M&A Advisor Tip: Value = Risk vs. Reward

/in , , /by Al Statz

Buyers value your business based on risk (real or perceived) and future cash flow. Consider potential business risks. What could prevent your company from realizing your forecasted earnings? Think talent, customers, suppliers, competition, cash flow.

Strategize ways to reduce risk in each area, e.g. cross training, outsourcing, succession planning, customer diversification, backup suppliers, etc. The more you do to take away potential pain points, the more attractive your business will be.

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.

Exit Strategies Group Celebrates 20th Anniversary

/in , /by Al Statz

I’m proud to announce that 2022 marks a new milestone for Exit Strategies Group – our 20th year in business!

I really appreciate those entrepreneurs and professional advisors who put their faith in us in those early days, and I thank the hundreds who have relied on us since.

We have grown slowly and steadily since 2002 through an interesting range of market conditions. Today we have a team of 14 accomplished professionals committed to providing the very best M&A advice / execution and business valuation services to owners of family owned and closely-held companies. Though still focused on California, we are now completing deals and valuing companies throughout the U.S.

I am happy to say that I still enjoy the same aspects of the business that I did when I started Exit Strategies Group. All of us find it extremely gratifying to help owners achieve successful business sales, mergers, acquisitions, estate plans, buy-sell transactions, management buyouts, buy-ins, stock ownership plans, retirements, corporate restructurings, and other important financial transactions.

Please join us in celebrating 20 successful years of service! And join us as we continue to serve, grow, adapt and have fun in the years ahead.

Sincerely,

Al Statz, Founder & President, Exit Strategies Group, Inc.

When selling your business is your succession plan

/in , /by Al Statz

How old are your key employees? This is becoming one of the key issues buyers care about when acquiring a business. It’s not a case of agism – buyers would love for your senior employees to stay. It’s about risk and how soon the business’s pivotal people are going to retire.

Right now, 10,000 Baby Boomers turn 65 each day. In 2020, 3.2 million Boomers left the workforce, and this trend is likely to continue. A survey from the New York Federal Reserve suggests nearly half of Americans are likely to retire before 62. The labor force is aging-out, and analysts predict this “demographic drought” is only going to get worse.

When business owners want to retire, they can no longer count on the buyer to find their replacement. If selling the business is your entire exit plan and succession strategy wrapped in one, you could be risking its value. Many buyers want your next wave of leadership tee’d up and ready to go. Because buyers know they may not be able to find those people on their own.

For example, we were recently working with a machine shop in which the business owner and one engineer were the only people handling sales and estimating. The owner was already halfway out the door, and the engineer planned to stay for only about another year.

They do specialized, one-off and low production run jobs, which means estimating is not something that can be readily standardized. Without either of these two people, sales cannot happen. That’s a critical risk, and it’s not something every buyer is willing to take on.

Here’s a bigger example: Wipfli recently conducted a survey of business owners in the construction industry and found that nearly 90% plan to transition ownership in the next 10 years, and half expect to transition in the next five.

This is an industry facing critical talent shortages. According to the National Center for Construction Education & Research, a third of the construction workforce will retire by 2026. That means a shortage on the jobsite and in the C-suite. Those business owners need to start shoring up their succession plans now if they want to retain business value.

There are a large number of family-owned and privately held businesses out there with owners approaching retirement age, and no one ready to take over. The M&A market is booming, but those leadership gaps are keeping some business owners from maximizing their value or even being able to sell their company during these great times.

Now more than ever, leadership and succession planning can protect your business value. However, if you simply don’t have the energy or expertise to add that to your to-do list, there is another option that can help get your business sold at top value: a multi-year transition period.

There are all kinds of ways to structure a deal for owners who intend to stay on – consulting or employment contracts, equity positions, performance incentives. It can be a great way to alleviate the pressures of ownership while taking advantage of growth opportunities using your new partner’s resources.

Buyers want to see a strong management team in place. If you don’t have that, an extended transition gives the buyer assurances that the business can continue to operate as-is for a set period of time. It also gives them a long-lead time to find and cultivate new leadership.

If you’re thinking about exiting in the next five years, talk to your advisors about ramping up your succession plans. As part of those conversations, consult with an M&A advisor and find out all your options for exit – including ways to incentivize key employees with equity positions and how to protect value when you don’t have a successor in place.

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: The Case of the Missing Successor

/in , /by Al Statz

Businesses are facing talent shortages at all levels – at the front lines and in the C-suite. In some industries, like construction, talent issues can complicate exit plans. At some point, there may not be enough leaders left to take over for all the owners who want to exit.

Now more than ever, succession planning can protect your business value. Buyers are looking for companies with a strong management team ready to lead.

If you’re thinking about exiting in the next five years, talk to us about your options – including ways to incentivize key employees and how to protect value when you don’t have a successor in place.

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.

How 100 minus 90 equals 20

/in , /by Al Statz

Here’s a story of how 100 – 90 = 20. We recently represented some owners who had lots of options when it came to selling their business. They had a high demand manufacturing operation, and buyers wanted in – offering everything from minority or majority investments to full exit options.

At first, the sellers thought they wanted a full exit, all cash at close. If they were going to give up control, they figured it was best to cash out. But as they continued to talk with potential buyers and partners, they began to consider a majority recapitalization.

In a majority recap, the owners sell a majority interest to investors who provide a cash infusion. The sellers maintain a meaningful minority stake in the business and, typically, continue to manage the “recapitalized” operation.

In this transaction, the sellers got 90% of company value as cash at close, rolling over just 10% of their proceeds into the new company. But because of the debt structure on the new entity, that 10% actually translated into a 20% ownership stake.

A typical model for investment buyers like private equity firms or family offices is to put roughly 50% debt on the new company. This allows them to leverage their equity and generate a better return. Through that debt arrangement, the value of the sellers’ rollover essentially doubled to 20%.

Majority recaps are a way for an owner to diversify their net worth while also getting a strong financial partner who will help grow the business. Typically, these transactions are structured so that the seller (aka the new minority owner) holds no personal guarantees on the debt.

So worst case scenario, if the company goes totally south, they’d only lose that 10%. No one could go after the 90% they already took out of the business. It’s like the seller gets to take their chips off the table and play with the “casino’s money”.

Value today

Business valuations are strong today. Market conditions are such that there are a lot of well-funded buyers out there looking for opportunities. We’re in a seller’s market and people are seeing values trending at or above previous benchmarks in their industry.

What that means is that the 90% cash at close our sellers took in this deal was probably worth as much or more than a 100% sale would have been worth a few years ago.

Value tomorrow

As we say in M&A, majority recaps provide the seller with a “second bite of the apple.” That second bite typically occurs four to seven years after the initial recap.

After a period of investment and growth, the majority and minority owners agree to liquidate value (i.e., “re-sell” the business). If performance has been good, the owner’s minority shares could be worth similar and sometimes more than they received in the original transaction, depending on how much equity they roll over.

Gain or give

For some sellers, that extra minority stake in the business is really bonus money. We sometimes see sellers use deals like this as a way to transition ownership to their children or their management team. (Note: Roll over equity could be 10%–49%).

It’s a way to provide people with a meaningful ownership stake and opportunity for growth – without risking their own financial future in the process.

Control issues

When considering a majority recap, understand the role your new partners will want you to play in the business. Sellers think, “I’ll be a minority owner and I won’t have control anymore.” While technically true, it’s not the reality of most relationships.

Financial buyers (i.e., investors) are not looking to come in and take over your business – not if they can help it. These buyers prefer companies with strong management teams who have a vision for the future. They want to support the team that will grow the business – not control them.

The takeaway here is that you have options when selling your business – lots of options. Sell and exit right away, sell and stay, minority stake, majority stake, control, consult, gift, succession plan. It’s all on the table in today’s M&A market.

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: Make contracts assignable

/in , /by Al Statz

One key factor that significantly impacts the value of any contract is whether it’s assignable.

Don’t put yourself in a position of negotiating assignability at time of sale. It eliminates confidentiality and opens the door for customers to highjack your deal. Knowing your company is for sale—and that the sale is dependent on their contract—shrewd customers will ask for lower prices or more favorable terms, knowing you’ll likely agree to anything reasonable. You and your buyer both lose.

Not all industries lend themselves to contracts. Secure them if you can and work with your attorney so you can transition those agreements to a new owner…without asking customer permission first.

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.

 

Entrepreneurs really do think of business as their baby

/in , /by Al Statz

Many business owners say selling their business feels like giving a child up for adoption. As it turns out, that’s not just a metaphor. Research shows entrepreneurs really do think of their business as a kid.

Researchers found parallel brain activity between owners thinking about their business and parents thinking about their kids. In either case, similar areas of the brain lit up, including areas associated with parenting, pleasant sensations, and rewards.

Researchers say the phenomenon provides a deeper understanding of “entrepreneurial bonding.” I say it explains why selling your business can be such an emotional rollercoaster. As owners exit their business, they’re struggling with issues like these:

Letting go

Many business owners feel like their identity is wrapped up in their business. Some can’t believe the business can thrive without them. Others don’t know who they’d be without the business.

Proud Parent Syndrome™

In the same way parents can be blind to their children’s faults, they may struggle to see their company’s weakness. Some owners are unwilling to hear the business is worth less than they think it is.

Sleepless nights

As some point in every M&A negotiation, you’re going to lie awake at night wondering if you’re doing the right thing. Are you getting enough value for your business? Is the buyer a good fit?

Any parent knows what it’s like to lie awake in the middle of the night worrying. When selling, business owners can help avoid sleepless nights by working with an M&A advisor to put their business on the open market without an asking price. When you bring multiple buyers to the table in an auction-like environment, you know you’re getting the best the market can bear.

Legacy over money

When sellers have multiple options to choose from, they sometimes choose a buyer for culture fit over money. They may accept a lower price to work with a buyer who’s going to mesh with their team and keep the business local.

It’s not unlike parents who want to give their kids the best and are willing to sacrifice themselves to make that happen. At the end of the day, when selling your business, it’s never just business. It’s very, very personal.

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.

Buyer’s top focus is employee team

/in , , /by Al Statz

Employees. Finding them. Keeping them. It’s on everyone’s mind right now. And for the company or person who buys your business, it just may be their number one concern.

In the latest IBBA and M&A Source Market Pulse Report, a quarterly survey of M&A advisors, respondents indicated that employees were buyers number one due diligence concern so far this year.

Employee issues, specifically longevity, loyalty and work ethic, ranked ahead of other due diligence priorities like operations, revenue and customer concentration.

We’ve been hearing from sellers for a couple of years now that finding qualified employees is their number one barrier to growth. Many can’t find the talent they need to meet customer demand, much less open new divisions or expand to new territory.

This shortage of good talent is also one contributing factor in the strong M&A market right now. When businesses can’t grow organically, they look to acquisitions as a path to expansion. That’s why buyers are putting increased scrutiny into the quality of a company’s employee team.

As an industry, we’ve been talking for years about how important it is to have a well-developed management team in place before you sell. Buyers want a leadership group – or at least one key manager – who can maintain the business in the owner’s absence.

What’s interesting, is that in the recent Market Pulse Report, management team ranked number five on the buyer due diligence list. A good succession plan and backup support is still incredibly important to the saleability and value of your business, but it seems that the strength of your overall employee team is – at this moment in time – an even bigger priority.

Here are some of the issue areas buyers are looking at:

 

Retention

How long do employees stay with you? What practices do you have in place to keep people loyal and committed to your organization? People stay with their employer for more than salary and benefits. Buyers need to understand why employees are loyal so they can make sure it’s a good fit for their own culture and expectations.

Culture

Do employees have an ownership mindset? Do they pitch in and support each other in times of need? Have they built a self-policing culture of quality and performance? And again, will the factors shaping that culture mesh with the buyer’s workplace?

Learning and development

Millennials are currently the largest percentage of the U.S. workforce, and this employee group, more than any other, cares about training and growth. Workplaces with established learning and development programs, as well as those with an organic culture of internal mentoring and promotions, will win employee loyalty – and points with buyers.

Cross-training

COVID-19 shone a spotlight on the benefits of cross-training. When business conditions are changing rapidly, it’s critical to have the ability to move employees from role to role. What’s more, cross-training benefits your people by broadening their skillsets and enabling more flexible scheduling.

Cross-trained employees are better able to fill in and cover for colleagues who want time off, who need extra help during a busy shift, or those who are sick or quarantined and unable to come into work for an extended period of time.

Niche, high-demand skills

In a tight talent market like this, an acquisition can be a way for a company to gain access to highly skilled talent. In some cases, this can even be the primary reason for an acquisition.

If you have employees with hard-to-find skills and employees who could take on new challenges and help a buyer grow, think about how you can retain them and keep them engaged in the run-up to selling your business. That said, we generally do not advise disclosing your exit plans to employees in advance.

A pending sale can cause anxiety among your employee group. Some will look for a new job rather than risk an uncertain future with a new owner. Talk to your M&A advisors about your key employees, stay bonuses, and what kind of succession planning is right for your situation.

Depending on your exit goals, we may be able to target buyers who will offer small equity positions to key employees. For the right employees – the opportunity to gain a real ownership stake in your business could be a meaningful incentive that keeps them committed to your company.

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: Buy your buddy a beer, not experience

/in , /by Al Statz

I’m all for friendships, but I wouldn’t risk my financial future on one. Unfortunately, many business owners do just that. If you’re like me, many of your professional advisors have become your friends, and you want to honor those relationships.

But M&A is a specialist’s world. If you engage your usual advisor (e.g., attorney) to conduct a business sale and they are not a specialist in M&A transactions, you could be risking everything you worked so hard for. Think of this as brain surgery. You wouldn’t use your general doctor who has done your annual physical for the last 25 years. So why would you not bring in a specialist with the largest financial transaction of your life?

Find someone with the right experience to protect you, your family, and your employees. When the sale is done, you’ll have the resources to throw some new business (and some beers) your friend’s way.

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.

Employee Retention Raises Business Value, Especially Now

/in , /by Al Statz

“To win in the marketplace, you must first win in the workplace.” Those words of Doug Conant, business leader and former CEO of Campbell Soup Company, ring particularly true today.

The talent market was tight before the pandemic, but now we’re in a critical state. Finding employees, and keeping them, is a challenge for everyone. And if you’re selling your business, it just might be the buyer’s number one concern.

In the latest IBBA and M&A Source Market Pulse Report, a quarterly survey of M&A advisors, employee issues topped the list of buyer due diligence concerns. Employees, specifically longevity, loyalty, and work ethic, ranked ahead of other priorities like operations, revenue, and customer concentration.

When businesses don’t have enough talent to grow organically, they may turn to acquisitions instead.

But buyers know that to make that strategy work, they need to acquire a fully staffed, stable employee team and a culture of retention.

Employee issues buyers care about right now:

Turnover: Buyers are looking at turnover and retention trends. If you’re constantly in hiring mode to replace departing talent, buyers will see that as an element of risk.

Culture: People stay in a job for more than salary and benefits. Buyers want to know what it is about your workplace that makes people stay – and will it mesh with their own culture?

Training: A strong learning and development program is one way to keep people loyal and engaged. Buyers see value in companies with a culture of internal mentoring and promotion, particularly if you can show how it’s linked to employee retention.

Cross-coverage. COVID-19 shone a spotlight on the benefits of cross-training. Cross-trained employees are better able to fill in for workers who want time off, who need extra help during a busy shift, or those who are sick or quarantined and unable to come into work.

Leadership potential. If you have employees who could take on new challenges and help a buyer grow, think about how you can retain them and keep them engaged in the run-up to selling your business.

However, we do not recommend disclosing your exit plans to employees. If employees find out your business is for sale, they may look for another job rather than risk an uncertain future with a new owner.

Depending on your goals, we may be able to find a buyer who will offer equity positions to select team members. The chance to get a real ownership stake in your company could be just the incentive your top talent needs to stay.

Talk to your M&A advisor about your key employees, stay bonuses, and what kind of succession planning is right for your situation.

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.