M&A Advisor Tip: Take a vacation to grow your value

Build a strong management team and work on transitioning yourself out of the business. Buyers want to see that the business can run—and run well—without your constant attention.

What would happen if you took the summer off? What would you come back to? If the answer is locked doors, then you’ve got some work to do. If your team might call you and have a meeting once a week, you’re moving in the right direction.

Start with a long weekend and build up to multiple weeks then months off. It will be an exercise your spouse and family will be happy to participate in and will allow your management team to grow.

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

Secure Your Final Exit

A significant concern for the seller of a business who retains a minority position after a sale, is how to sell the remaining shares if things do not work out as expected. This type of sale is commonly referred to as a majority recapitalization.

There are many ways things can go wrong. But since the seller no longer has control over the company, they face the challenge of how to facilitate a final exit.

Imagine that you are the sole owner of a company that you have managed for many years. You decide to sell your company and hire an M&A advisor. After several talks with potential investors, you agree to sell 70% of your company at a fair value to a strategic or financial investor. Since you are no longer in control, you no longer have the final say in strategic and financial decisions. Now assume that you start to strongly disagree with the new majority owner’s decisions regarding the direction of the business. How can you exit the business in an orderly and amicable manner?

The seller (now minority shareholder) and the new investors must plan for these potential outcomes and resolutions in the shareholder’s agreement, at the time that the initial sale is negotiated.

Here is where your M&A advisor and attorney’s experience comes into play. Standard clauses in stockholder’s agreement do not usually contain buy-sell provisions (i.e. a buy-sell agreement) which are intended to ensure a fair and equitable share transfer without a lot of drama, disagreement or delay. Buy-sell provisions are complex and multi-faceted. Two important aspects are to define appropriate trigger events and methods of determining a share price when triggered. The pricing mechanism can be an independent business valuation, a formula, or a fixed-price.

We strongly advocate for buy-sell agreements that rely on an independent valuation for share pricing to overcome the many pitfalls of other pricing approaches. The valuation expert can perform this work on behalf of the buyer and/or seller. Buy-sell agreements can require one, two, or even three valuation experts to determine a final price.

We also strongly advise owners to hire an experienced M&A advisor and transaction attorney to guide them through the entire sale process and advise on the numerous complex issues and decisions that arise during the course of a transaction.

Exit Strategies values control and minority ownership interests in private businesses for buy-sell, tax, financial reporting, strategic purposes. If you’d like help in this regard or have any questions, you can reach Victor Vazquez, ASA, MRICS at victor@exitstrategiesgroup.com.

Keep widening your moat

When buying a business, one of the qualities buyers look for is barriers to entry. The harder it is for someone to get started in your business or take away your customers, the bigger the barrier.

When investing in businesses, Warren Buffet talks a lot about moats. “In business, I look for an economic castle protected by unbreachable moats,” he says. “If you have an economic castle, people are going to come and want to take that castle away from you. You better have a strong moat.”

The idea of a moat refers to how well your company can keep competitors at bay. Buyers see long-term value in wide moats. The better the moat, the greater confidence the buyer has that your cash flows won’t fall to competition over time.

One way to gauge the width of your moat is to identify your unique selling proposition. The aim is to have “three uniques.”

Maybe you make widgets and you’re one of only a few widget makers who can fabricate them out of carbon fiber. And maybe it’s hard to find short-run manufacturing or someone who will provide widget engineering support for a customer’s research and development work.

The goal is to identify a unique combination of valuable services that sets you apart from everyone else in the market. There may be a limited few who can claim two of your “uniques” but the goal is that no one else can claim all three things you offer your clients.

Identifying your three uniques will show the buyer that you really do have something special – something difficult-to-imitate and proprietary to you.

Then, as you evaluate your business from year to year, ask yourself if your three uniques still stand. Has your competitive advantage gotten stronger (or weaker) than the year before? To buyers, that can be a more important indicator of future value than your revenue and profit alone.

Buyers are looking for long-lasting competitive advantages. So even if your business is having record sales, you need to think about how you are widening your competitive moat.

As Buffet said, “We tell our managers we want the moat widened every year. That doesn’t necessarily mean the profit will be more this year than it was last year because it won’t be sometimes. However, if the moat is widened every year, the business will do very well. When we see a moat that’s tenuous in any way – it’s just too risky.”

When it comes to selling your business, any perceived risk lowers the value. Lower risk, like wider moats, bring more buyers to the table.

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


M&A Advisor Tip: Stay Bonuses Add Value

Confidentiality is important in a sale. But what do you do when critical employees must be informed? We recommend stay bonuses. A stay bonus provides an incentive for key employees to cooperate and assist with a sale.

We see stay bonuses ranging from 20% to 100% or more of an employee’s salary. It’s common to allocate around 50% percent at closing and 50% six months or a year later. Buyers want assurances the management team will stick around. A stay bonus significantly increases that chance. It’s a nice carrot for the employee, and it makes your company more saleable because it lowers a buyer’s risk.

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


Can I retire if I sell my business?

Not every business owner wants to retire, but most do, someday. And in my experience as an M&A advisor, when an owner is ready, they want to move quickly. However, for business owners who have most of their net worth tied up in an enterprise that they personally manage, retirement planning is more complicated.

If you are a business owner, obtaining answers to these two simple but powerful questions will bring clarity to your retirement plans.

Question 1: What is the asset value I need to retire?

This question isn’t unique to business owners, but since your business is your most valuable asset, understanding your total net worth is more complicated.

Find out how much your business is worth by having a business valuation expert or M&A advisor do a reasonable amount of analysis on the company to determine the most probable selling price range. It helps to select a valuator who also sells businesses and is not just a theoretician.

You’ll need a CPA or tax attorney to help you understand the taxes on a sale of the business and develop strategies to minimize or defer taxes. Experienced M&A and financial advisors can often introduce tax minimization strategies, but you need a licensed professional to dial this in.

Then you should sit down with a financial advisor to run the numbers on your retirement assets and your desired lifestyle, and estate and philanthropy goals. Investment returns depend on the type of assets you hold and expect to hold in retirement. Income sources may include installment payments, Social Security, deferred compensation payouts, pensions, dividends, annuities, and rental income. Is the income sufficient or will you need to liquidate holdings in retirement? There’s a lot to consider and having the right financial advisor(s) is extremely helpful.

When there is a gap between the current value of your retirement assets and the value you need, owners often look to the business to fill that gap by increasing sales and net margins, and driving out business risk. A seasoned valuator can point to opportunities to improve the value and marketability of the business, and make it more attractive to target acquirors. They can help you understand market conditions, and when the time is right, they can represent you in the sale process and help you obtain the best deal available in the marketplace.

Do this sooner than you think. Best is 5 years before your target retirement date. The sooner you start to plan, the more knowledgeable you become about your situation, your exit options, and the financial and operating metrics that you must achieve to launch the sale process. If you find you have a valuation gap, it can take time to close. Also, you never know what market conditions are going to be, or what investment returns will be in retirement, so best to have a comfortable asset value safety margin.

Question 2: How well will the business perform without me?

Business valuation, whether performed by an independent expert or a potential acquirer, is a function of expected future cash flows and risk. The lower the risk the higher the value. Changing management introduces risk for the next owner. Whenever an owner’s efforts drive business performance, the future of that business without that owner is riskier.

For some business owners the question of how the business will perform without them is an easy to answer. They’ve worked themselves out of a management or key contributor role and the business can reasonably be expected to perform just fine without them. However, most small and medium sized businesses are significantly dependent on the talents, experience and/or relationships of the owner(s).

The way to overcome this is to grow the business, build a strong management team, groom your successor, and have an org chart that makes good sense to prospective buyers. Absent that, it helps to be willing to stay on for a period after the sale (typically 1 to 3 years), at a normalized salary, until you replace yourself. The first option is usually far better from a valuation perspective.

When choosing a valuator, find one with general management experience and years of M&A dealmaking experience to receive an objective assessment of your management organization and get actionable advice in this area. Remember, the goal is to sell and retire, not just sell and keep working!

You may have to revisit these two questions multiple times before initiating a sale process. And your business valuator, if you find the right one, should become a trusted advisor for you as you go forward.

These are just two of many questions to answer when assessing the value, marketability and sale readiness of a business and deciding if market conditions are right for a successful sale. See Exit Strategies Group’s blog for hundreds of articles on exit planning for business owners.

Al Statz is CEO and founder of Exit Strategies Group, Inc., a lower middle market business valuation and M&A advisory firm with offices in California and Portland OR. For further information or to discuss your retirement goals and circumstances with an M&A advisor and valuation expert, privately and confidentially, contact Al at 707-781-8580 or alstatz@exitstrategiesgroup.com.

How three private equity firms valued the same company

As part of our annual State of the Market M&A conference, held virtually this winter, we invited three private equity (PE) firms to review and submit an offer on a hypothetical company. They revealed their offers at the conference, and we held a panel discussion on why they valued the company the way they did.

We keep the invited PE firms confidential. They don’t know who else will be submitting “offers,” so there’s no collusion or comparing notes ahead of time.

Because they’re doing this as a public exercise, there’s a built-in disincentive to bid too low or too high. Value the business too low, and they’ll scare off future acquisition targets. Go too high, and future targets will demand a similar multiple. It’s a great educational experience to see “what is market” and to dig into deal trends, value drivers, and detractors.

This year, we based the deal on a real company that actually sold in 2018, fudging enough details to hide the company’s true identity. We provided a full memorandum and financial info and set parameters so everyone is reviewing the same info and providing the same detail in their Letter of Intent.

In the end, the winning bid came in about 10-20% higher than the company actually sold for. The lowest bids came in around 80% of value.

Why could one PE firm bid higher? As it turns out, they had previous experience in the space. The acquisition target did big capital product sales. In other words, large, mostly one-time sales without much recurring revenue. What this PE firm saw, though, was an opportunity to build new sales through parts, maintenance, and add-on systems.

They’d done something similar before and believed they could do it again. The target had a 100+ year history in the market and had some international sales, and they saw a great foundation to grow on.

Why did the other PE firms bid lower? They didn’t have experience with a similar operation. The nature of one-time sales turned them off. And though the target acquisition had made some international sales, they were to a country that has experienced political disruption—making the foreign market angle less attractive to these buyers.

Lessons learned:

Buyers have money to spend. These three PE firms alone have $500 million in dry powder or equity they need to put to work. With dry capital plus their current investments, they have a combined capital base of $1 billion.

That’s just three firms, and there’s an estimated 4,000 of them in the U.S. A lot of people are putting money into private equity right now because they’re generating stronger returns than traditional investments.

Management team matters. These firms said the quality of a company’s management team was typically their top consideration when evaluating a target. They want to see strong, proven management teams who will stay to guide the company after a sale.

Exit strong. Their second big requirement is to see a company on an upward, or at least stable, trend. They don’t want to see sales and profits dropping or yo-yoing with no rhyme or reason. They put the most weight on the trailing 12 months of performance, meaning an owner’s last year in business can be the most important year in their lifecycle.

Diversify. Another key value driver was customer and supplier concentration. These PE firms said they’re okay as long as the top customer is around 25% or less of sales. Once the top customer starts getting to be 30% or more, they’ll either walk away because the deal has too much risk or they’ll restructure the offer to include earnouts and other performance-based payments.

Second exit is a team decision. PE firms invest in businesses with the intent to sell. Some firms have “patient capital” and can wait 7 to 15 years for that exit. Others manage investments in 5-to-7-year windows. But the firms we spoke to said timing that sale is often driven more by company management than the PE firm itself.

They depend on their management teams to tell them when they think the timing is right, and that becomes a group discussion. It’s generally not a top-down mandate, and that’s an encouraging thing for the remaining shareholders to hear.

Overall, the message was that the number of good quality deals on the market has declined, and PE firms have money they need to spend. That’s a supply and demand equation in the business owner’s favor. Businesses relatively unaffected (or those positively affected) by COVID-19 are going to get some good, hard looks and are likely to pull in strong multiples right now.

Al Statz is President and founder of Exit Strategies Group, a leading California-based M&A advisory firm with decades of experience selling manufacturing, distribution and service companies in the lower middle market. For further information, or to discuss a potential sale or acquisition, confidentially, contact Al Statz at 707-781-8580.

M&A Advisor Tip: Fix Gas Guzzler Before a Sale

Working capital is like gas in a car—it makes your business go. So when buyers acquire a company, they expect some “fuel” to be included in the tank.

But when business owners get successful and comfortable, they get lax about working capital. They establish a habit of fast payment, slow collections, and excess inventory, and they turn their well-oiled machine into a gas guzzler. Go into a sale in this condition and you’re basically giving away money.

Working capital can be a sticking point in negotiations, so the sooner you minimize working capital the better. Plan to make adjustments at least a year prior to sale.

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

M&A Advisor Tip: Be ready when you are ready

When a business owner says it’s time to sell, I ask, “How fast do you want to be out?” The answer I hear most is, “Yesterday.” But sellers underestimate how long the process takes. Once we sign our engagement agreement with the business owner, it takes about 9 to 12 months to sell. After that, expect a six-month to one-year transition.

In an ideal world, you’d be working with an advisor 2-3 years before you put your business on the market. Plan ahead and there are several things you can do to maximize value or better position your company for sale. The more you plan, the more options you will have at the time of your exit.

Figure out what you want and then work the numbers backwards. Start talking with your advisors now, so when you’re ready, you’re ready.

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

Seller’s Market Sentiment Back to Pre-Covid Levels

What a difference a year makes! Sellers of $1M+ enterprise value businesses have an advantage, with roughly 2/3 of M&A advisors and business brokers calling it a seller’s market for these larger businesses. Confidence is rising across all sectors.

Market Pulse Survey – Quarter 1, 2021 Presented by IBBA & M&A Source

Al Statz is the CEO of Exit Strategies Group. For more information on exit planning or to discuss a potential M&A or business valuation need, contact Al at alstatz@exitstrategiesgroup.com

Put Time into Planning Sale of Business

Over my 19 year M&A advisory career, I have met many business owners who spent more time planning their children’s wedding, their 50th wedding anniversary, or even their fantasy football draft, than they spent planning for the sale of their business.

According to the quarterly Market Pulse Report, we know that when it comes time to sell their business, less than half of all business owners plan ahead. That means that most owners wait for some type of trigger event before they go to market. Those triggers are unplanned and unpleasant in nature, stemming from a family health issue, conflict, or burnout.

According to Christopher Snider, CEO of the Exit Planning Institute, 50% of business owners exit because of one of the “Dismals Ds”: death, divorce, disability, distress, disagreement.

Unfortunately, that often means business performance is on the decline. Or, at the very least, it means the business owner hasn’t made specific changes that will better position their company for a sale or transition.

Selling a well-prepared business is a completely different experience than selling due to a Dismal D trigger event. You have more leverage, and the process is less stressful as you are proactively executing a strategy versus reacting to an event in your life. With planning, you’ll be able to walk away from the closing table feeling satisfied and confident that you made the right choices.

It’s true that you may still be able to sell your business without planning. But the more you plan, the more options you have when you want to exit. When a business owner is well-prepared with an attractive business, they typically receive more offers. That gives you more leverage in the sale negotiations.

The holy grail is when you have prepared the business, you are emotionally ready, and the M&A market is robust. If you can pull that off, it’s typically a win in terms of valuation and deal structure. Plus, the sale process will go faster and smoother, reducing the inevitable emotional turmoil for you.

Not everyone achieves such perfect timing, but your chances are significantly better if the sale is part of a planned exit strategy. Whether you’re 10 months or 10 years away from exiting your business, take time now to truly think about how and when you will leave.

Have a conversation with an M&A advisor. It doesn’t mean you have to sell right away. But you become better educated about your exit options, the importance of timing, and how the process works.

Al Statz is the CEO of Exit Strategies Group. For more information on exit planning or to discuss a potential M&A or business valuation need, contact Al at alstatz@exitstrategiesgroup.com