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.

Management Buyouts are a great option, but consider the risks

/in , /by Adam Wiskind

One of the more attractive exit options for you as a business owner is a management buyout (MBO). That is when your management team works together to buy either a total or a majority stake in your company, thus taking control of the company themselves.

There are several benefits to selling your company to your management team:

  • You can reward loyal managers with an opportunity to gain equity in the company. Managers are more likely to maintain the corporate culture and honor your legacy than an unknown buyer.
  • The management team already knows the company intimately, so you’ll have less to disclose; and the managers will be less concerned about due diligence, representations and warranties, and indemnity.
  • The management team has experience in the business, so you’ll have less of an obligation to train them and can transition out of the business faster after the sale.
  • Information about the company can remain more confidential as sensitive information does not have to be divulged to external parties.
  • Though you may not get a strategic price premium for the business, you should at least get fair market value.
  • With thoughtful planning and early preparation, the sale can be carried out on your timeframe.

However, management buyouts also present some unique risks that must be addressed to avoid derailing the deal.

Management Team Composition

Even if they are effective managers not all teams have the collaboration, leadership, financial positions, and motivation to acquire a business. You should make an unbiased assessment of your management team’s abilities and plans prior to committing to sell your business to them. Many of the tips found in this article on assessing buyer prospects apply to MBO teams as well. Also, be aware of managers who are not invited to join the MBO team, as they can disrupt a deal that they feel that they should have participated in.

Team Organization

MBO team members have very often not acquired a business before. They may need professional help to organize themselves to write a business plan, create a shareholder agreement and locate financing. The team will need to consider how their positions and responsibilities will change once they become owners.

Business Performance

The MBO team needs to maintain the profits and prospects of the company while they are navigating the deal process. A deterioration in business performance could scare off financial backers of the transaction and put undue stress on the deal.

Plan for Failure

Clearly there are benefits to selling your business to your management team rather than to an unknown buyer; however, if the deal with management falls apart, the repercussions can be severe. What happens to your business value if one or more of your managers leaves because of a deal gone bad?  Be sure to have contingency plans in case the buyout doesn’t work.

Having the right professional advisors increases the likelihood of a successful buyout. For advice on exit planning or selling a business, contact Adam Wiskind, Advisor at Exit Strategies Group, Inc., at awiskind@exitstrategiesgroup.com. Exit Strategies Group is a partner in the Cornerstone International Alliance.

 

The happiest business owners know what’s next

/in , /by Al Statz

I had the privilege of chatting with Bo Burlingham, former executive editor for Inc. magazine and author of several books, including Finish Big: How Great Entrepreneurs Exit Their Companies on Top.

We talked about one of the key discoveries that led to the book, namely that so many business owners were unhappy after selling their companies. It didn’t really matter how much someone got for their business – some sellers were delighted while others were depressed and miserable.

What made sellers unhappy? Burlingham spent years doing interviews to find that out. And one of the biggest issues he found is that people didn’t have a place to redirect their passion and energy.

For many entrepreneurs, the business becomes their identity. It gives them direction. Without that outlet, some former business owners become unmoored. Suddenly, their phone isn’t ringing as much. No one needs them to make hard decisions anymore, and that can be troubling for some folks.

Burlington describes these owners as “wandering the desert.” They’re searching for that new thing to get excited about, and some of them take years to find it.

You might think a little wandering sounds fine, but retiree beware! There’s actually research that shows early retirement can increase your chance of early death.

A 2019 study conducted by economists at Harvard and State University of New York found that cognitive decline accelerated when people left work. Researchers contributed it to the loss of social engagement and connection that many people find in the workplace.

And yet business owners should not delay selling. Ironically, the best time to sell is when you’re engaged and excited about your business.

Buyers pay for the future cash flow of the business, and that means you’ll get the most value when you go out on the upswing. Buyers feed off your energy, so you want to show them someone who’s really truly passionate about where their company can go.

But the kicker is, you need to be passionate about your next steps, too. It’s important to know what you’re headed for, not just what you’re leaving behind.

When an entrepreneur’s identity is wholly tied up in their business, that can be a red flag. It’s a sign they might hold on to the business too long, past the point where their leadership is the best thing for the company and its value.

That’s why we ask sellers to go through a “bucket list” exercise. Think about what you want to be remembered for. What captures your interest and enthusiasm, besides your business?

Selling your business should be the first step in your best chapter ever. You’ll have the gift of time and money – and the opportunity to do anything with it you want. The best thing for your health, your happiness, and the value of your company is to know the next chapter you want to write.

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: Time Kills All Deals

/in , /by Al Statz

More than purchase price or structure, time is the most likely reason a business sale will fail. Time breeds frustration and fatigue. From irascible attorneys to disorganized brokers and licensing issues, plenty of factors can bog down a deal.

Sooner or later one party or the other gets fed up and rationalizes, “It wasn’t meant to be.”

Your advisor should have a reasonable client load (no more than four or five is ideal) so they can give you the time and energy you deserve. Look for an office with a manager dedicated to closing details. You need someone organized and proactive, looking several weeks and months in advance.

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’s dirty playbook

/in , /by Al Statz

If you work in M&A, you can take a class on how to take advantage of people. It’s true! Buyers can go through mergers and acquisitions training, at some of the most prestigious universities, learning how to pay as little as possible for a family-owned business or privately held company.

M&A transactions are complex, and it’s natural that buyers and sellers will have some competing interests. When both parties come to the table in good faith, with a commitment to finding a workable agreement, these negotiations don’t have to be overly contentious.

But when buyers are out to do their worst, negotiations can devolve into a hostile power play. Worse yet, some sellers don’t know enough to push back. They get steamrolled and taken advantage of by specialists who wake up every morning intent on getting the best possible deal for their investors, at all costs.

These buyers know what they’re doing and they’re willing to play dirty to get what they want. Here are some of the tactics they might use:

Tie you up in exclusivity

Many M&A negotiations include a no-shop clause. This is a period of exclusivity when the seller cannot solicit offers from other parties. The due diligence process is expensive for buyers, so sellers sign these agreements as an act of good faith, giving buyers some security that their investment will be worthwhile.

Typically, a no-shop clause has a near-term expiration date and are only in effect for a couple of months (45—90 days). Buyers with a lot of leverage, and those working with inexperienced sellers trying to represent themselves, will work hard to tie you up in exclusivity for as long as possible.

If they can get away with it, the no-shop clause won’t have any expiration date at all, allowing the buyer to drag their feet indefinitely. Which brings us to the next strategy…

Drag it out

The goal here is to wear the seller down. They’ll request more and more documents. They’ll find “surprise concerns” they need to discuss with their team.

They’ll tell you, “We like your company, but we’re finding some issues we need to look into more. We need you to get us X, Y, Z.” They want to amplify tension, use up your mental energy, and distract you from the real work of running your business.

Re-trading the deal

At the end of the day, the whole play is about getting you to accept a lower value. You will have entered into exclusive negotiations based on certain expectations, but they’ll “uncover” issues to rationalize a price adjustment – an adjustment they were planning on from day one.

Play on your emotions

In the book of dirty plays, this one is a doozy. Buyers will find out key occasions in your life: your spouse’s birthday, your kid’s graduation date, your anniversary. And right before the big day, they’ll find something in due diligence and call an emergency meeting.

They’ll make you think the whole deal is going to blow up if you can’t make that meeting. Again, they’re looking to get you to wave the white flag of surrender.

In every industry, there are good and bad actors. Unfortunately, the bad ones are perfectly willing to engage in psychological warfare.

The less interaction the buyer and seller will have after a sale – i.e., the less future success hinges on the seller’s continued cooperation – the less incentive a buyer has to treat the seller fairly. Unsuspecting sellers can find themselves at the losing end of a winner-take-all kind of game.

It’s like a boxing match. You’re going into the ring at 0-0 and they’re at 40-2. They’ve been playing the game for two decades. I don’t care how strong you are, you’re not going to win that fight. That’s why it’s important to have professional, specialized advisors by your side before you enter the game.

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: Take a vacation to grow your value

/in , /by Al Statz

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

/in , /by Victor Vazquez

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

/in , /by Al Statz

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

/in , /by Al Statz

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.