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Exit Strategies Advises IRR Los Angeles & Orange County on their Sale to CBRE

/in , /by Roy Martinez

Exit Strategies, a California based mergers and acquisitions (M&A) brokerage and business valuation firm, recently advised the owners of Integra Realty Resources of Los Angeles and Orange County on the sale of their Southern California commercial property and right-of-way appraisal business to CBRE Group, Inc.

IRR Los Angeles co-owner, John Ellis, said, “Roy Martinez of Exit Strategies helped us understand the value of our business and introduced us to resources needed to complete the transaction. We could not have done it without him.”

IRR is a network of commercial real estate valuation, counseling and advisory firms in the United States.

CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Dallas, is the world’s largest commercial real estate services and investment firm.

Terms of the acquisition were not disclosed.

This sale is an example of Exit Strategies’ M&A brokerage experience and valuation expertise in the business-to-business services sector. Exit Strategies has appraised and brokered hundreds of service businesses. If you are looking to sell, merge or acquire, we would be interested in hearing from you. Roy Martinez can be reached at 707-781-8583 or jroymartinez@exitstrategiesgroup.com.

Cornerstone International Alliance sets new record: $1.3 billion in business transactions

/in , /by Al Statz

Exit Strategies Group is a partner in the Cornerstone International Alliance

After a record setting year in 2021, Cornerstone International Alliance members, a consortium of industry-leading lower middle market mergers and acquisitions (M&A) and investment banking firms, shattered that record in 2022, completing 169 deals with an enterprise value of more than $1.3 billion.

“2021 was a milestone year with $1.1 billion in deals closed for the first time. So to have another record year in 2022 is evidence of the strength of the Alliance and its members,” said Nick Olsen, Managing Director of Cornerstone International Alliance. “Notably, this past year was unique with so much uncertainty in the global market. The way our group made it a successful one, speaks volumes to their experience, focus and drive to do what is best for their clients. Even more encouraging is the outlook for 2023 is also very promising.”

Echoing Olsen’s sentiment is Craig Castelli, found and CEO of Caber Hill Advisors, an Alliance member headquartered in Chicago. “Congratulations to Cornerstone International Alliance and its member firms for another fantastic year,” said Castelli. “It’s a testament to the disciplined focus on only accepting best-in-class firms into the network. It’s an honor to be considered worthy of membership. I’d like to personally thank my team at Caber Hill and all of our clients and partners as we celebrate a great 2022 and a strong start this year. We couldn’t have done any of this without you and the Alliance.”

Alliance members typically work with business owners whose companies have $500,000 to $15 million in EBITDA or $5 million to $150 million in revenue. The members’ primary services provided include business sales, acquisitions, and valuations. Since its founding in 2018, the Alliance has selectively grown its membership and now has 27 members on four continents, creating a global network that opens doors to transactions being completed worldwide along with access to industry experts and an array of tools to best service their clients.

The organization’s most recent international member is Netherlands-based, Florijnz Corporate Finance.

“At the same time we’re celebrating our 10-year anniversary in 2022, we’re also celebrating a significant growth in business, leading us to hire additional staff and move to a new office location,” explained Hans Minnaar, Florijnz founder and director. “Last year we served 20 Dutch businesses in national and cross-border transactions and we’re on track to beat that this year. A part of that success is derived from our membership with the Alliance, the global connections it creates and the ability to share experiences and expertise that can’t be found anywhere else.”

The Alliance’s diverse membership creates a global footprint that is unmatched in the lower middle market. That, combined with members’ experience, resources and collaborative efforts are the driving force behind this continued level of success. To date, members have completed more than 3,750 business transactions.

CIA members are high performers with high integrity. Together we are working to set the standard for M&A excellence in the lower middle market.

Al Statz, CEO of Exit Strategies Group, Inc., alstatz@exitstrategiesgroup.com.

Pros and Cons of Selling to Family

/in /by Al Statz

A business transfer to your children or other family members is a great way to ensure your business culture and legacy remain intact. You get to share a valuable asset with people you love and will probably have ongoing opportunities to stay involved in the business you started.

On the downside, your children may not actually want the business and may feel pressured to take on something for which they have no real interest (or even aptitude). What’s more, selling to your kids typically involves a gradual payout, most times 7-10 years, meaning you lose out if business performance declines. That can be a difficult, dicey thing, capable of driving a wedge between you and the people you care about most.

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 to Divest Part of a Company

/in , , /by Al Statz

Selling a division or line of business is often more complex than selling an entire company. If you’re like most private business owners, you have never sold a business, let alone carved out and divested part of one. This article shares some of what I’ve learned about planning and executing a successful divestiture during my 20+ years of investment banking.

In my experience, most divestitures are intentional efforts to generate liquidity or streamline and strengthen core business operations. Often, the divested unit is underperforming and out of alignment with the company’s strategic direction.

Sometimes the asset to be divested is a distinct business unit with its own P&L and minimal overlap with the selling company’s main business. Other times, the asset is significantly integrated with the company’s primary business and some amount of “disentanglement” is needed before it can be reliably marketed and sold for an attractive price.

Spinning off the business into a standalone entity before a sale might even be necessary. From a buyer’s perspective, stand-alone or near-stand-alone entities are more attractive investment opportunities — because they are easier to value, perform due diligence on, and integrate. And since sellers want the buyer to take on and operate the acquired entity as soon as possible, a presale spin-off by the seller should be given consideration.

An entangled business is more challenging to acquire, and therefore sell, because of the added risk of misunderstanding exactly how the target business functions and the risk of making mistakes in the carveout/integration process. Also, consider that buyers will need to make significant investments beyond the purchase consideration. Plus, the pool of potential buyers is generally much smaller for a significantly entangled business.

When selling an entangled business, sellers must often enter into a Transition Services Agreement (TSA) that extends beyond the sale closing. This is an agreement in which the seller agrees to provide certain services to the buyer to maintain business continuity until the buyer is fully prepared to operate the acquired business.

Before attempting a divestiture, it’s worth having an experienced M&A advisor, business attorney and CPA help you conduct due diligence to assess the value and sale readiness of the assets or unit to be divested, and to identify potential challenges that are likely to arise during the sale process and whether a presale spin-off may be warranted. They will help you see the business through a buyer’s eyes and can help you develop a roadmap and budget for a successful divesture.

The divestiture’s purpose and expected financial benefits to the parent and its shareholders should be clear, and potential risks should be well understood. Your team will need to determine the specific assets and liabilities to be transferred, and each entity’s expected future cash flows. The acquisition costs and incremental investments required of an acquirer must also be estimated to arrive at a justifiable valuation. Sellers may decide to delay a sale to boost the group’s performance and show a track record of results before beginning the sale process.

For the sale process you’ll need reasonably accurate and reliable proforma financial statements. You’ll need to provide figures from the parent company’s books to show a buyer how expenses have been allocated.  It pays to be diligent and thoughtful in your preparation. Sloppiness here can lead to no deal and wasted time and money.

Beyond financial considerations, the “separation review” must consider business processes, customers and vendors, equipment, facilities, IT systems, IP, brand and market perception, leadership and governance, tribal knowledge, employee retention and engagement, and more. Acquirers pay a premium when they confidently understand a target business and clearly see how it will fit into their operations, support their strategic goals, and accelerate their future growth.

You’ll also need a strategy for communicating the spin-off and/or divestiture plans to key stakeholders, including employees, shareholders, suppliers, and customers. This will help ensure a successful transition and minimize disruption and potential harm to the business.

In a divesture, think of an M&A advisor as a strategic short-term member of your executive team. They help you develop a winning strategy and manage the entire process — performing financial modeling and valuation, preparing detailed and compelling offering materials, identifying best-fit buyers, conducting buyer outreach, attracting multiple bids and negotiating deal terms, facilitating due diligence, and liaising with attorneys and diligence providers.

All these efforts ensure that the divestiture is completed smoothly and efficiently. Preparation is key. You’d be surprised how challenging it is to maintain deal momentum while still unravelling organizational and operational entanglements.

In conclusion, divesting part of a business is a complex endeavor requiring thoughtful planning and precise execution. Following these steps will increase your odds of closing a deal and achieving your desired outcomes.

Continue the Conversation

Al Statz is president and founder of Exit Strategies Group, Inc. For further information on divesting a business unit or to discuss a potential need, confidentially, contact Al at 707-781-8580 or alstatz@exitstrategiesgroup.com.

Highlight Your Company’s Intangible Assets When Selling

/in , , /by Al Statz

Intangible assets represent most of the value in almost all of the companies we sell, so it only makes sense that showcasing the intangible assets that make your company unique and successful can significantly impact your final transaction value. Here are some practical tips to help you leverage your intangible assets in a sale process.

Intangible assets are non-physical assets such as contracts, customer lists, proprietary software, databases, designs, recipes, proprietary business processes, well protected trade secrets, works of authorship, key employees, strategic relationships, audit reports, credentials, licenses, and brand recognition. Intellectual property (“IP”), such as patents, trademarks, and copyrights, are all intangible assets. These assets generally produce value for a company, but don’t appear on its balance sheet.

Three steps to inventory your intangible assets:

  1. Conduct an internal audit of your business operations to identify all intangible assets owned by or used in the business and gather appropriate supporting documentation for each asset.
  2. Prepare a detailed description of each item including the nature, scope and history of the asset, how it is used, its original cost, past and future economic benefits, ownership, licenses and any legal restrictions, useful life, potential threats, etc. Include references to supporting documentation.
  3. Group assets into appropriate asset classes (by type and business function) and save the supporting documents in a well-organized virtual data room.

Engaging the services of legal, financial, and valuation experts can help bring to light intangible assets that may not be immediately obvious. An attorney can verify ownership rights and ensure that your assets are properly protected and legally transferable.

When taking a business to market, M&A advisors prepare a marketing document known as a Confidential Information Memorandum or CIM. The CIM will highlight your company’s intangible assets and suggest how buyers can utilize them to create new revenue streams, increase profits, or mitigate potential risks. Of course, buyers will do their own due diligence on your assets, and lots more, before closing the deal, so all assertions in the CIM must be reasonable. Overhyping a company can be a quick turnoff for buyers.

The M&A advisor or investment banker also uses your intangible asset documentation to help them identify potential acquirers that stand the most to gain from obtaining access to those assets.

Intangible assets can exist and not have value to their current owner. When a target business is profitable and growing, it usually isn’t necessary to place values on individual intangible assets for sale purposes. If a business is a pre-revenue startup or marginally profitable, or if certain intangible assets aren’t being used productively in the business, it may be helpful to have an expert determine the economic value of individual assets.

Even owners with long expected hold periods can benefit from identifying and monitoring their company’s intangible assets by using this information in strategic planning and investment decision making. The asset inventory and supporting documents should be reviewed and updated periodically by the executive team as part of its planning process.

In conclusion, having a full inventory of a company’s intangible assets is an advantage when marketing and negotiating the sale of a business. Take the time to identify and document your intangible assets to ensure that you receive the best possible reward for your life’s work.

Continue the Conversation

Al Statz is president and founder of Exit Strategies Group, Inc. For further information on leveraging your intangible assets in a business sale or to discuss a potential M&A need, confidentially, contact Al at 707-781-8580 or alstatz@exitstrategiesgroup.com.

“In God we trust; all others bring data”: A Due Diligence Survival Guide for Sellers

/in , /by Al Statz

“In God we trust; all others bring data” is a famous quote from W. Edwards Deming that emphasizes the importance of data analysis in business decision making. The due diligence process is a critical part of every M&A transaction, and in today’s data-driven world, having relevant and accurate company data has never been more important. Buyer due diligence has become increasingly thorough and wide ranging over the 20 years that I’ve been advising sellers. Contributing factors are advancements in ERP, CRM and BI systems, more laws and regulations to comply with, increased globalization, increased reliance on intellectual property and growing cybersecurity risks to name a few. This post provides a brief due diligence survival guide for company owners looking to sell or recapitalize.

Tips for surviving an M&A due diligence process:

Be prepared

You should start preparing for due diligence well in advance of the sale process by becoming equipped and well-prepared with accurate and reliable data. Compile all the necessary information, including financial statements and accounting records, contracts, leases, tax filings, HR records, legal records, customer, supplier and transaction data, and lots of detailed operational data. An M&A advisor can recommend the appropriate documents and reports to collect and can evaluate your state of readiness.

Conduct an IT audit

If your expected sale is a few years away, an IT audit can help you identify system limitations, highlight opportunities for improvement, and make informed decisions about what updates or upgrades to make. By modernizing software, implementing BI tools and cybersecurity measures, upgrading hardware, using data analytics to drive your business, and investing in training, you will increase the chances of a successful due diligence process and sale.

Get organized

Present information in an organized and professional manner and make it easily accessible to the buyer. This will make it easier for the buyer to understand the information and will help save time and keep your sale process moving forward. It also demonstrates that you have a handle on your business and shows your attention to detail and professionalism. M&A advisors typically provide a sample due diligence list and organize everything for you in a virtual data room.

Be transparent

Be transparent and forthcoming with information during the due diligence process. The buyer will be hunting for red flags and discrepancies in the data. By providing full information and being transparent and honest, you will build trust and credibility, help avoid potential transaction roadblocks, and reduce unpleasant and potentially costly surprises later on. Your M&A advisor and attorney can advise you on how and when to disclose certain sensitive information.

Be Proactive

Buyers will have lots of questions to understand your business and the data that you provide. Anticipating their questions and addressing them up front (in a Confidential Information Memorandum or virtual data room exhibits) and having ready answers helps everyone navigate the sale process more smoothly and reduces the time it takes to complete due diligence. A seasoned M&A advisor will know what to communicate and when.

Work with a team

Assemble a team of competent advisors — an M&A attorney, CPA and M&A advisor at minimum — to help you navigate the due diligence process. They can provide guidance, answer questions, and help you avoid potential pitfalls. Having the right internal staff involved is also crucial. An M&A advisor can help assemble and organize your team, reduce the burden on you, and minimize the risk of a failed process.

Stay focused

The overarching goal of due diligence is to help the buyer confirm their decision to proceed to a transaction closing on the price and terms agreed upon in the LOI. Stay focused on this goal, don’t get discouraged by what seems like an endless onslaught of requests, and resist getting sidetracked. Due diligence is just one part of the sale process. M&A advisors manage the overall process and work with deal participants to keep things moving forward in parallel.

Be flexible

Inevitably, issues arise during the due diligence process and that need to be researched and resolved or worked around in order to keep the sale moving forward. Be ready to pivot and prepared to negotiate.

In summary, surviving due diligence in a business sale requires preparation, organization, robust IT systems, transparency, proactivity, flexibility, and experience. By following these tips, you can help to ensure that your due diligence process goes smoothly. And if you take to heart, “In God we trust; all others bring data”, you will be well on your way to a successful business sale.

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For further information on M&A due diligence requirements or to discuss a potential business sale, merger or acquisition need, confidentially, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

New law exempting M&A Advisors from SEC registration is welcomed by small businesses and those who depend on them

/in , /by Al Statz

The Consolidated Appropriations Act, 2023 (H.R. 2617), signed into law by President Biden on December 29, 2022, includes a provision exempting brokers that facilitate small business M&A (Mergers and Acquisitions) from federal broker-dealer registration. The section on “Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification” amends the Securities Exchange Act of 1934, effectively codifying the SEC’s sweeping 2014 M&A Broker No Action Letter. It benefits businesses who work with M&A advisors because advisors will no longer have the increased transaction cost and complexity of working under a broker-dealer who adds no real value to a transaction except to ensure compliance. The new exemption will go into effect at the end of March 2023.

The Securities Act amendment responds to the growing demand for M&A activities in the small business sector, which has increased in recent years. This exemption is expected to make it easier for small privately held companies to access M&A services and, by eliminating regulatory burden, reduce transaction costs for those looking to sell, merge or acquire other companies. Small businesses are defined in the law as those with up to $250 million revenue or $25 million EBITDA, which covers more than 99% of all privately held companies in the U.S.
The new law should bolster the overall economy as small businesses contribute significantly to job creation and economic growth.

The exemption applies to change-of-control transactions only, not equity securities offerings (i.e., capital raising). To qualify as a control transaction, the acquirer must end up with a 25% or greater interest in the acquired company and participate directly or indirectly in its management (e.g., board representation or executive management). The limits on the exemption easily cover all of Exit Strategies Group’s M&A activities.

In conclusion, this new law exempts M&A brokers from federal broker-dealer registration and right-sizes federal regulation of small business transactions while preserving important investor protections. It is a welcome change for small privately held companies and their stakeholders, those who advise them, and the broader economy.

For further information on this topic contact Al Statz. And don’t hesitate to reach out to a member of our team with any M&A or business valuation questions, needs or referrals.

Better to sell early in consolidation. Here’s why.

/in , /by Al Statz

Consolidation is inevitable in maturing industries. As an M&A advisor working with owners of private wholesale distribution, manufacturing and industrial service companies, one of the questions I am often asked is whether it is better from a valuation perspective to sell early in a consolidation phase, or hold off. It depends of course, but generally earlier is better, all else being equal.

I’ll explain why, but first I want to point out that industry consolidation isn’t always at the top of a seller’s list of sale timing considerations. More important factors may be:

What is your exit time frame?

Next year or two? Three to five years? Five or more years? The answer is often driven by your financial needs and that of your partners. Obviously, as with any investment, the shorter the holding period, the more conservative one should be with respect to anticipated returns. Maybe today’s value isn’t quite what you think it can be in a few years – but eliminating risk may be worth a lower price tag.

For sellers who want to stay and manage the acquired/merged business or serve in a strategic (e.g. corporate development) role, that tail of income is above and beyond the sale consideration. Sellers who want to buy a boat and sail to the Bahamas had better have a strong executive team in place to lock in value. If not, their company will likely be passed on by the buyer for another acquisition with stronger leadership, and they may lose out on that strategic premium.

Is your company performing well?

Last I checked, cash flow was still king when it comes to acquisition values. If your business is performing well relative to industry peers and further improvement is likely, now may be your best opportunity to maximize value in a sale or recapitalization. If not, you’ll have to decide if and how you and your leadership team are going to improve performance and by when. And, by the way, what is your track record of achieving past projections?

Is the macro-environment favorable?

Does the economic outlook portend for several more years of strong economic growth, or is there increasing uncertainty or signs of an imminent slow down?

If the former is the case, perhaps you have time to continue to grow revenue and profit margins to increase value and better position your business for a future sale. If a downturn is likely, are you prepared financially and mentally to wait it out and try achieving liquidity several years from now? If that’s not appealing, maybe now’s the time to take some or all of your chips off the table.

Conditions can change quickly for all sorts of reasons and you can be stuck, not just with a reduced valuation, but with closed private capital markets altogether. M&A came to a sudden halt in early 2020 and late 2022, and remember what happened in the wake of The Great Recession.

Why earlier is usually better.

To make my answer more tangible, consider the example of independent industrial distributors, where national or global players are executing acquisition-based growth strategies. Driving consolidation may be mergers and product line expansions by upstream manufacturers (suppliers) and vendor reduction programs and consolidation among downstream customers.

  1. If I’m an aspiring consolidator/acquirer, I’m willing to pay a nice premium for my first acquisition in a particular market – to attract the best of the options available and to secure that foothold ahead of my competitors. I may want to make a statement with regard to the quality of organization I intend to build. Hence, there is more of a strategic component in the valuation of platform acquisitions, whereas later add-on acquisitions may be more about simply adding market coverage and earnings.
  2. Further, the first couple of acquisition targets are likely to have more to say (and be credited for) relative to the manufacturers they are aligned with. As the map fills in, later acquisitions may be forced to discard certain lines and replace them with others to conform to the acquiring organization – which destroys value. Count on acquirers considering the lost profits, risk and costs of making those transitions when assessing the value of an acquisition.
  3. Early on, there are likely to be more strategic acquirers available. As the market consolidates further, the number of viable strategic match-ups will decline, which may favor the remaining buyers and reduce the likelihood of a strategic premium for sellers. Eventually, the only option for the last few independents standing may be to sell to pure financial buyers – such as their management teams or private investors, or private equity groups if the independent is large and profitable enough and positioned for strong future growth. For some owners this is perfectly acceptable, for others it is not.
  4. Then there is the expectation that consolidators will have competitive advantages over independent operators – such as access to and influence with best-in-class suppliers, ability to attract and retain talent, proprietary products and solutions, investments in technology and online platforms, buying power, lower admin costs, access to growth capital, financial stability, etc. To the extent true (which sometimes it’s not true because there are also competitive disadvantages) the market share and value of the remaining independents will gradually deteriorate.
  5. Disintermediation is a constant threat to wholesale distributors, as manufacturers seek to expand their profit margins. This can take the form of direct salespeople serving large accounts or entire geographies, and online platforms. As industries mature, distribution’s market share tends to decrease as direct relationships increase, although this varies by segment.

Another attractive aspect of being one of the first few acquisitions in a roll-up is your team’s ability to shape culture and strategic direction. You have less influence as a late addition to a well established platform.

Conclusion

Going to market early in a consolidation phase is likely to produce a stronger valuation than waiting around, all else being equal. However, when evaluating their exit options, company owners should carefully consider shareholder needs, business performance and market conditions, in addition to what stage of maturity their industry is in.

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Al Statz is the founder and president of Exit Strategies Group, a leading lower middle market M&A advisory and business valuation firm. For further information on this topic or to discuss a potential business sale, merger or acquisition, confidentially, contact Al at 707-781-8580 or alstatz@exitstrategiesgroup.com.

 

Avoiding costly M&A delays and deal failure

/in , /by Al Statz

No matter how motivated the buyer and seller, selling a business is always a challenge. There’s a lot that can go wrong, and deals can fall through at any time.

Delays are one of the biggest problems contributing to deal failure. The longer the process drags on, the more likely it is that a) someone gets fed up and moves on or b) something big will happen, economically or geopolitically, that disrupts the deal.

Here are three top delays that can be readily avoided when selling your business:

Messy financials.

Disorganized or simply non-standardized financials can cause significant slowdowns. If your bookkeeping doesn’t align with accepted practices, buyers will spend considerable time and money verifying your numbers.

Buyers don’t like making that investment only to find out your EBITDA is 20% less than stated. At this point, they generally expect to “retrade” the deal, adjusting their price or terms. This can lead to contentious negotiations or complete deal failure.

In the three years before a sale, it’s best to have your financial statements audited by your CPA firm. If you haven’t done that, you can have a Quality of Earnings report completed by a reputable third-party firm, separate from your standard CPA. Either approach will give buyers confidence, create transparency in your numbers, and allow the process to move ahead faster.

Surprise discoveries.

When selling your business, we say “go ugly early.” If you have skeletons in your closet, a customer that’s threatening to walk, ineligible workers on payroll… we need to disclose that to buyers sooner rather than later.

When surprise conditions are revealed too late in negotiations, it makes buyers wonder, “What else are they hiding?” Unexpected revelations can trigger additional due diligence, causing buyers to view your business as a source of risk and suspicion.

Inexperienced deal teams.

When it’s time to sell your business, you want a proven deal team in your corner – including an investment banker, a tax specialist, and an M&A attorney. Your regular CPA and attorney have their own roles to play, but you also need M&A specialists who understand what’s standard and customary in deal terms.

Inexperienced advisors tend to be both slow and overzealous. They work overtime to figure out what they don’t already know, and they tend to ask for unreasonable concessions which slow down negotiations.

Experienced M&A advisors can keep the process moving forward at an appropriate pace and minimize the impact of any complicating factors that arise. The old adage of “time kills all deals” holds true in M&A. The longer it takes to get to that closing table, the more expensive and tenuous the deal gets.

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.

Deal Killers: Undisclosed Liabilities

/in , /by Al Statz

We have a saying: “Go ugly early.” When you’re selling a business, put issues on the table right away. Whether you have ineligible employees on your payroll, you just lost a client, or litigation is pending—be up front.

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.