Secrets to Business Valuation – a Lesson from Curly

/in , /by Al Statz

Remember that scene from the 1991 movie City Slickers where Curly (Jack Palance) shares the secret to life with Mitch (Billy Crystal) shortly before he dies? Curly holds up his index finger and says to Mitch that the secret to life is to figure out his one thing and then stay with it. Channeling Curly today, I will share with you the three things that determine the value of any operating company, with rare exception.

As M&A advisors and valuation experts, we frequently see similar companies of the same size sell for vastly different sums. Let’s look at a simple illustration. Say Company A and Company B both distribute industrial products in similar markets, both do $30 million in revenue and both go to market at the same time. At the end of a rigorous sale process, Company A sells for $25 million and Company B sells for $15 million.

What caused the difference in the price buyers were willing to pay? It usually boils down to three factors: cash flow, growth and risk.

Cash Flow

At the end of the day what matters most to investors is future cash flow. Net cash flow is influenced by net profits, as well as working capital levels and capital investment needs. Owners can use free cash flow to either pay themselves, pay debt providers or reinvest in the business. Looking at our example, even though Companies A and B have the same revenue, Company A operates more efficiently and generates significantly more cash flow for its investors.

Growth

The second factor is growth — top line and bottom line growth. The more cash flows are expected to grow over time, the more cash flow investors will have at their disposal, and the higher they will value a company. Company A has likely proven – based on its historical financial results and investment record – that they are capable of growing at a faster pace than Company B.

Risk

The third thing affecting valuation is the level and types of risk associated with receiving those expected cash flows. Investors decide how certain they are that a company will continue to perform the way it has or achieve its growth projections. The more certain they are, the more they’ll pay, and vice versa. In our example, Company A may have less cash flow volatility, a stronger leadership team, or more market or product diversification, which would reduce perceived risk and increase certainty of performance.

Valuation theory and actual prices paid support the view that similar companies can have very different values. Acquirers and investors, when deciding how much to pay for a company, quickly look past gross revenue and EBITDA to net cash flows, growth and risk. The sooner a company owner understands and embraces this, the happier they’ll be when they decide to sell.

Exit Strategies values private companies for business owners before they make important decisions about sales, mergers acquisitions, recapitalizations, buy-sell agreements, equity incentive plans, and more. If you are business owner and would like to learn more or discuss a potential M&A transaction or valuation need, confidentially, give Al Statz a call at 707-781-8580.

 

Corporate Social Responsibility in Mergers and Acquisitions

/in , , /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.

  1. 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.
  2. 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.
  3. 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.
  4. 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

/in , /by Al Statz

Al StatzWe 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.

Other Common Questions

  • Owners of small businesses often ask, should I sell the property first?  The answer is almost always no. As a rule, commercial properties are more marketable than small businesses. For most commercial and industrial properties this holds true with or without a tenant.
  • When maximizing value is a seller’s primary objective, their first question should be, is the total value of my business and property higher if I sell them as a package or sell them separately? Every situation has to be evaluated on its own merits.

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.

Why Business Owners Should Prepare to Sell Now

/in , /by Al Statz

 

Al StatzReason 1:  Concentration of Wealth

A typical business owner has 70-80% of their wealth tied up in their business. That’s a lot of eggs to carry in one basket. On top of that, private businesses are less liquid and more risky than stocks, bonds and real estate investments.

Fortunately owners can control the value and sell-ability of their businesses. Now, whether they exercise that control is another matter!

Reason 2: Many Sales Are Unplanned

Over the years, studies have indicated that as many as 50% of all business sales are involuntary.  The cause may be personal in nature (death, disability, divorce, etc.), or related to a change in business or market conditions. If that 50% statistic is close to accurate, owners should make their businesses ready to sell and attractive to investors at all times. Definitely as they approach retirement age.

So, how sale-ready are most businesses?

In the Q1 2019 Market Pulse Survey of U.S. business brokers and M&A advisors by the Pepperdine Capital Markets Project of Pepperdine University, the consensus was that 70% of businesses are unsellable. These same professional intermediaries also estimated that 48% of businesses on the market won’t sell.  Now that’s a sobering statistic.

The quarterly Market Pulse Survey looks at businesses in the range of $500,000 to $50 million in enterprise value. Generally, larger businesses are more sell-able. This size effect has always been there, but in my experience it has become even more pronounced since the 2009-2010 recession.

Are business owners planning ahead?

The intermediaries surveyed by Pepperdine in Q2 2019 indicated that most business owners conducted no formal planning prior to engaging a broker/advisor. Lower middle market business owners ($5-50 million enterprise value) were more proactive, though still roughly 40% failed to plan more than a year in advance.

Why owners may be resisting exit preparation.

From my perspective, some of the more common reasons business owners put off exit preparation are their independent personalities, blindspots caused by a lack of experience and objectivity, fear of looking foolish, skepticism (too many impostors and bad actors out there), the formality of the processes that have been proposed to them, and just being too busy working in their businesses.

The best way to maximize enterprise value and increase the likelihood of a successful ownership transition is to start preparing early. Don’t leave it to chance. For more information see my recent blog titled, Failing to Plan Your Exit is Planning to Fail. Or visit this page of our website for an overview of the exit planning process.

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Al Statz is founder and president of Exit Strategies Group, a leading M&A advisory and business valuation firm with offices in California and Portland Oregon. Al can be reached at 707-781-8580 or alstatz@exitstrategiesgroup.com. Feel free to request a copy of the latest Market Pulse Survey.

Failing to Plan Your Exit is Planning to Fail

/in , /by Al Statz

Al StatzBen Franklin is credited with saying, “If you fail to plan, you are planning to fail.” And Warren Buffet once said, “Someone’s sitting in the shade today because someone planted a tree a long time ago.” These sayings are great reminders for business owners looking to exit.

For most business owners, their company represents the lion’s share of their net worth. It also represents their life’s work and a legacy worth protecting. Getting their exit right takes some planning.

However, coordinating all of the business, management, financial, legal, tax, estate, family, legacy, market and personal considerations is complicated and emotional for owners. And few have the time (or the training) to tackle all of this on their own, while running their business. Therefore many owners procrastinate when it comes to exit planning.

Failing to Plan

Failing to prepare for an exit can result in a business owner …

  • being forced by unplanned circumstances to exit involuntarily in a bargain sale, sale to a competitor or liquidation
  • wasting time and money on one or more sale transactions that fail to close
  • undervaluing their business
  • giving up more of the proceeds in taxes than necessary
  • prolonging retirement and failing to achieve their retirement goals
  • failing to leave a lasting legacy
  • burdening their family with matters that they were unprepared for

Whether you intend to transfer your company to family, partners, managers, a third party, private equity or a strategic buyer, exit planning is well worth it.

Eight Benefits of Exit Planning

  1. Identifies value and transferability gaps – a key starting point
  2. Makes your company more attractive to buyers
  3. Increases value for all shareholders
  4. Produces a smoother management transition
  5. Minimizes risks
  6. Minimizes taxes
  7. Establishes clear priorities, strategies and time frame
  8. Prevents costly mistakes

On a personal level, exit planning settles your mind and re-energizes you by focusing your efforts and giving your work greater purpose.

Fortunately, you don’t have to learn the ins and outs of exit planning. This is where firms like Exit Strategies come in.

Contact Al Statz at 707-781-8580 or email alstatz@existrategiesgroup.com for more information on simple and straightforward business preparation. We can help you create a plan, and coordinate with and introduce you to the other professionals you’ll need. As always, everything we discuss will remain confidential.

Opportunity Zones: a Compelling Tax-Advantaged Investment for Business Sellers

/in , /by Bob Altieri

Cashing in on the sale of your business is the final reward for many years of dedication and hard work. Then your CPA tells you how much you will owe in taxes. It’s a shock, but there’s a relatively new reinvestment opportunity that may help trim your tax bill …

In April 2018, The U.S. Department of the Treasury and the Internal Revenue Service (IRS) designated Opportunity Zones in 18 States. The Tax Cuts and Jobs Act created Opportunity Zones to spur investment in distressed communities throughout the country. New investments in Opportunity Zones can receive preferential tax treatment.

Under the Tax Cuts and Jobs Act, States, D.C., and U.S. possessions nominate low-income communities to be designated as Qualified Opportunity Zones, which are eligible for the tax benefit. Attracting needed private investment into these low-income communities will lead to their economic revitalization, and ensure economic growth is experienced throughout the nation,” said Secretary Steven T. Mnuchin. “The Administration will continue working with States and the private sector to encourage investment and development in Opportunity Zones and other economically disadvantaged areas and boost economic growth and job creation.”

Qualified Opportunity Zones retain this designation for 10 years. Investors can defer tax on any prior gains until no later than December 31, 2026, so long as the gain is reinvested in a Qualified Opportunity Fund, an investment vehicle organized to make investments in Qualified Opportunity Zones. In addition, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor would be eligible for an increase in its basis equal to the fair market value of the investment on the date that it is sold.

How Opportunity Zone Funds work

An investor who has triggered a capital gain by selling a business or real estate, can receive special tax benefits if they roll that gain into an Opportunity Fund within 180-days. Advantages are:

  • The payment of capital gains is deferred until December 31, 2026
  • It reduces the tax owed by up to 15% after 7-years
  • There is zero tax on gains earned from the Opportunity Zone Fund

If you’re planning to realize a sizeable capital gain or recently sold an asset where there is a capital gain (within the 180-day filing window), Opportunity Funds may help to keep more in your bank account and less in the federal treasury. It’s worth a look. Consult with your CPA or financial advisor.

Bob Altieri is a senior M&A advisor and business valuation expert with Exit Strategies Group. He can be reached at boba@exitstrategiesgroup.com.

California’s AB5 Law May Impact Small Business Values

/in , , /by Adam Wiskind

Adam Wiskind, CBIAssembly Bill 5 (AB5), signed into law last month by governor Gavin Newsom, will impact the valuation of many small businesses in California that have grown to depend on independent contractors.  For impacted owners intending to sell in the near term, this new law may require a change of plan.

The new law, which goes into effect on January 1, 2020, creates an explicit three-part test for whether a worker can be classified as an independent contractor.  A worker can only be considered an independent contractor if:

  • (A) the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
  • (B) the worker performs work that is outside the usual course of the hiring entity’s business; and
  • (C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

AB5 exempts many occupations including doctors, dentists, lawyers, engineers, architects, accountants, real estate agents, travel agents, graphic designers, human resources administrators, grant writers, marketers, fine artists, investment advisors, broker-dealers and salespeople provided their pay is based on actual sales, rather than wholesale purchases or referrals. However, many small businesses in California that regularly employ independent contractors for work that is within the usual course of their business are not exempt.  For these businesses reclassifying workers could add as much as 30% to labor costs.  Labor intensive service businesses will be most impacted. Court reporting, janitorial and delivery services are typical examples.

Valuation Impact

Non-exempt California businesses that have to reclassify independent contractors to employees will likely see a contraction in enterprise value as buyers (and banks and appraisers) apply the expected increase in labor cost to proforma financials and guess at how much of the increased cost can be passed along to consumers. As businesses in a particular non-exempt industry convert from independent contractors to employees, the competitive playing field will be re-balanced.  Some who choose not to comply will go out of business. Those who already comply could see an increase in business, and value.

Owner Options

Business owners are considering their options to respond to the new law and its impact on valuation, including:

  1. Mount legal or policy challenges – The major gig-economy platform companies will challenge the law and small businesses may follow suit.
  2. Relocate work outside California – Can work currently being done by local independent contractors be transferred to contractors outside of California?
  3. Ignore the law – Some owners will no doubt continue with business as usual in the hopes that they don’t face a legal challenge.
  4. Reclassify workers and absorb the additional costs – The new law will raise costs for those who reclassify workers, and likely for the consumers of their products and services. There is a lot to consider here.  Which workers should be reclassified?  How will worker roles change? What are the cost implications?  How will these changes impact supervision, accounting, compliance and insurance requirements? Will the change result in a more committed and productive work force?

Regardless of how they respond, business owners who have spent years building their businesses under an independent contractor model and are impacted by AB5 are at crossroad. Hopefully this article raises awareness of the issues and helps some owners evaluate their options. If you are one of these owners, be sure to get professional legal and HR counsel.

Adam Wiskind is an M&A advisor at Exit Strategies Group and is a Certified Business Intermediary based in Sonoma County California.  If you are interested in better understanding this topic or in selling a $1-50 million revenue California business, contact Adam at awiskind@exitstrategiesgroup.com.

Understanding the Value of Intangible Assets

/in , /by Joe Orlando

As a follow-up to our recent post on profiting from intangible assets in a business sale, this post introduces intangible asset valuation. As our last post outlined, “intangible assets are identifiable, non-physical in nature. They are something you can describe, document … and, most importantly, transfer.” Once identified, there are several ways to value intangible assets. I’ll discuss a common approach called the “with and without” method, using a simple and recognizable case study.

Let’s say you have a headache and you’re walking down the pain relief aisle of your local Walgreens pharmacy. You see Bayer Aspirin, “The Wonder Drug” to the left and a Walgreens generic bottle on the right. Same ingredients, strength and pill count. However, the Bayer Aspirin is $7.99 and the generic brand is $5.29.

What is the value of the Bayer brand name?

The shopper comparison suggests that Bayer believes that a buyer will pay $2.70 more for a bottle of its aspirin than a generic equivalent. What does this $2.70 represent? In this simple example it represents the premium attached to the Bayer name.  Bayer is able to capture a 34% premium WITH the use of this brand and no premium WITHOUT it. But why?

The Bayer brand has a history that dates back to 1863. They developed the drug in 1897 and sold it under the Aspirin brand name. Only after Bayer’s rights to that brand name either expired, were lost or sold in other countries, did the Aspirin name become a generic descriptor for the drug. This history creates brand recognition and helps the company command a higher selling price than generics to this day.

Why does this all matter? Because the value of the Bayer brand can be determined to be the value of the premium that company is able to generate by owning this brand.

Quantifying brand value is based on the “relief from royalty” concept. This concept suggests that brand value is the value the owner gets by being “relieved” of the royalty payments they would otherwise have to make if they did not own the brand; a more detailed With and Without scenario.

How the numbers work in the Bayer example:

  • Sales: Assume Bayer sold $500 million in aspirin and other related products over the last year. (This is an estimate; Bayer doesn’t disclose sales by product.)
  • Royalty Payment: Assume the Bayer brand, including artwork, colors and logo, can be licensed for 10% of sales. (Bayer has royalty agreements for its various brands but doesn’t disclose specifics.)
  • Royalty Stream of Payments: If you multiply $500 million by 10%, the owner of the brand would generate a royalty stream of $50 million.
  • Long-Term Growth (g): Let’s assume that the growth of this revenue is 3%.
  • Discount Rate (i): Assume, with a stable company and a low interest rate environment that the discount rate (or required rate of return for an investment is this company and therefore its brand) is 10%.
  • Capitalization Multiple: The theory of capitalizing a payment is to multiply next year’s payment by the inverse of its cap rate or as noted above, (i – g) or (10% – 3%) or 7%. The inverse is 1 / 7% or a capitalization multiple of 14.28x.
  • Value of Brand: Assuming the $50 million grows by 3%, the next year’s royalty stream is equal to $51.5 million or $50 million times (1 + 3% growth rate). Value is therefore equal to this next year’s royalty stream times capitalization multiple times 14.28 or $735.4 million.

It may seem strange that the value of a brand that generates only $500 million a year is equal to almost 1.5 times that revenue but if you look at from the point of Bayer, it makes sense. Because Bayer has a “relief from the royalty” payment it would need to make if it did not own the brand, it is able to generate an additional $50 million in value by owning it.  The value of that rising income stream over time is worth a great deal to a stable company like Bayer.

However, if the holding company was smaller and less stable, we would increase the discount rate to reflect that additional risk. Using the above math with a 15% discount rate (an extra 5% of required return to compensate an investor for accepting this additional risk) produces a value of $429.2 million (equal to (i – g) or (15% – 3%) or 12%.  The inverse is 1 / 12% or a capitalization multiple of 8.33x times $51.5 million).  All other inputs are the same except for this risk which has a direct and significant impact on the value.

Think of other intangible assets in the same way.

What would my business be worth if I didn’t have:

  • My customers
  • My supplier relationships?
  • The non-competes with my senior management team?
  • My workforce?

While the approach to valuing these other assets is a bit more complicated, the concepts are fundamentally the same — what is value with and without the asset?

My goal for this blog post was only to introduce this concept. Hopefully reading this didn’t give you a headache. But if it did, reach for your favorite brand of pain reliever! Or for a deeper dive into intangible asset valuation methodologies, read this blog post from the CFA Institute.

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Exit Strategies values intangible assets for a variety of purposes including divestitures, mergers and acquisitions, purchase price allocations, financial reporting, corporate restructuring and planning. If you’d like help in this regard or have any related questions, you can reach Joe Orlando at 503-925-5510 or jorlando@exitstrategiesgroup.com.

 

Exit Strategies Advises Olympus Controls on Sale to Applied

/in , , /by Al Statz

PORTLAND, OR (August 22, 2019) — Exit Strategies Group, Inc. is pleased to announce that Olympus Controls Corp. has been acquired by Applied Industrial Technologies.  We represented Olympus and its shareholders as their exclusive M&A advisor.

Established in 1998, Olympus Controls is a leading distributor of world-class machine automation products focused on assemblies and engineered solutions. Olympus specializes in motion control, robotics, machine vision, sensor and IIOT technologies, and is one of the largest and fastest-growing automation technology centers in the U.S., with 80 skilled employees serving 12 Western states from 5 office locations.

Clients look to Olympus Controls for advanced technologies as well as sophisticated application support, electromechanical assembly, custom system design and integration, and software development. Olympus automates machines in many industries including life sciences, pharmaceutical and biotech, semiconductor, electronics and display, food and beverage, warehousing and third-party logistics, cloud services (data centers), packaging, machining/forming/3D printing, aerospace and others.

Applied Industrial Technologies (NYSE: AIT) is a leading value-added distributor of power transmission products, engineered fluid power components and systems, flow control solutions and other industrial products, with revenue exceeding $3 billion. The acquisition of Olympus serves to establish an automation technology platform.

Scott Hendrickson, Olympus founder and CEO, noted “The synergy and strategic fit between Applied Industrial Technologies and Olympus Controls was way too strong to overlook. We can instantly leverage our shared client relationships and unique Engineered Solutions business models to make an immediate and impactful dent in the machine automation market. Our team has always had a high degree of respect for Applied’s dominance in the fluid power space and Olympus Controls brings an exciting opportunity for them to strengthen and expand their technology offering in motion control, machine vision, robotics and industrial networking.”

“Engaging Exit Strategies to help us navigate the sale process was a great decision. Al Statz and his team brought a wealth of M&A experience, and provided outstanding advice, service and value from start to finish.” Mr. Hendrickson added.

Exit Strategies is honored to have helped Olympus shareholders and management achieve this outcome. We congratulate both companies and look forward to seeing them innovate and grow in the years ahead.

We see interest in industrial automation and robotics acquisitions, recapitalizations and mergers remaining strong for some time as the industry grows and consolidates. Trends driving growth in automation include the need to improve productivity and quality in the face of scarce skilled labor and rising labor costs, increased use of electronics and internet connectivity in all types of products, continued miniaturization of electronics, rapidly-changing consumer tastes, new warehouse and data center applications, and recent advances in enabling technologies such as vision, 3D sensing and AI. Rising occupancy costs and regulatory requirements are also contributing factors. U.S. Companies have to invest more in automation in order to compete on the global stage, or they risk extinction.

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Exit Strategies is a California-based M&A advisor and business valuation firm serving lower middle market U.S. companies in several industries including automation and robotics distribution, system integration and manufacturing.  For further information about Exit Strategies’ services, contact Al Statz at 707-781-8580.  Terms of the Olympus-AIT deal will not be disclosed.

Profit from Intangible Assets in a Business Sale

/in , , /by Al Statz

The sale of a business includes intangible assets. This article explains what intangible assets are and how articulating, supporting and protecting them enhances business sale outcomes. Let’s get started.

What is an Intangible Asset?

Intangible assets are things that are non-physical in nature that you can identify, describe, document (e.g. a contract, list, logo, drawing or schematic) and, most importantly, transfer. Intellectual property is an example of an intangible asset.

The Financial Accounting Standards Board (FASB), in its ASC 805 standard for reporting of Business Combinations, separates intangible assets into these categories:

  1. Marketing-related: such as trade names, trademarks, non-compete agreements and URLs
  2. Customer-related: customer lists, contracts and relationships, order backlog
  3. Artistic-related: works of art, magazines, books and articles
  4. Contract-based: permits and licenses, licensing and royalty agreements, franchise agreements
  5. Technology-based: trade secrets, databases, patented technology

Do all intangible assets have value?

Just because an intangible asset exists, doesn’t automatically give it economic value. To have value it has to produce some form of economic benefit. For example:

  • Generate operating or licensing income
  • Reduce operating expenses or future capital spending
  • Reduce business risk

Of course, an intangible asset must be transferable in a sale to have value to a new owner. (Intangible asset valuation is a topic for another day.)

Goodwill is excluded from the above list because it is considered to be a blended residual asset. Goodwill is influenced by factors such as high profit margins, barriers to market entry, competitive advantages, a regulated protected position or lack of regulation, longevity in the market, a trained work force, etc.  Synergistic value associated with premiums paid by strategic buyers are often considered “blue sky” value above a “justifiable” goodwill value.

Document to Impress

After you take an inventory of your company’s intangible assets, the next step is to be sure that the key ones are documented in a manner that will satisfy buyers. For example, support for customer-based intangibles may include: a well-populated CRM database, master supply agreements, vendor quality audit records, open quote files, important correspondence, sales and contribution margin by customer history, AR aging schedules, purchase orders, etc.

Protect Your Assets

While documenting your company’s primary intangible assets, you are likely to uncover some that need better protecting through public registration (e.g. patents), securing or improving contracts, or better restricting access.

For many of our clients, trade secrets are their most valuable intangible assets. Suppose a significant portion of your company’s profitability is attributable to a proprietary production process. Ask yourself these questions: Is the process perfected and well documented? Are you taking appropriate measures to keep the process secret? Is access sufficiently limited? Do you have appropriate data security? Do you have non-disclosure agreements with third parties?  Do you have confidentiality agreements with your employees? If not, you know what to do.

Capitalizing on Intangible Assets in a Sale Process

Your intangible assets become the focal point of the Confidential Information Memorandum (CIM) prepared by your M&A advisor. The CIM can also articulate those intangibles that are underutilized and have potential to produce economic benefits to a new owner. We use our knowledge of your intangible assets to decide which target strategic acquirers are likely to derive the greatest benefit from them. We tailor our outreach strategy and communications accordingly. In the end, this generates more interest and better offers for the company in an M&A auction process. The M&A advisor can also advise on how and when to disclose sensitive details about key intangible assets during the discovery and due diligence phases of a merger or acquisition process.

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An investment in perfecting, identifying, documenting and protecting intangible assets is usually well rewarded in a sale. Exit Strategies helps clients take full advantage of the intangible assets in their businesses when going to market. If you’d like help in this regard or have any questions, you can reach Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.