago we sold a B2B distribution business in a volatile low-margin industry. Our client’s preferred option was to hold and lease the property for retirement income, but he was also open to  selling and reinvesting the proceeds in another property. I should mention that the current use of the property was the highest and best use. After several months on the market we had only one strong offer for the company, and that buyer insisted on purchasing the real estate as well. We negotiated a package deal that maximized total value to our seller client. During the negotiation we connected our client with a commercial broker who specialized in leased investments. After closing, our client happily 1031 exchanged into a commercial property with national tenants and professional management. He was also able to diversify his real estate holdings outside of California. The moral is, it is good to be able to offer options.

If you own a business with real estate, plan ahead and involve an M&A advisor/broker for best results. And be flexible. The deal you envision may not be the best deal the market has to offer.

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Exit Strategies Group, Inc. is an M&A brokerage and business valuation services firm serving closely-held businesses from offices in California and Portland Oregon.  Al Statz can be reached at 707-781-8580 or alstatz@exitstrategiesgroup.com.

Why Business Owners Should Prepare to Sell Now

/in , /by Al Statz

 

Al StatzReason 1:  Concentration of Wealth

A typical business owner has 70-80% of their wealth tied up in their business. That’s a lot of eggs to carry in one basket. On top of that, private businesses are less liquid and more risky than stocks, bonds and real estate investments.

Fortunately owners can control the value and sell-ability of their businesses. Now, whether they exercise that control is another matter!

Reason 2: Many Sales Are Unplanned

Over the years, studies have indicated that as many as 50% of all business sales are involuntary.  The cause may be personal in nature (death, disability, divorce, etc.), or related to a change in business or market conditions. If that 50% statistic is close to accurate, owners should make their businesses ready to sell and attractive to investors at all times. Definitely as they approach retirement age.

So, how sale-ready are most businesses?

In the Q1 2019 Market Pulse Survey of U.S. business brokers and M&A advisors by the Pepperdine Capital Markets Project of Pepperdine University, the consensus was that 70% of businesses are unsellable. These same professional intermediaries also estimated that 48% of businesses on the market won’t sell.  Now that’s a sobering statistic.

The quarterly Market Pulse Survey looks at businesses in the range of $500,000 to $50 million in enterprise value. Generally, larger businesses are more sell-able. This size effect has always been there, but in my experience it has become even more pronounced since the 2009-2010 recession.

Are business owners planning ahead?

The intermediaries surveyed by Pepperdine in Q2 2019 indicated that most business owners conducted no formal planning prior to engaging a broker/advisor. Lower middle market business owners ($5-50 million enterprise value) were more proactive, though still roughly 40% failed to plan more than a year in advance.

Why owners may be resisting exit preparation.

From my perspective, some of the more common reasons business owners put off exit preparation are their independent personalities, blindspots caused by a lack of experience and objectivity, fear of looking foolish, skepticism (too many impostors and bad actors out there), the formality of the processes that have been proposed to them, and just being too busy working in their businesses.

The best way to maximize enterprise value and increase the likelihood of a successful ownership transition is to start preparing early. Don’t leave it to chance. For more information see my recent blog titled, Failing to Plan Your Exit is Planning to Fail. Or visit this page of our website for an overview of the exit planning process.

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Al Statz is founder and president of Exit Strategies Group, a leading M&A advisory and business valuation firm with offices in California and Portland Oregon. Al can be reached at 707-781-8580 or alstatz@exitstrategiesgroup.com. Feel free to request a copy of the latest Market Pulse Survey.