The Four P’s of Selling a Business

March 4, 2020/in Exit Planning, Sell a Business /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

March 4, 2020/in Exit Planning, Sell a Business /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

February 19, 2020/in Exit Planning, Sell a Business /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?

February 1, 2020/in Exit Planning, Sell a Business /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.

Building Value Means Building Leaders

February 1, 2020/in Business Strategy, Sell a Business /by Exit Strategies

It’s the New Year, that time when many business owners make a fresh resolve to develop their business. For some, that means updating equipment and driving sales. But others will focus on something more personal and possibly more pivotal: developing their leaders.

GF Data shows that a solid management team will increase the valuation multiple. For smaller businesses, the quality of your management team can be an even bigger factor, influencing whether your business sells at all.

Here are five ways to develop your managers and bring out their best:

1. Coach, Don’t Rescue

A lot of leaders are “rescuers.” We care about our people and we want to see them succeed. But instead of onboarding correctly or coaching, we take over for them every time they have a problem.

Try coaching your team member to a solution. Help them find the courage to voice their own suggestions.

Questions like, “What do you think you should do?” often yield “I don’t know” answers. But a simple reframing can take the pressure off and encourage people to share their own thinking. If you’re trying to get someone past “I don’t know,” try one of these approaches:

“Suppose you did know. What’s a possible answer?”
“What if you knew you couldn’t fail?”
“Who’s the smartest person you know? What do you think they would do?”
Getting people to reframe the answer from someone else’s perspective can take away some of the discomfort we all feel about being wrong. What’s more, it helps them stretch and develop their own capabilities and confidence.

2. Set a No-Penalty Zone

Create an environment where it’s okay for people to make mistakes. Begin by setting boundaries (wide boundaries, preferably) around decisions and actions they can take on their own. As long as people are acting ethically and in adherence to your corporate values, support the choices they make.

You can always coach people and explain why you would have made a different decision, but don’t impose any negative consequences. It’s better to have a proactive team than people who sit in a state of paralysis waiting for you to sign off on a course of action.

3. Assess Your Team

Behavioral assessments can go a long way toward employee retention and development. From MBTI to DiSC, Strengths Finder, and others, tools like these can help your team identify their unique gifts and areas for improvement.

Invest in a business psychologist or other professional facilitator to take your team through the assessment. With the right guidance, the results can help improve team dynamics and equip you to be a better coach to each individual on your team.

4. Give them a Voice

Give people a place at the table. For a long time, I made the vast majority of my business decisions based on what I thought was best for the company. But over the last few years, I’ve gotten better at listening to my internal team.

My management team has helped me challenge my assumptions, develop new initiatives, and most critically for me, stay the course on a promising business plan instead of following my next big idea.

5. Get Out

We’re working with a husband and wife team who haven’t taken a vacation in five years. That’s not great on many levels. I don’t know if they haven’t developed their people or if the issue is more about an emotional, personal need for control.

If that sounds familiar, start slow. Take a long weekend away. Leave early on Fridays. Build up your ability to step away. As you leave your team in charge, their confidence will grow, and so will yours.

In terms of value, the ideal goal is to work yourself out of the business. Get yourself to a place where you can take extended vacations. Transition your role from working IN the business to working ON the business.

Buyers want businesses with transferable value. That means you need a leadership team that can sustain operations and, better yet, drive growth, without your direct involvement. If the business can’t survive without you, its value declines.

At the end of the day, building out your management team is a critical investment in your business. If it makes your life easier in the process (and it will), that’s just a nice side bonus.

For further information on what buyers look for in a management team, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

M&A Advisor Tip: Earnouts Break Valuation Deadlocks

January 17, 2020/in Sell a Business /by Exit Strategies

Earnouts are often used to bridge a valuation gap between a buyer and a seller. It’s a compromise, of sorts, to break a purchase-price deadlock when the seller wants more than the buyer is willing (or able) to pay.

In an earnout, a portion of the purchase price is paid out later, based on the company’s financial performance over time. Earnouts typically last from 1 to 3 years, subject to negotiation.

Some earnouts include acceleration provisions, stipulating that payments are due immediately if certain events occur e.g.,:

Buyer breach of post-closing covenants
Termination of key employees
Sale of the company or a substantial reduction in assets

These provisions are designed to protect the seller from changes that would harm the company/buyer’s ability to meet their earnout targets.

For further information on earnouts and other common M&A deal provisions, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

‘No Shop’ Protects Buyer Investment in M&A

January 17, 2020/in Acquire a Business, Sell a Business /by Exit Strategies

A no shop provision is an important part of M&A transactions. Also known as an exclusivity clause, a no shop clause prohibits the seller from sharing information or negotiating with other would-be buyers for a specified time frame.

Prior to this, the seller is negotiating with several buyers. The goal is to entertain multiple offers and figure out which buyer will ultimately provide the best deal for the seller.

Once the seller has identified their preferred buyer, both parties sign a letter of intent (LOI). At this point the buyer will begin more comprehensive due diligence to validate their assumptions and make sure the business is everything they believed it to be.

Due diligence is an intense process that could include FBI background checks, equipment appraisals, environmental studies, and more. Some buyer groups conduct industry studies or hire a consultant to call the business’s customers under the guise of a confidential customer satisfaction survey.

Financial due diligence will be a massive focus, of course. Securing a quality of earnings report could cost anywhere from $15,000 to $150,000, depending on the size and complexity of the target acquisition.

Then there’s the necessary legal fees. The buyer’s attorney will draft the asset or stock purchase agreement. This takes the framework of the LOI (typically five to seven pages) and puts it into comprehensive legalese (approximately 50 to 70 pages).

I’ve seen attorney fees as low as $15,000 for a small, routine deal and as high as $250,000 for a lower middle market acquisition (average range $30,000 to $50,000). Private equity firms, which make up a major buyer category, are not shy about spending fees to make sure they have the necessary protections in an acquisition.

At the end of the day, it might not be uncommon for the buyer to spend $100,000 to $500,000 in total transaction costs. That’s why most buyer groups are adamant that they get a no shop provision for 30 to 90 days.

That exclusivity period is the protection they have, ensuring that if they’re going to spend time and money going down this path, the seller is not going to negotiate the deal out from under them and sell to another group.

From a seller’s standpoint, a no shop period can help limit buyer’s remorse or post-deal litigation. If multiple buyers are trying to be the first to the closing table, buyers might skimp on due diligence. Rushing due diligence can lead to unexpected discoveries after the deal is closed, and that can lead to conflict and litigation.

Conversely, long no shop periods are not in the seller’s best interest as there is always a risk that a deal will fall through in due diligence. A shorter no shop period gives sellers a better chance of recapturing interest from a competing buyer if the transaction is terminated.

For further information on exclusivity and other common deal provisions, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

How Key Employees Factor into a Business Sale

January 15, 2020/in Exit Planning, Sell a Business /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.

Corporate Social Responsibility in Mergers and Acquisitions

January 2, 2020/in Business Strategy, Exit Planning, Sell a Business /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.

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.
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.
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.
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

December 18, 2019/in Exit Planning, Sell a Business /by Al Statz

Al Statz We 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.

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.