M&A Advisor Tip: Finish Strong

/in , , /by Al Statz

Begin the sale process while your business is on an upward trend. Buyers pay a premium for businesses with well-defined opportunities and a strong growth story.

Too many business owners get tired or complacent and psychologically retire early, before the sale. In fact, after retirement, burnout is the number two reason business owners sell. Unfortunately, burnout usually leads to declining revenues and reduced leverage in the sale process. Stay focused until the end and sell while you still have energy and enthusiasm for your business.

The fact is, many buyers base their valuations on the financial performance of your company over the last 12 months. So after decades of hard work, waiting just 12 months too long can leave significant money on the table.

For further information on finishing strong or to discuss a business acquisition or valuation need, contact Al Statz in our Sonoma County California office at 707-781-8580 or alstatz@exitstrategiesgroup.com.  Exit Strategies Group is a partner in the Cornerstone International Alliance.

M&A Advisor Tip: Work Yourself Out of a Job

/in , /by Al Statz

The more your business revolves around you, the more risk buyers see. To increase business value and marketability, build a strong management team.

Work yourself out of the business by developing an experienced, empowered management team. The less the business is dependent on you and your knowledge or relationships, the less risk buyers face in a transition. And less risk translates to a higher sale price. Also, more buyers will be able to buy your company if you have a strong management team, which increases competition and further enhances the probable selling price.

For further information or to discuss your situation or a current M&A need, contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com in our Sonoma County, California office. Exit Strategies Group is a partner of Cornerstone International Alliance.

Why Your Business Needs Google Reviews

/in /by Exit Strategies

For many businesses today, online reviews are a differentiator. In the past, people asked for references to vet a product or service. Today, they are more likely to conduct their own research and read online reviews. Google reviews can give businesses a credibility boost, for free. Let’s look at some of the key benefits.

Increased Credibility & Trust

According to statistics, approximately 91% of consumers read reviews to determine credibility of a local business, and 84% say that positive reviews help them gain trust. Without the reviews, that initial level of trust would not have been established. Needless to say, people trust Google. Third party reviews have more credibility and higher value than testimonials posted on a company’s own website.

Improved Business Conversions

Once a potential customer gains trust in your company through Google reviews, it is more likely that an inquiry will convert to an actual customer.

Customer Feedback Loop

Customer reviews Google educate your future customers and serve as a feedback loop for you when things need improvement.

Increased Online Reputation & Visibility

The power of online marketing methods that you might be using to promote your business will be amplified, as 5-star reviews attract online users and increase traffic to your website.

Be aware that clients will review your company whether you want them to or not. If you fail to set up Google reviews, you’re missing the opportunity to gain a level of control and visibility.

How to Set Up Google Reviews

  1. Create a Google My Business account. – Visit https://business.google.com. Complete the setup process by filling in email, phone number, business details, etc.
  2. Ask clients to review your services. – Start sharing your Google My Business URL with clients, and ask them to post a review about your company. When asking clients for reviews, you can mention that their review will help everybody else make an informed decision when they are looking for help. It is important to ask for reviews within a few days of completing a sale. As time goes by, clients become less motivated to post reviews.
  3. Remind clients. – Everybody is busy. Your client might forget to write a review. You may have to politely remind them and ask if they need any help posting the review.

Through the above process, you can begin generating online reviews for your business. Of course, it goes without saying that you can only guarantee good reviews when you are delivering top-notch products or services and excellent customer service.

Copyright: Business Brokerage Press, Inc.

Use Equity Incentive Plans to Boost Exit Value

/in , /by Al Statz

Closely-held business owners often use equity and equity-like programs to attract and retain key employees and incentivize them to boost profits and build enterprise value. These plans provide value to the employees through current profit sharing and/or future equity appreciation. I am a strong proponent of utilizing these types of incentive plans as part of an exit strategy. Let’s break this down.

Why profit sharing for key contributors?

  1. Sharing company profits with key employees incentivizes them to work harder and smarter, think more holistically about the business and be more productive.
  2. For the company, profit sharing shifts compensation from a fixed to a variable expense and aligns the employee’s short-term interests with its own.
  3. The company can track, calculate and compensate employees on the performance of the whole company or a business unit (e.g. regional office) when appropriate.

Often, profit sharing is all that is needed to attract and retain top talent. However, by itself, profit sharing isn’t an incentive to create value for company shareholders.

Why equity appreciation incentives for key contributors?

  1. Equity plans encourage longer-term thinking and behaviors that increase enterprise value.
  2. Allows employee to defer compensation into the future, assuming there is an exit strategy.
  3. Creates incentive to stay, if the company increases in value.
  4. Allows the company to conserve cash needed for growth (vs immediate compensation).
  5. Rewards employee for betting on a new or unproven company, if applicable.
  6. Helps company compete for talent, both with private “tech” companies that grant stock options, and with public companies that promise more opportunities for career advancement but rarely offer equity appreciation incentives except to the very top executives.

Equity Incentive Plan Options

These plans include “Qualified” Incentive Stock Options and Non-Qualified Stock Option plans. Qualified means the plan qualifies for favorable tax treatment by the IRS.

Stock Appreciation Rights (“SAR”) plans grant a right to employees to receive compensation if and when the company is sold, based on the increase in value over some base value (strike price). The employee pays ordinary income tax on the gain when realized. The rights typically vest over some period and are subject to continued employment. SARs do not pay dividends and holders receive no voting rights. It is common (but not required) to have both a profit-sharing plan and a SAR plan.

Phantom Stock plans are similar to a SAR plan. One key difference is that phantom stock plans usually pay dividends on the vested portion (like actual shares), which effectively adds a profit sharing component.

I’m barely scratching the surface of this subject. If you are considering creating an equity incentive plan for key employees, it is critical to work with an attorney that specializes in this area. Jonathan Rubens, a partner in the San Francisco-based law firm of Moscone Emblidge & Rubens LLP, is one of the best. Read Jon’s article: Equity Incentive Compensation and Succession Planning Part I: Stock Options and other Structures for the Closely-Held Business

When your ultimate goal is to sell the company, you have to think about how potential buyers will view the plan(s). It is exceedingly difficult to take benefits away from key employees and keep them happy. The buyer will likely have to continue a profit-sharing plan or replace it with some other form of compensation. This just means that your plan has to produce the desired effect – an incremental boost in sales, earnings and net cash flow. You have to get this right!

Al Statz is President and founder of Exit Strategies Group, a leading California-based M&A advisory, valuation and exit planning firm with decades of experience. For further information or to discuss your exit plans, confidentially, contact Al Statz at 707-781-8580.

Hard Times: Great Opportunities

/in , /by Don Ross

Don Ross, CBBThe effects of the Covid -19 Pandemic have been real and apparent.  GDP in the first quarter declined by 4.8% according to the Bureau of Economic Analysis and economists are predicting the American economy to contract by as much as 30% in fiscal year 2020.  Brutal.

So what is there to get excited about?

Opportunities are laying in the weeds – that’s what.

Entrepreneurs of newly acquired businesses are aggressively moving forward in their business pursuits, predicated upon two newly emerging dynamics:

  • Greater availability of resources
  • Evolving customer needs

In the case of resources:

  1. Capital is more plentiful and interest rates are at historical lows.
  2. Commercial landlords are becoming more negotiable as vacancies and available inventory increase. The service industry – finance, human resources and internet – related – for example, are encouraging more office at home and shrinking their office building footprint. Leases of restaurants and other retailer brick and mortar retail facilities are being renegotiated on the basis of net useable, “socially distanced” square footage rather than the conventional gross square footage.
  3. The labor pool, with unemployment projected to be as high as 25%, is a growing resource for unskilled and skilled workers.
  4. Liquidated furniture, fixtures and equipment are available at discounted costs.
  5. Existing supply chains anxious to get back to business are offering better terms. Newly emerging domestic supply chains are developing and eliminating over-reliance on unreliable overseas suppliers.

As for customer needs:

Given the change in the social landscape as a result of the Pandemic, entrepreneurs are forecasting the future needs of a society that arguably may have more time and less space.  Restricted travel and working from home, for example, may translate to a healthier environment and greater family life at the expense of travel overseas and large sports and music venues. I am reminded of my great grandfather who after World War I and the Spanish Influenza (and the Model T Ford) transitioned from the largest carriage making operation north of the Golden Gate Bridge to a successful tire and farm equipment dealership.

“If it works, don’t fix it” will be a hackneyed expression that will go the way of the buggy whip.  Entrepreneurs will re-invest and re-tool physical plant, operations and labor resources to meet the newly evolving needs of their customers.

Opportunities await those who are inspired by optimism, gifted with vision, and empowered by hard work.

For further information contact Don Ross, 707-778-0210 or donross@exitstrategiesgroup.com.

Valuing a Business in the Time of COVID-19

/in , /by Joe Orlando

Joe OrlandoBusiness owners and investors alike are asking themselves the same questions in the current COVID-19 environment.  Are there opportunities in downturns? If so, when do you know when buy and sell? What are my illiquid assets worth?

A former boss and one of the best bond traders I’ve ever met frequently used a popular trader’s phrase that predicting when a market will bottom and turn is “like trying to catch a falling knife.” A recent article revisited this phrase in the context of today’s market and the human decision-making process. As the article suggests, the big takeaway from Nobel Prize-winning psychologist Daniel Kahneman’s book Think, Fast and Slow is that “in critical situations that rapidly unfold…we tend to rely on our intuitions.” However, Kahneman suggests that when we are losing money fast, “we’d be better off…by slowing down and taking the time to analyze not only the market situation unfolding but our response to it.”

Responding to Market Data

In publicly traded markets, there is no short supply of data to analyze in determining a proper response. Volatile markets generate gigabits of trading data that money managers, traders and research analysts can tap into to assess markets and responses in the form of buy/hold/sell recommendations. But what about small private companies? With data limited to their own operating metrics and year over year change, how can an owner operator analyze the market situation and how to respond to it. Following Kahneman’s advice we suggest you slow down and analyze before acting.

A Private Company Response

The most prevalent approach to value is capitalizing current or discounting forecasted cash flows. This approach is based on three key inputs;

  1. Cash Flows – or the benefit stream to a business owner.
  2. Growth – or the rate at which these cash flows are expected to grow or decline.
  3. Risk – or the impact outside forces have on receiving these benefits over time.

These three inputs have different relationships. All other inputs being equal, the increase in cash flows increases value. The same is true for growth. Risk has an inverse relationship to value as the increase in risk lowers value. So as an owner operator or business manager, a quick assessment of the impact of this market on value depends on the flow of these three inputs. If you are lucky enough to benefit from the demand of essential products in this market, both cash flows and growth (at least in the short-term) are likely up. Some if not most of that increase in value is offset by an increase in risk as the world ponders a strange question of when to “reopen” its economies.

The Next Layer of the Onion

A quick assessment by the seasoned owner or manager is the difference between growth and stagnation, deep losses versus breakeven and, ultimately, success and failure. These quick assessments are needed every day as these three key inputs constantly update. As valuation experts, Exit Strategies Group also believes that there is “value” in a formal valuation of a business at a specific date. The value of this formal approach increases in chaotic times and a deep dive of a business by an independent, third-party appraiser at a relative low in a company’s valuation history has many benefits. The most important of these benefits is an answer to the question, “what is my business worth today in is COVID-19 market.”

Unique Valuation Opportunities and Needs

We believe that in addition to answering this question, a formal business valuation (either a full or limited scope analysis and report) exposes unforeseen or unnoticed risks and conversely “nuggets of value” in the form of intangible assets that fuel the business and its growth. But this deliverable of an opinion of value of 100% or 1.0%  has additional and unique uses amid this COVID-19 crisis;

  1. Gifting – Down markets give owner operators and investors a unique opportunity to pass value to the next generation or your favorite charity at a low price that limits the use of a lifetime gift tax exemption and maximizes the benefits of estate planning.
  2. Option Plans – The IRS in its IRC 409A statute requires that a valuation of equity securities used to price options be updated every year or when there is a “material change” in the business. Usually, for venture backed companies, this material change within the one year window is a new financing round. However, in times of market downturns, there is a unique opportunity to price new options or reprice existing options at a lower price. For companies that rely on this stock-based compensation to woo new hires, this opportunity allows these companies to reset the price and restart the clock for another year.
  3. Exit Strategies – In our conversations with owner operators in this market that had plans to sell the business before COVID-19, we have sensed both frustration and acceptance of the fact that either retirement just got pushed off a few more years or the quality of that immediate retirement has taken a hit with an expected decline in the selling price. A current valuation will help you decide whether to proceed with a sale or stay the course. For those who want to maximize exit value in the next 2-5 years, now is the time to identify key risks to mitigate and “nuggets of value” to invest in.
  4. Bankruptcy – A recent blog on our site talks about valuing a business in bankruptcy. An assessment of the value of your business may suggest that it is time to take advantage of Bankruptcy Code of the US and reorganize your company and renegotiate with your creditors to develop a plan to come out of this down time with a stronger balance sheet and capital structure, even at the cost of diluting ownership. Less of something is worth more than all of nothing.

When Should I Start the Valuation Process?

Again, perfect market timing is a myth and trying to predict when your business’ value will bottom and turn is “like trying to catch a falling knife.” Any valuation requires significant due diligence on the part of owners and managers so the time to start is when you have the time to dedicate to this process. If you or your team are currently slow based on the demand of your products and services, now may be the best time to dedicate that down time to this process. If you are going gangbusters supplying essential products and services, your time now is better spent running your business. If the above benefits don’t coincide with your current situation but may soon, then later (or in the next 6-12 months) is a better time to engage.

Regardless of your timing, give us a call and let’s talk through your situation and what may make the most sense for you in this market.

Exit Strategies values control and minority ownership interests of private businesses for tax, financial reporting, strategic purposes. If you’d like help in this regard or have any related questions, you can reach  Joe Orlando, ASA at 503-925-5510 or jorlando@exitstrategiesgroup.com.

M&A Advisor Tip: Planning for Death or Disability
/in , /by Exit Strategies

The Wall Street Journal recently ran an article about CEOs accelerating succession plans and backup management strategies in the wake of COVID-19.

It’s a question every owner should be asking (now and always): What happens if you are unable to manage your company?

No one likes to think about all the what-if scenarios in life. Most business owners have no plan for exiting their business at all, much less exiting in the face of conflict or tragedy. Talk to your advisors and have a written plan for your business in the event you’re incapacitated.

That plan should include a current estimate of value, life insurance on behalf of the business, and temporary management appointments.

For further information on contingency planning for private business owners, or to discuss a current business sale, acquisition or valuation need, contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.

Begin with the Knowns and Unknowns

/in , /by Exit Strategies

The world feels like it’s turned on its head right now. People are anxious, with good right to be. There’s so much we can’t predict about the weeks and months ahead. When planning your response, begin with what you know and what you don’t know.

What we know:

We’re in a pandemic, and social distancing can flatten the curve, meaning slow the rate by which the illness spreads. And, at this point, we can probably say this pandemic will be linked to an economic recession.

Start by responding to what we know. If you’re a business owner or in another position of influence, this begins with supporting social distancing efforts and following guidance from the CDC. For many, this means finding creative ways to keep your employees engaged and working so you can keep paying them for as long as possible.

Whether you’re shoring up remote work operations, or innovating your business model, remember your employees are anxious. Many of them are trying to balance work and childcare. Others are alone and will be feeling the isolation more keenly.

Now is the time to practice compassionate leadership. You can’t really know how much this situation is affecting each employee – who has vulnerable family members, who is most economically at-risk, and who has underlying mental health issues that will make this situation more difficult to bear.

Prioritize social connection as part of your workday. Plan virtual coffee meetings or happy hours via conference call. Managers, make it a point to check in on employees. Find out how people are doing, and not just in terms of work and technology. Ask how they’re feeling. Find out how the separation from the office is affecting them and what else is raising their anxiety.

Communicate. Rumors fly in uncertain times. Give your employees clear, reliable information. If you don’t know what your plan is yet, it’s okay to say that. Employees need to hear from you, and even those “we’re still considering our options” messages can head off misinformation.

What we don’t know:

The unknowns are many. We don’t know how long this situation will last. We don’t know the depth of the economic impact. So how do we respond in uncertain times?

Madison, Wisconsin based futurist Rebecca Ryan recommends scenario planning. Map out your worst fears, your highest aspirations, and your reasonable expectations (what feels most plausible over the next 18 months).

Do this together with your leadership team. Part of the value, as Ryan explains it, is stating your assumptions to the group. Which possibilities are you putting in the plausible zone, rather than the best- and worst-case scenario boxes?

Any scenario is possible, so spend time on each. Try to imagine how your business will respond to each possible future. A few weeks or months from now, you will have more information and can revisit your scenarios again.

If you tend toward pessimism, this kind of scenario planning may help lift you up out of fear by forcing you to imagine positive outcomes. That slight lift, that shift in perspective, can be extremely beneficial in times of stress.

But more than that, scenario planning helps you make thoughtful decisions in uncertain times – times when informed decisions aren’t always possible.

 

COVID-19 Exit Planning Insight: Keep a Journal

/in , , /by Al Statz

Al StatzThere’s no shortage of information out there right now on how company owners and CEO’s are responding to COVID-19. [By now, leaders have taken steps to survive and fight another day. Most now understand what business will look like for them until restrictions are lifted, and they’re formulating plans to thrive again post-pandemic.] With few companies going to market during this crisis, our insights will focus on exit planning, acquisition opportunities and non-elective sales for a while.

Today we have a simple but powerful suggestion for owners who wish to sell in the next three to four years: Keep a COVID-19 Journal.

Why a COVID-19 Journal

When you sell a business, the buyer’s financial diligence usually focuses on the past three years. Like it or not, what happens during this COVID-19 disruption will generate lots of pointed questions. It’s unavoidable. Your M&A advisor / investment banker will help you tell your unique story, but you’ll need to have the supporting facts and data.

Keeping a COVID-19 journal means tracking and documenting key events, management decisions and business performance data, in real time, during this crisis. Key events and decisions are those that will have a substantial impact on current or future business performance or risk. Decisions should be well documented, including timing, rationale and expected results.

The more data and details you have the better your story can be told. Don’t try to remember it all. Some of this data may not be captured in or stored by your ERP system. For example, you may need to be manually recording weekly RFPs, quoting activity and order backlog.

Examples of Key Events and Decisions:

Financial/Liquidity

  • draw-down on the credit line
  • renegotiated bank covenants or asset-base
  • cancelled all company credit cards
  • sold surplus assets to generate cash
  • other key cash preservation actions taken
  • government subsidies received and how accounted for

Customers

  • change in key customer payment terms or collections
  • major order cancellations
  • downstream verticals shut down and aided by crisis
  • customer loss or gain due to or during the crisis
  • impact on orders, sales and accounts receivable

Marketing & Sales

  • implementation of new remote/online sales strategies
  • implementation of new marketing initiatives
  • RFP inquiries and quoting activity

Suppliers

  • renegotiated payment terms
  • changed payment practices
  • notified that critical components unavailable
  • major order cancellations
  • major supply chain interruptions and changes
  • renegotiated lease or mortgage payments
  • impact on accounts payable

Employees

  • salary reductions, job-sharing, furloughs and layoffs (and severance paid)
  • major staff redeployments
  • organizational restructuring
  • new hires/rehires – impact on payroll

Products & Services

  • diversified (new product line or service) to generate sales
  • decision to stop replenishing certain inventory (to preserve cash)
  • major resource shifts
  • suspension of a product development initiative

Strategic/Operations

  • shifts in target markets, products, services or customers
  • major re-positioning or change in business model
  • permanent operational changes made
  • a new strategic alliance
  • acquisition of a distressed competitor

Action Steps

Start your journal today and cover historical events as best you can. Assign someone to take detailed minutes of weekly or daily executive team meetings and compile KPI’s. Schedule time each day to summarize key events, decisions and performance metrics.

One of my clients finds writing this journal to be “therapeutic, amid the chaos”. And he’s looking forward to telling his unique COVID-19 story to prospective acquirers (and their lenders).

As a result of this surprise economic crisis, acquirers may be adding “Evaluate the potential impact of future unpredictable business disruptions” to their acquisition due diligence check lists. We’ll soon find out.

If you are wondering what information to include in your COVID-19 Journal, Exit Strategies Group’s M&A advisors and valuation experts can provide invaluable insights. Don’t hesitate to call if we can help you prepare your journal, make a strategic acquisition, or prepare for a post-pandemic exit.

Previous COVID-19 M&A Updates:

COVID-19 M&A Update: Survival Mode

/in , /by Al Statz

As of 4/6/2020

The fact is, no one knows when this public health crisis will be resolved or when commerce will return to normal.

The fact is, most businesses are struggling. They have scaled back or stopped operating. Leaders have taken quick decisive action to stem losses and preserve cash. They are taking advantage of government assistance. Luckier ones are less affected; some are thriving. Indeed, these are unprecedented times.

Affected company leaders are taking stock.

Business owners and management teams are taking care of their employees first, as they should, and reaching out (by email, phone and video conferencing) and staying close to customers and suppliers. They are remaining calm, intentionally limiting their media intake. They are monitoring KPI’s and dashboards more frequently than ever – hourly or daily instead of weekly or monthly. They are getting a handle on what business is going to be like until restrictions are lifted.

And they are looking ahead.

They are formulating strategies to strengthen their market position and thrive when we come out the other end of this. They are revising their quarterly and annual business plans and executing on those plans. Many are working on systems, marketing, policies and procedures, and picking up some of those “B” projects that fell by the wayside.

Exit Strategies Group is here for you. Please don’t hesitate to call us if we can help you navigate this crisis, or just to touch base.

All the best to you, your families and your companies,
The Team at Exit Strategies Group