Will appear on Seller pages – RECENT SELLER ARTICLES

Don’t Let Key Employees Hijack Your Exit Strategy

/in , /by Jim Leonhard

In building a successful company, owners usually invest in hiring and developing managers and key contributors that become vital to the company’s effective operations. These people are considered “key employees”. When the time comes for the owner to exit his or her business, these key employees are usually valuable “assets” in the eyes of potential buyers.  Unfortunately, if a business owner has failed to take certain steps, key employees can derail a successful sale or ownership transfer.

Here are some observations and suggestions with respect to key employees that can help enable a successful exit:

  • Ask all employees to sign a multi-year non-compete and non-solicitation agreement. While not always enforceable, they make employees pause and potential buyers more comfortable.
  • Ensure your key employees are sufficiently incentivized to facilitate rather than undermine your exit. For example, grant minority shares, stock options or stock appreciation rights, or offer them stay bonuses so they would profit from a sale.
  • Cross-train your key people to reduce reliance on single individuals. And if your business can afford it, develop a bench of qualified staff beneath key employees so someone can step up should an unexpected vacancy occur.
  • Carefully decide when and how much of your plans to divulge to key employees. Employees often react negatively to the prospect of a company being sold and may start seeking employment elsewhere. Assuming you’re planning to sell to a third party, most owners wait as long as possible to inform key employees of your plans, and, when you do, give them only the information they need. If possible, assure them they will be valued and wanted by the new owners. If the terms of the intended sale don’t allow you to do that, be ready to offer key employees a stay bonus that extends beyond the sale closing.
  • Involve an exit planning advisor who can help you position your company for a successful management transition. He or she can help you build transferable enterprise value, minimize key person risks and discounts, and avoid many common pitfalls along the way.

Click on this link to read a tragic key employee sabotage story:  When Key Employees Stall Your Exit

Could this happen to you? Don’t take chances with your retirement!

For further information on incentivizing key employees or for help with an exit strategy, M&A or business valuation, feel free to contact Jim Leonhard at 916-800-2716 or jhleonhard@exitstrategiesgroup.com.

Is Your Company an Employee Stock Ownership Plan (ESOP) Candidate?

/in , /by Al Statz

Employee Stock Ownership Plans (ESOPs) have compelling competitive, financial and legacy benefits. For business owners weighing their exit options, a leveraged ESOP may be feasible if the owner, company and employees possess certain attributes:

Owner Attributes

  1. Owns 30% or more of corporate stock
  2. Has a low basis in the stock
  3. Looking to reduce involvement in the company long term (5+ years) or shorter term if successor(s) are in place to take over
  4. Concerned with employee welfare and wants to reward them by transferring an interest in company stock to them
  5. Wants to sell shares on a tax-deferred basis
  6. Willing to sell for fair market value and forgo the possibility of obtaining a price premium through an M&A sale process

Company / Employee Attributes

  1. Mature, non-cyclical business with strong operating performance (revenue and net margins), past and projected
  2. A balance sheet strong enough to absorb ESOP acquisition debt
  3. Adequate cash flow from operations to cover capital spending needs and debt service for ESOP acquisition and other borrowings
  4. Adequate payroll, say $1,000,000 or more per year
  5. 20+ employees
  6. A participatory management culture, and open and effective communications between employees and management
  7. Strong executive leadership and management bench to succeed long term

ESOPs are costly to set up and comply with IRS and DOL regulations. They are not for everyone. ESOP is a complex area that is not well understood by most CFO’s, attorneys, CPAs and M&A advisors. Be sure to work with specialists.

Use these rules of thumb if you are considering transferring ownership of your company through an Employee Stock Ownership Plan. To find help determining the feasibility of an ESOP for your California company, feel free to contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

Current Market Multiples for Main Street Business Sales

/in , , /by Louis Cionci

Each quarter, The International Business Brokers Association (IBBA) and M&A Source together with Pepperdine Private Capital Markets Project and the Graziadio School of Business and Management at Pepperdine University publish a quarterly national survey of business brokers and M&A advisors called the Market Pulse Survey. Price multiples and other key metrics in the Main Street Market section of the Q3 2017 survey are presented below.

Main Street businesses are defined as those with enterprise values up to $2.0 million.

 

MEDIAN MULTIPLES PAID FOR MAIN STREET BUSINESSES

 

 

 

 

SDE is Sellers Discretionary Earnings, which is defined as earnings before owner/GM compensation (one full-time working owner), depreciation and amortization, non-operating income & expenses, nonrecurring income & expenses, interest income & expenses, and taxes.

 

PORTION OF SALE PRICE RECEIVED AS CASH AT CLOSE

 

 

 

 

WHY SELLERS WENT TO MARKET

 

 

 

WHAT WAS MOTIVATING BUYERS

Help! I Need a Broker to Sell My Company

/in /by Exit Strategies

I was recently talking with a business owner who is considering selling his California company. He had found my contact information online, and while he was interested in getting started, he really didn’t know how to evaluate a business broker’s credentials for a sale engagement. Sellers are often unsure what questions to ask. For this reason, I like to spend 15 minutes to share my relevant M&A experience, my career history, our firm’s processes and resources, and our capacity to get a deal done for the prospective client. In this blog post, I’ll focus on pertinent questions that a seller should ask when interviewing a prospective business broker or M&A intermediary.

Many sellers base their selection strictly on how well they like the broker, or on “gut feel.” While it’s vital that a seller and business broker get along well together, a seller should consider this “Likeability Quotient” along with more objective criteria.

Factors to consider when selecting a business broker:

  1. How long has the broker been selling businesses?
  2. How many transactions has the broker completed?
  3. What is the broker’s closing success rate?
  4. Does the broker’s firm have exceptional valuation expertise?
  5. How extensive is the offering memorandum that the broker prepares?
  6. Does the broker have specific domain knowledge in your industry?
  7. What size deals does the broker’s firm typically work on?
  8. How many client engagements does the broker work on at any time?
  9. Does the broker work full-time on deals, or is business brokerage a side-business?
  10. How involved does the broker stay during the due diligence and closing phases of a transaction?

Hiring the right broker to sell your business is a critically important decision. Asking the above questions will help you  select a capable, honest and hard-working business broker by objectively evaluating their background, credentials, work ethic, and capacity for successful deal making. With these questions answered to your satisfaction, add bonus points if the broker has a high Likeability Quotient.

When is the Right Time to Sell My Business?

/in , /by Al Statz

BOOK REVIEW —

I don’t recall the last time I recommended a book, but today I feel compelled to tell business owners about an excellent new book titled, “When is the Right Time to Sell My Business?”

This book not only helps you decide when to sell your business, but will also help you understand its value from the perspective of willing buyers, increase its value and marketability, and choose and plan your best exit option. If you are a private business owner; following the recommendations in this book will help you sell for more money, on your terms and time-frame, without regrets.

Expect a great return on the time you’ll invest in reading this book. Mr. Mowrey presents a sensible and proven approach to selling a business. It’s a quick read that covers a lot of important ground at just the right depth for busy business owners, and it’s one that I suspect you’ll take notes in and refer back to as you approach your exit. Mr. Mowrey pours a tremendous amount of valuable insights and sound recommendations into 188 pages. I can’t say that for most of the books on this subject authored by other so-called experts.

CPA’s, transaction attorneys, wealth managers, M&A intermediaries and business appraisers would also do well to read this one.

Purchase this Book on Amazon

Full Disclosure — Not only is Rich Mowrey a four-time business owner and seasoned valuation expert and transaction intermediary, he’s also a colleague of ours who we met through our national business valuation and M&A trade associations.

The process outlined in Rich’s book closely mirrors what Exit Strategies does for our clients. Feel free to contact one of our California-based advisors with any business valuation or M&A brokerage questions or needs.

Forbes Article: Which Is Better, A Financial Buyer Or A Strategic Buyer?

/in , /by Al Statz

Image result for forbes logoI thought would share this brief Forbes article that came across my transom early this morning. I generally agree with author John Warrillow’s comments on Strategic versus Financial buyers. If your goal is to maximize value and liquidity today, and you’re not looking for an equity partner to help you build longer term enterprise value, a strategic buyer generally produces the best outcome. Having multiple strategic buyers at the negotiating table as a result of a structured M&A sale process produces even better results!

The article …

If you decide to sell your business to an outside acquirer, you’re going to have to decide between a financial and a strategic buyer. Understanding the different motivations of these two buyers can be the key to getting a good price for your business.

A financial buyer is acquiring your future profit stream, so they will evaluate your business based on how much profit it is likely to make in the future and how reliable that profit stream is likely to be. The more profit you can convince them your company will produce, the more they will pay for your business.

But there is a limit to how much they will pay, … READ THE FULL ARTICLE ON FORBES.COM

Is Private Equity the Right Solution for Your Exit?

/in , /by Al Statz

Is Private Equity the Right Solution for Your Exit? Private Equity Groups (PEGs) are disciplined buyers of lower middle-market companies. Most have cash funds and lender relationships in place for the right acquisition opportunities. PEGs often recapitalize a company, where they purchase a majority or minority interest. They bring growth capital and business acumen to […]

Read more

Targeting Strategic Buyers for Your Company

/in /by Exit Strategies

One aspect that separates M&A advisors from business brokers is the approach used to identify and target buyer candidates. The typical business brokerage approach is largely advertising based. They place a description of the seller’s business on several websites (BizBuySell and others) and then simply await inquiries. Business listing websites are effective for “main street” businesses (restaurants and auto repair shops) where the buyers are individuals and ad-hoc partnerships. However, in the lower-middle market, specialized corporate buyers aren’t shopping on these sites. Most strategic buyers don’t even realize they’re buyers, yet.

We’ve had great success targeting and selling companies to strategic buyers and industry-focused private equity groups.

Early in my career when I worked at WebEx (www.webex.com) in business development, we would conduct a quarterly exercise to identify potential strategic partners. In this half-day exercise, we would brainstorm a list of all possible market segments where we expected to find partnership value, and then identify the top players in each space. That simple exercise directed our strategic actions and objectives for the quarter. Employing a similar approach for my sell-side M&A clients, I’ve found that strategic targeting is the most effective way to find the right buyer.

Where are you most likely to find a strategic buyer for your company?

I like to start by brainstorming the low hanging fruit. This is an exercise where the seller client and the M&A advisor benefit from close collaboration. Some market segments will be obvious, such as customers, partners (resellers, VARs, OEMs), competitors, vendors, and distributors. Other fruitful segments are less obvious and often overlooked. Exit Strategies has a systematic approach to expanding this universe of target business segments.

For each of my sale engagements, I develop and maintain a list of all strategic buyer candidates by market segment, and I share that list with my client. This exercise requires deep research to generate a comprehensive list of companies, followed by more exploration to identify the right individuals at these companies. Exit Strategies has several databases that help with this. Subsequent outreach campaigns include phone calls, email, LinkedIn, and good old snail mail.

It’s a ton of work, but the results of a strategic targeting process are well worth the considerable effort. Of course, our client’s identity is protected until the buyer has been properly screened and an NDA has been signed.

 

Six Reasons NOT to Skim

/in , , /by Don Ross

Pulling unreported cash receipts out of a business is indefensible and unwise under any circumstances, but particularly if the owner expects to exit in the next 3-5 years.

All of us during our childhood were offered the parental edict: “Don’t do it, you are only hurting yourself.” So “why”, you may ask . . . now that you are a grown adult, “should I not skim?”

Many reasons immediately come to mind and I am certain that we could all come up with many more, but in the interests of brevity, I’ll keep it to six reasons.

  1. Skimming is against the law. Tax evasion is a felony.
  2. Management of your business becomes more challenging. Skimming requires you to underreport revenues which means your cost of sales percentage rises. Cost containment and inventory control are more difficult to assess.
  3. Loss of Employee, Partner and Spousal Trust. You set a bad example and create a fertile ground for others to steal. Worse yet, a disgruntled employee or retaliatory ex-spouse or partner could report you.
  4. Bank Loans are difficult to secure, for you and potential buyers.
  5. The value of your business declines.
  6. The marketabilty of your Business is severely compromised. You cannot expect potential buyers to trust you, let alone make a “leap of faith” and pay a premium for your business on the merits of unreported, unverifiable income.

Hopefully this doesn’t apply to you. But, if it does, what’s the solution? I refer you back to your childhood: Don’t Do It.

  1. Stop Skimming
  2. Clean up your books.
  3. Effectively manage your business, using reliable financial records.
  4. Redeem your credibility with your staff, your partners and your bank.
  5. Add value to your business as an ongoing entity or as a potential sale. The amount you no longer skim can easily be worth 2 – 5 times its selling value, or more, depending on the degree of skimming and the size and nature of your business.

In summary, each of us at some point makes a life defining decision … “Do I want to eat better or sleep better?”  You make the call.  As it relates to preparing a business to sell, you can do both.

Don Ross is a seasoned business broker with Exit Strategies Group. He can be reached at 707-778-0210 or donross@exitstrategiesgroup.com. 

Exit Strategies Advises RST in Strategic Sale to Subsite Electronics

/in , /by Al Statz

Exit Strategies Group, Inc. (ESGI) is pleased to announce the acquisition of its client, robotic inspection equipment manufacturer RS Technical Services, Inc. (RST), by Subsite Electronics, a Charles Machine Works company. Exit Strategies served as exclusive M&A advisor to RST.

Acquired by:

Since 1984, R.S. Technical Services, Inc. (rstechserv.com) has been a leader in the design and manufacture of robotic video inspection equipment used to monitor and repair municipal water and wastewater collection and conveyance systems, mainly pipelines too small to allow man entry. Its systems are designed around a unique technology that incorporates all power and control functions into a single conductor, making its equipment more reliable and safer to use than competing solutions. RST has facilities in Kentucky and California.

Subsite Electronics (subsite.com), a Charles Machine Works company, manufacturers utility locators and horizontal directional drilling (HDD) guidance systems. The RST acquisition adds proven remote video inspection capabilities to Subsite’s line of underground awareness solutions. Employee-owned Charles Machine Works, founded in 1902 in Perry, Oklahoma, has several brands and divisions, and is perhaps best known for its Ditch Witch brand of HDD and trenching equipment. For more information visit charlesmachine.works.

Al Statz, President of Exit Strategies, who led the transaction, stated “We are proud to have represented the owners of RST in this successful sale to Subsite. Our team identified, profiled and had preliminary talks with over 100 target buyers, both strategic and private equity, and qualified 6 finalists. Subsite was selected not only on economic terms, but also because they demonstrated a strong culture of customer care, innovation, integrity and commitment to employees that was important our clients.”

For advice and representation in the valuation, sale, merger or acquisition of your company, contact Al Statz at 707-781-8580 for a free confidential consultation. Financial terms of the RST-Subsite transaction will not be disclosed.

About Exit Strategies

Exit Strategies Group, Inc. (ESGI) is a California-based M&A brokerage and business valuation firm focused on producing exceptional exits for closely-held and family owned lower middle-market companies. ESGI brings M&A experience, process management and close attention to detail to help companies sell, merge, recapitalize and acquire businesses successfully. Our advisors have sold companies in a variety of industries including sophisticated technology design, manufacturing, distribution and value-added services.