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Exit Strategies Group Advises Shaltz Automation in Sale

/in , /by Al Statz

(Flint, MI) — Exit Strategies Group, Inc. recently served as the exclusive financial advisor to Shaltz Automation, a leading regional industrial automation solutions provider, in its acquisition by Flow Control Group (FCG), a portfolio company of KKR & Co. Inc.  Deal terms were not disclosed. 

Headquartered in Flint, Michigan, Shaltz Automation provides advanced industrial automation products from many global manufacturers. Final mile assembly, manufacturing, engineering services, system integration, application know-how and technical support feature prominently in their business model. Technologies include pneumatics, vision systems, robots, machine controls, sensors and other advanced industrial automation technologies. Founded in 1975, Shaltz is a critical partner to major OEM and end user manufacturers in Michigan and Ohio serving diverse end markets such as medical device, food and beverage, automotive, electric vehicle, electronics and packaging.

“We were looking to partner with a like-minded M&A advisor who could understand and promote our unique capabilities, market position and growth potential. Exit Strategies adeptly connected us with potential partners and ensured that we selected the best option and optimized deal terms. Al Statz and Adam Wiskind were with us at every critical step,” said CEO Phil Shaltz.

Flow Control Group is a leading solutions provider focused on technically oriented products and services for the flow control, fluid handling and process and industrial automation sectors with locations throughout North America. As a critical intermediary between suppliers and customers, FCG’s distribution and technical services serve an essential function in the movement of mission critical components to a diverse array of end markets and applications. This deal expands FCG’s market coverage in the industrial automation segment of its business.

“Exit Strategies was incredibly pleased to partner with Phil, Chris Carpenter and the Shaltz Automation team, as this acquisition provides the right opportunity for Shaltz to continue its impressive growth trajectory,” said Al Statz, President of Exit Strategies Group. This transaction illustrates Exit Strategies’ expertise and continued commitment to providing strategic merger and acquisition services to leading industrial automation technology companies.

About Exit Strategies Group

Exit Strategies Group (ESG) is a California-based firm that offers strategic mergers and acquisitions advice and execution, and business valuation services. Founded in 2002, with offices in San Francisco and Portland, ESG represents private companies on the sell-side and works with private equity, public and private companies and family offices on the buy-side. Our industry expertise spans all areas of industrial automation products and services. Since inception, ESG has advised on well over 100 transactions. For more information visit www.exitstrategiesgroup.com

Management Buyouts are a great option, but consider the risks

/in , /by Adam Wiskind

One of the more attractive exit options for you as a business owner is a management buyout (MBO). That is when your management team works together to buy either a total or a majority stake in your company, thus taking control of the company themselves.

There are several benefits to selling your company to your management team:

  • You can reward loyal managers with an opportunity to gain equity in the company. Managers are more likely to maintain the corporate culture and honor your legacy than an unknown buyer.
  • The management team already knows the company intimately, so you’ll have less to disclose; and the managers will be less concerned about due diligence, representations and warranties, and indemnity.
  • The management team has experience in the business, so you’ll have less of an obligation to train them and can transition out of the business faster after the sale.
  • Information about the company can remain more confidential as sensitive information does not have to be divulged to external parties.
  • Though you may not get a strategic price premium for the business, you should at least get fair market value.
  • With thoughtful planning and early preparation, the sale can be carried out on your timeframe.

However, management buyouts also present some unique risks that must be addressed to avoid derailing the deal.

Management Team Composition

Even if they are effective managers not all teams have the collaboration, leadership, financial positions, and motivation to acquire a business. You should make an unbiased assessment of your management team’s abilities and plans prior to committing to sell your business to them. Many of the tips found in this article on assessing buyer prospects apply to MBO teams as well. Also, be aware of managers who are not invited to join the MBO team, as they can disrupt a deal that they feel that they should have participated in.

Team Organization

MBO team members have very often not acquired a business before. They may need professional help to organize themselves to write a business plan, create a shareholder agreement and locate financing. The team will need to consider how their positions and responsibilities will change once they become owners.

Business Performance

The MBO team needs to maintain the profits and prospects of the company while they are navigating the deal process. A deterioration in business performance could scare off financial backers of the transaction and put undue stress on the deal.

Plan for Failure

Clearly there are benefits to selling your business to your management team rather than to an unknown buyer; however, if the deal with management falls apart, the repercussions can be severe. What happens to your business value if one or more of your managers leaves because of a deal gone bad?  Be sure to have contingency plans in case the buyout doesn’t work.

Having the right professional advisors increases the likelihood of a successful buyout. For advice on exit planning or selling a business, contact Adam Wiskind, Advisor at Exit Strategies Group, Inc., at awiskind@exitstrategiesgroup.com. Exit Strategies Group is a partner in the Cornerstone International Alliance.

 

The happiest business owners know what’s next

/in , /by Al Statz

I had the privilege of chatting with Bo Burlingham, former executive editor for Inc. magazine and author of several books, including Finish Big: How Great Entrepreneurs Exit Their Companies on Top.

We talked about one of the key discoveries that led to the book, namely that so many business owners were unhappy after selling their companies. It didn’t really matter how much someone got for their business – some sellers were delighted while others were depressed and miserable.

What made sellers unhappy? Burlingham spent years doing interviews to find that out. And one of the biggest issues he found is that people didn’t have a place to redirect their passion and energy.

For many entrepreneurs, the business becomes their identity. It gives them direction. Without that outlet, some former business owners become unmoored. Suddenly, their phone isn’t ringing as much. No one needs them to make hard decisions anymore, and that can be troubling for some folks.

Burlington describes these owners as “wandering the desert.” They’re searching for that new thing to get excited about, and some of them take years to find it.

You might think a little wandering sounds fine, but retiree beware! There’s actually research that shows early retirement can increase your chance of early death.

A 2019 study conducted by economists at Harvard and State University of New York found that cognitive decline accelerated when people left work. Researchers contributed it to the loss of social engagement and connection that many people find in the workplace.

And yet business owners should not delay selling. Ironically, the best time to sell is when you’re engaged and excited about your business.

Buyers pay for the future cash flow of the business, and that means you’ll get the most value when you go out on the upswing. Buyers feed off your energy, so you want to show them someone who’s really truly passionate about where their company can go.

But the kicker is, you need to be passionate about your next steps, too. It’s important to know what you’re headed for, not just what you’re leaving behind.

When an entrepreneur’s identity is wholly tied up in their business, that can be a red flag. It’s a sign they might hold on to the business too long, past the point where their leadership is the best thing for the company and its value.

That’s why we ask sellers to go through a “bucket list” exercise. Think about what you want to be remembered for. What captures your interest and enthusiasm, besides your business?

Selling your business should be the first step in your best chapter ever. You’ll have the gift of time and money – and the opportunity to do anything with it you want. The best thing for your health, your happiness, and the value of your company is to know the next chapter you want to write.

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.

M&A Advisor Tip: Time Kills All Deals

/in , /by Al Statz

More than purchase price or structure, time is the most likely reason a business sale will fail. Time breeds frustration and fatigue. From irascible attorneys to disorganized brokers and licensing issues, plenty of factors can bog down a deal.

Sooner or later one party or the other gets fed up and rationalizes, “It wasn’t meant to be.”

Your advisor should have a reasonable client load (no more than four or five is ideal) so they can give you the time and energy you deserve. Look for an office with a manager dedicated to closing details. You need someone organized and proactive, looking several weeks and months in advance.

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.

M&A’s dirty playbook

/in , /by Al Statz

If you work in M&A, you can take a class on how to take advantage of people. It’s true! Buyers can go through mergers and acquisitions training, at some of the most prestigious universities, learning how to pay as little as possible for a family-owned business or privately held company.

M&A transactions are complex, and it’s natural that buyers and sellers will have some competing interests. When both parties come to the table in good faith, with a commitment to finding a workable agreement, these negotiations don’t have to be overly contentious.

But when buyers are out to do their worst, negotiations can devolve into a hostile power play. Worse yet, some sellers don’t know enough to push back. They get steamrolled and taken advantage of by specialists who wake up every morning intent on getting the best possible deal for their investors, at all costs.

These buyers know what they’re doing and they’re willing to play dirty to get what they want. Here are some of the tactics they might use:

Tie you up in exclusivity

Many M&A negotiations include a no-shop clause. This is a period of exclusivity when the seller cannot solicit offers from other parties. The due diligence process is expensive for buyers, so sellers sign these agreements as an act of good faith, giving buyers some security that their investment will be worthwhile.

Typically, a no-shop clause has a near-term expiration date and are only in effect for a couple of months (45—90 days). Buyers with a lot of leverage, and those working with inexperienced sellers trying to represent themselves, will work hard to tie you up in exclusivity for as long as possible.

If they can get away with it, the no-shop clause won’t have any expiration date at all, allowing the buyer to drag their feet indefinitely. Which brings us to the next strategy…

Drag it out

The goal here is to wear the seller down. They’ll request more and more documents. They’ll find “surprise concerns” they need to discuss with their team.

They’ll tell you, “We like your company, but we’re finding some issues we need to look into more. We need you to get us X, Y, Z.” They want to amplify tension, use up your mental energy, and distract you from the real work of running your business.

Re-trading the deal

At the end of the day, the whole play is about getting you to accept a lower value. You will have entered into exclusive negotiations based on certain expectations, but they’ll “uncover” issues to rationalize a price adjustment – an adjustment they were planning on from day one.

Play on your emotions

In the book of dirty plays, this one is a doozy. Buyers will find out key occasions in your life: your spouse’s birthday, your kid’s graduation date, your anniversary. And right before the big day, they’ll find something in due diligence and call an emergency meeting.

They’ll make you think the whole deal is going to blow up if you can’t make that meeting. Again, they’re looking to get you to wave the white flag of surrender.

In every industry, there are good and bad actors. Unfortunately, the bad ones are perfectly willing to engage in psychological warfare.

The less interaction the buyer and seller will have after a sale – i.e., the less future success hinges on the seller’s continued cooperation – the less incentive a buyer has to treat the seller fairly. Unsuspecting sellers can find themselves at the losing end of a winner-take-all kind of game.

It’s like a boxing match. You’re going into the ring at 0-0 and they’re at 40-2. They’ve been playing the game for two decades. I don’t care how strong you are, you’re not going to win that fight. That’s why it’s important to have professional, specialized advisors by your side before you enter the game.

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.

M&A Deal Terms: Fall 2021

/in , /by Al Statz

You may have heard – it’s a bifurcated market.

Declining caps on general indemnification against breaches of representations & warranties [1] had been a feature of the seller’s market for lower middle market businesses, going back well before the pandemic. Average caps have remained in the range of 15-16% of Total Enterprise Value (TEV) since the fall of 2020, according to GF Data’s semi-annual report on key deal terms, covering transactions by 243 active private equity data contributors completed through June 30, 2021.

However, a drilldown shows the same kind of market delineation we have seen in valuation.   Selling businesses featuring neither above-average financial characteristics (EBITDA margin and revenue growth) nor rep and warranty insurance (RWI) completed deals with an average cap of 23 % of TEV. For businesses offering above-average financials, RWI or both, cap averages were in the low to mid-teens.

The indemnity survival period [2] in the first six months of this year across all industries was 20.3 months, up slightly from the 2016-to-present average of 19.2 months.

The chart below makes clear that businesses with above-average financials and the ability to use RWI are rewarded in valuation. Businesses lacking both are subject to higher caps, in addition to dampened pricing.

In the first half of 2021, utilization of rep & warranty insurance bounced back to 59.1% of all deals. RWI usage anomalously declined in 2020, averaging 53.0% for the year. This reflected a temporary icing of the insurance market following the onset of the pandemic.

GF Data collects and publishes proprietary business valuation, volume, leverage and key deal term data on private equity sponsored merger and acquisition transactions with enterprise values of $10 to 250 million. GF Data gives M&A deal participants and advisors more reliable external information to use in valuing companies and negotiating transactions.

[1]  Indemnification cap refers to the general indemnification provided by the seller to the buyer against breaches of reps and warranties. This does not include carveouts for specific issues or items. For example, parties often agree that the general cap will not apply in the event of fraud.

[2]  Survival period refers to the period after closing during which a buyer may assert a breach of the reps and warranties against seller. Again, this does not include carveouts. For example, exposure on tax, environmental, and ERISA issues often exceeds the general survival period.

For assistance with selling a lower middle market business, contact Al Statz in Exit Strategies Group’s Sonoma County California office at 707-781-8580 or alstatz@exitstrategiesgroup.com.

M&A Advisor Tip: Stay Bonuses Add Value

/in , /by Al Statz

Confidentiality is important in a sale. But what do you do when critical employees must be informed? We recommend stay bonuses. A stay bonus provides an incentive for key employees to cooperate and assist with a sale.

We see stay bonuses ranging from 20% to 100% or more of an employee’s salary. It’s common to allocate around 50% percent at closing and 50% six months or a year later. Buyers want assurances the management team will stick around. A stay bonus significantly increases that chance. It’s a nice carrot for the employee, and it makes your company more saleable because it lowers a buyer’s risk.

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.

 

Can I retire if I sell my business?

/in , , /by Al Statz

Not every business owner wants to retire, but most do, someday. And in my experience as an M&A advisor, when an owner is ready, they want to move quickly. However, for business owners who have most of their net worth tied up in an enterprise that they personally manage, retirement planning is more complicated.

If you are a business owner, obtaining answers to these two simple but powerful questions will bring clarity to your retirement plans.

Question 1: What is the asset value I need to retire?

This question isn’t unique to business owners, but since your business is your most valuable asset, understanding your total net worth is more complicated.

Find out how much your business is worth by having a business valuation expert or M&A advisor do a reasonable amount of analysis on the company to determine the most probable selling price range. It helps to select a valuator who also sells businesses and is not just a theoretician.

You’ll need a CPA or tax attorney to help you understand the taxes on a sale of the business and develop strategies to minimize or defer taxes. Experienced M&A and financial advisors can often introduce tax minimization strategies, but you need a licensed professional to dial this in.

Then you should sit down with a financial advisor to run the numbers on your retirement assets and your desired lifestyle, and estate and philanthropy goals. Investment returns depend on the type of assets you hold and expect to hold in retirement. Income sources may include installment payments, Social Security, deferred compensation payouts, pensions, dividends, annuities, and rental income. Is the income sufficient or will you need to liquidate holdings in retirement? There’s a lot to consider and having the right financial advisor(s) is extremely helpful.

When there is a gap between the current value of your retirement assets and the value you need, owners often look to the business to fill that gap by increasing sales and net margins, and driving out business risk. A seasoned valuator can point to opportunities to improve the value and marketability of the business, and make it more attractive to target acquirors. They can help you understand market conditions, and when the time is right, they can represent you in the sale process and help you obtain the best deal available in the marketplace.

Do this sooner than you think. Best is 5 years before your target retirement date. The sooner you start to plan, the more knowledgeable you become about your situation, your exit options, and the financial and operating metrics that you must achieve to launch the sale process. If you find you have a valuation gap, it can take time to close. Also, you never know what market conditions are going to be, or what investment returns will be in retirement, so best to have a comfortable asset value safety margin.

Question 2: How well will the business perform without me?

Business valuation, whether performed by an independent expert or a potential acquirer, is a function of expected future cash flows and risk. The lower the risk the higher the value. Changing management introduces risk for the next owner. Whenever an owner’s efforts drive business performance, the future of that business without that owner is riskier.

For some business owners the question of how the business will perform without them is an easy to answer. They’ve worked themselves out of a management or key contributor role and the business can reasonably be expected to perform just fine without them. However, most small and medium sized businesses are significantly dependent on the talents, experience and/or relationships of the owner(s).

The way to overcome this is to grow the business, build a strong management team, groom your successor, and have an org chart that makes good sense to prospective buyers. Absent that, it helps to be willing to stay on for a period after the sale (typically 1 to 3 years), at a normalized salary, until you replace yourself. The first option is usually far better from a valuation perspective.

When choosing a valuator, find one with general management experience and years of M&A dealmaking experience to receive an objective assessment of your management organization and get actionable advice in this area. Remember, the goal is to sell and retire, not just sell and keep working!

You may have to revisit these two questions multiple times before initiating a sale process. And your business valuator, if you find the right one, should become a trusted advisor for you as you go forward.

These are just two of many questions to answer when assessing the value, marketability and sale readiness of a business and deciding if market conditions are right for a successful sale. See Exit Strategies Group’s blog for hundreds of articles on exit planning for business owners.

Al Statz is CEO and founder of Exit Strategies Group, Inc., a lower middle market business valuation and M&A advisory firm with offices in California and Portland OR. For further information or to discuss your retirement goals and circumstances with an M&A advisor and valuation expert, privately and confidentially, contact Al at 707-781-8580 or alstatz@exitstrategiesgroup.com.

M&A Advisor Tip: Fix Gas Guzzler Before a Sale

/in , /by Al Statz

Working capital is like gas in a car—it makes your business go. So when buyers acquire a company, they expect some “fuel” to be included in the tank.

But when business owners get successful and comfortable, they get lax about working capital. They establish a habit of fast payment, slow collections, and excess inventory, and they turn their well-oiled machine into a gas guzzler. Go into a sale in this condition and you’re basically giving away money.

Working capital can be a sticking point in negotiations, so the sooner you minimize working capital the better. Plan to make adjustments at least a year prior to sale.

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.

Burnout drives business owners to sell their companies

/in /by Al Statz

Business owners are burned out, worn out, and getting out. More than 1 in 4 business owners who put their business on the market this spring did so because of burnout. That’s according to a first quarter survey of business brokers and M&A advisors conducted by IBBA and M&A Source.

Retirement still leads as the number one reason sellers go to market. That hasn’t changed in the Market Pulse survey’s nine year history. But this time we saw a real jump in burnout as the reason business owners are selling.

Even more concerning, 15% of sellers had some kind of health issue driving them to market. That’s also higher than previous surveys and suggests the pandemic has taken a heavy toll on business owners.

Business owners already deal with a lot of stress and pressure. Getting qualified employees has been a constant challenge – and we’ve been hearing about that for a couple of years already.

For many, the pandemic was the straw that broke the camel’s back. And we’re not just talking about businesses that had financial struggles. Even those businesses that stayed operational through the pandemic still had worries over employee safety, PPP versus unemployment, and retaining their talent.

It’s not that big of a surprise that business owners are saying, “Enough is enough.”

In addition, to burnout and health reasons, 7% of sellers went to market to get ahead of potential increases in capital gains tax. The Biden administration has indicated it will ask for significant increases in the capital gains tax rate in the near future.

If Biden’s tax plans come to fruition, the capital gains tax rate could effectively double, from 20% to 39.6% for income exceeding $1 million. Right now, that means business owners need to shift their focus from maximizing total transaction price to maximizing after-tax proceeds.

Even if a business owner is projecting 5% annual growth, they’d have to run their business another five years just to net out the same amount they could today after increased capital gains.

Business brokers and M&A advisors say they’re already seeing an uptick in activity with 41% reporting stronger deal flow over a year ago. They predict M&A will continue to pick up through the rest of the year.

Without some big resurgence in COVID, the market is going to finish out hot by year end. Right now we have double the deal flow we typically do, and our peers across the country are reporting the same thing. Everyone is busy.

Sellers are coming back to market, but the buyers never left. Sellers with COVID-proof, or at least COVID-resistant, businesses are seeing competitive bids and getting strong values.

Al Statz is President and founder of Exit Strategies Group, a leading California-based M&A advisory firm with decades of experience selling manufacturing, distribution and service companies in the lower middle market. For further information, or to discuss a potential sale or acquisition, confidentially, contact Al Statz at 707-781-8580.