M&A Advisor Tip: What Does It Feel Like When You Sell?

February 1, 2020/in Exit Planning, Sell a Business /by Exit Strategies

“Immense satisfaction tinged with loss.” That’s how one business owner described selling his business.

After putting years of hard work into building a business, many owners have a hard time letting go. Emotions run high, and those emotions can lead to some regrettable decisions.

As advisors, part of our role is to help you make sound choices when it comes to selling your business. We can help you sort through your emotions and your goals to find the right buyer to carry on your legacy, at the right time.

Smart preparation and planning make it easier to find the right fit. It doesn’t matter if you’re not ready to let go yet. Let’s start the conversation today.

For more information contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.

Building Value Means Building Leaders

February 1, 2020/in Business Strategy, Sell a Business /by Exit Strategies

It’s the New Year, that time when many business owners make a fresh resolve to develop their business. For some, that means updating equipment and driving sales. But others will focus on something more personal and possibly more pivotal: developing their leaders.

GF Data shows that a solid management team will increase the valuation multiple. For smaller businesses, the quality of your management team can be an even bigger factor, influencing whether your business sells at all.

Here are five ways to develop your managers and bring out their best:

1. Coach, Don’t Rescue

A lot of leaders are “rescuers.” We care about our people and we want to see them succeed. But instead of onboarding correctly or coaching, we take over for them every time they have a problem.

Try coaching your team member to a solution. Help them find the courage to voice their own suggestions.

Questions like, “What do you think you should do?” often yield “I don’t know” answers. But a simple reframing can take the pressure off and encourage people to share their own thinking. If you’re trying to get someone past “I don’t know,” try one of these approaches:

“Suppose you did know. What’s a possible answer?”
“What if you knew you couldn’t fail?”
“Who’s the smartest person you know? What do you think they would do?”
Getting people to reframe the answer from someone else’s perspective can take away some of the discomfort we all feel about being wrong. What’s more, it helps them stretch and develop their own capabilities and confidence.

2. Set a No-Penalty Zone

Create an environment where it’s okay for people to make mistakes. Begin by setting boundaries (wide boundaries, preferably) around decisions and actions they can take on their own. As long as people are acting ethically and in adherence to your corporate values, support the choices they make.

You can always coach people and explain why you would have made a different decision, but don’t impose any negative consequences. It’s better to have a proactive team than people who sit in a state of paralysis waiting for you to sign off on a course of action.

3. Assess Your Team

Behavioral assessments can go a long way toward employee retention and development. From MBTI to DiSC, Strengths Finder, and others, tools like these can help your team identify their unique gifts and areas for improvement.

Invest in a business psychologist or other professional facilitator to take your team through the assessment. With the right guidance, the results can help improve team dynamics and equip you to be a better coach to each individual on your team.

4. Give them a Voice

Give people a place at the table. For a long time, I made the vast majority of my business decisions based on what I thought was best for the company. But over the last few years, I’ve gotten better at listening to my internal team.

My management team has helped me challenge my assumptions, develop new initiatives, and most critically for me, stay the course on a promising business plan instead of following my next big idea.

5. Get Out

We’re working with a husband and wife team who haven’t taken a vacation in five years. That’s not great on many levels. I don’t know if they haven’t developed their people or if the issue is more about an emotional, personal need for control.

If that sounds familiar, start slow. Take a long weekend away. Leave early on Fridays. Build up your ability to step away. As you leave your team in charge, their confidence will grow, and so will yours.

In terms of value, the ideal goal is to work yourself out of the business. Get yourself to a place where you can take extended vacations. Transition your role from working IN the business to working ON the business.

Buyers want businesses with transferable value. That means you need a leadership team that can sustain operations and, better yet, drive growth, without your direct involvement. If the business can’t survive without you, its value declines.

At the end of the day, building out your management team is a critical investment in your business. If it makes your life easier in the process (and it will), that’s just a nice side bonus.

For further information on what buyers look for in a management team, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

M&A Advisor Tip: Earnouts Break Valuation Deadlocks

January 17, 2020/in Sell a Business /by Exit Strategies

Earnouts are often used to bridge a valuation gap between a buyer and a seller. It’s a compromise, of sorts, to break a purchase-price deadlock when the seller wants more than the buyer is willing (or able) to pay.

In an earnout, a portion of the purchase price is paid out later, based on the company’s financial performance over time. Earnouts typically last from 1 to 3 years, subject to negotiation.

Some earnouts include acceleration provisions, stipulating that payments are due immediately if certain events occur e.g.,:

Buyer breach of post-closing covenants
Termination of key employees
Sale of the company or a substantial reduction in assets

These provisions are designed to protect the seller from changes that would harm the company/buyer’s ability to meet their earnout targets.

For further information on earnouts and other common M&A deal provisions, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

‘No Shop’ Protects Buyer Investment in M&A

January 17, 2020/in Acquire a Business, Sell a Business /by Exit Strategies

A no shop provision is an important part of M&A transactions. Also known as an exclusivity clause, a no shop clause prohibits the seller from sharing information or negotiating with other would-be buyers for a specified time frame.

Prior to this, the seller is negotiating with several buyers. The goal is to entertain multiple offers and figure out which buyer will ultimately provide the best deal for the seller.

Once the seller has identified their preferred buyer, both parties sign a letter of intent (LOI). At this point the buyer will begin more comprehensive due diligence to validate their assumptions and make sure the business is everything they believed it to be.

Due diligence is an intense process that could include FBI background checks, equipment appraisals, environmental studies, and more. Some buyer groups conduct industry studies or hire a consultant to call the business’s customers under the guise of a confidential customer satisfaction survey.

Financial due diligence will be a massive focus, of course. Securing a quality of earnings report could cost anywhere from $15,000 to $150,000, depending on the size and complexity of the target acquisition.

Then there’s the necessary legal fees. The buyer’s attorney will draft the asset or stock purchase agreement. This takes the framework of the LOI (typically five to seven pages) and puts it into comprehensive legalese (approximately 50 to 70 pages).

I’ve seen attorney fees as low as $15,000 for a small, routine deal and as high as $250,000 for a lower middle market acquisition (average range $30,000 to $50,000). Private equity firms, which make up a major buyer category, are not shy about spending fees to make sure they have the necessary protections in an acquisition.

At the end of the day, it might not be uncommon for the buyer to spend $100,000 to $500,000 in total transaction costs. That’s why most buyer groups are adamant that they get a no shop provision for 30 to 90 days.

That exclusivity period is the protection they have, ensuring that if they’re going to spend time and money going down this path, the seller is not going to negotiate the deal out from under them and sell to another group.

From a seller’s standpoint, a no shop period can help limit buyer’s remorse or post-deal litigation. If multiple buyers are trying to be the first to the closing table, buyers might skimp on due diligence. Rushing due diligence can lead to unexpected discoveries after the deal is closed, and that can lead to conflict and litigation.

Conversely, long no shop periods are not in the seller’s best interest as there is always a risk that a deal will fall through in due diligence. A shorter no shop period gives sellers a better chance of recapturing interest from a competing buyer if the transaction is terminated.

For further information on exclusivity and other common deal provisions, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

How Key Employees Factor into a Business Sale

January 15, 2020/in Exit Planning, Sell a Business /by Al Statz

One of the negotiations we get involved with as M&A advisors is retention of key employees. Nearly every private business in every industry has a few “indispensable” employees. Before taking a company to market, we work with clients to evaluate key-person dependence and develop strategies for retaining key employees. This article offers help in identifying key employees in your business.

On one hand, having key employees is a selling feature of a business. But, when critical responsibilities and proprietary knowledge are concentrated in a few key individuals, this represents a business risk to buyers who need these people to stay and be happy and productive. Business deals can grind to a halt over key employee retention if owners fail to plan for this part of the sale process.

An owner’s first instinct is often to downplay the importance of key employees, so as not to discourage prospective buyers. But denial is not a strategy. In today’s market you can expect buyers to investigate key employees and insist on their commitment to the company. Ask these questions to identify your key employees, before going to market. Buyers will!

8 Questions to Help Identify Key Employees

1. Who are our top sales producers?
2. Who shoulders most of the workload around here?
3. Who designed our top-selling products?
4. Who own patents to important products?
5. Who would do the most damage if they left to join a competitor?
6. If we lost them today, who would be most difficult for us to replace?
7. If we lost them today, who would have the most impact on our top line and/or bottom line?
8. When I leave, who will replace me?

With your key people identified you can develop strategies to mitigate the company’s dependence on them and/or retain them, and decide how and when to involve them in the sale process. Your strategy may include stay bonuses.

It’s always better to have a well thought out exit strategy than to leave things to chance. It helps to work with an experienced M&A broker/advisor like Exit Strategies. Since 2002 we’ve helped well over a hundred sellers strategize and successfully navigate tricky ownership transfer issues like key employee retention.

To learn more or to discuss a potential business sale or acquisition need, give Al Statz a call at 707-781-8580.

Corporate Social Responsibility in Mergers and Acquisitions

January 2, 2020/in Business Strategy, Exit Planning, Sell a Business /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.

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.
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.
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.
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.

* * *

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

December 18, 2019/in Exit Planning, Sell a Business /by Al Statz

Al Statz We 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.

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.

• • •

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

December 7, 2019/in Exit Planning, Sell a Business /by Al Statz

Reason 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.

* * *

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.

Nine Warning Signs Your Buyer Can’t Close the Deal

December 4, 2019/in Acquire a Business, Sell a Business /by Exit Strategies

The proof is in the pudding. It ain’t over ’til it’s over. Don’t count your chickens before they’ve hatched. Pick your cliché. Just because someone makes an offer to buy your business doesn’t mean they will close the deal.

As a seller, you need to look at more than dollar signs on a purchase offer. Make sure your advisors are researching and asking questions to figure out which buyers are for real, and which ones are just talking a big game.

Sometimes buyers want to rope you in to an exclusive negotiation. They throw out a high price, fully intending to negotiate down as they conduct due diligence and “discover” weaknesses in your business.

Some buyers have big egos and want to be the big dog at the table. But their balance sheets or lending relationships can’t really support the promises they’ve made.

Still others make what they believe to be legitimate offers with good intent. But if they’re not the final decision maker — the person controlling the checkbook— their efforts might be scuttled by a higher up, or a lender, who simply doesn’t see the same advantages in the deal.

These things happen more often than you probably think.

Nine warning signs your buyer won’t follow through:

Too good to be true. They offer a super high price and a 45-day closing “guarantee no risk” if you’ll sign their exclusivity agreement. Your buyer may have ulterior motives. They’ll get access to your sensitive information and get you off the market (weakening your position). Later, they’ll try to renegotiate a sizeable haircut or walk away when you don’t accept their lowball offer. Either way, they gained meaningful competitive intelligence which could significantly hurt your business or its value going forward.
Too vague. They won’t estimate cash at closing. They say, “We’re going to try to get as much as we can.” Or, “We’re not quite sure yet.” A good buyer should have an idea of how much of the purchase price will be paid in cash at the closing.
Unclear funding plan. They won’t disclose their lending sources. A buyer isn’t qualified if they can’t demonstrate financial ability to fund the deal.
Lack of transparency. They won’t connect you to their prior business partners. If they’ve done acquisitions in the past, they should provide seller references. We want to know what the buyer is like to work with and if they do what they say they’re going to do.
“Hidden” history. They won’t disclose anything about their acquisition history. A buyer who keeps their past business under wraps may not have as much experience as they say they do.
No digital footprint. We’re looking for a website, press releases and announcements of past companies the buyer has acquired. Ideally, we’d like to see a few published news items, too. Active acquisition firms want to get their name out there.
Fuzzy deal terms. Once you get to the letter of intent (LOI) stage, you need to strike a fine balance between strict detail and vague conditions. While this is generally not the time to demand all the deal specifics, unclear deal terms could put you in a position of weakness later on. Alternately, a vague LOI could be a sign your buyer is kicking tires and not really committed to a deal.
Slow to respond. Perhaps your buyer was engaged and enthusiastic at the start of the process, but now they’re taking a long time to get back to you. If there’s a noticeable change in communication, that’s a signal you’re no longer a priority acquisition target.
No control over the purse strings. Buyers reps and corporate development teams aren’t the final decision makers. Business owners without enough capital to fund their own deals aren’t the final decision makers. These buyers have to sell your deal to their lenders or other equity partners, and that introduces risk into the transaction.

As you evaluate offers for your company, you have to consider whether one buyer is more likely than another to get a deal over the finish line. Some buyers are just bad actors, looking to take advantage. In other cases it’s a lack of time, money, information, experience or authority that can derail a deal.

M&A advisors are skilled at recognizing these warning signs and helping you avoid these types of problems. Contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com for further information or to discuss a potential sale, merger or business acquisition need. Exit Strategies Group is a partner of Cornerstone International Alliance.

Failing to Plan Your Exit is Planning to Fail

November 21, 2019/in Exit Planning, Sell a Business /by Al Statz

Al Statz Ben 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

Identifies value and transferability gaps – a key starting point
Makes your company more attractive to buyers
Increases value for all shareholders
Produces a smoother management transition
Minimizes risks
Minimizes taxes
Establishes clear priorities, strategies and time frame
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.