Exit Planning--Structured Financial Partners: Building value for your company's tomorrow ℠

Benefits of Planning PRE-Exit

The May issue of our monthly newsletter, "The Exit Planning Edge" is out and available on line at the following link: May Issue--Benefits of Planning Pre-Exit. In it we discuss how exit planning is a value enhancement proposition and by employing certain strategic initiatives well in advance of exit, an owner can reap the rewards of increased profits and less stress.

 

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Confusing strategy with tactics

Everybody wants to be strategic these days.

But let's take a moment to discuss the difference between strategy and tactics, from the traditional military perspective:

Strategy is the utilization, during both peace and war, of all of a nation's forces, through large-scale, long-range planning and development, to ensure security or victory. Tactics deals with the use and deployment of troops in actual combat. -- Random House Dictionary, © Random House, Inc. 2010

When we first have a discussion with a prospective client, we often come face-to-face to the ugly truth that these usually savvy business owners don't know the difference between strategy, tactics and the tools of battle.

Here is an example:

Business owner tells me that they have been exploring an ESOP Strategy.

My question—What is your large, overriding objective?

Answer—To exit the business on a tax favored basis.

My reply—So this, "To exit the business on a tax favored basis" is your strategy. ESOP has nothing to do with the strategy. We must recognize ESOP for what it is. It is a tool of battle. Before selecting the tools of battle, we must tactically assess the options available to you to achieve your strategic objective.

The moral of the story: Calling a tool a strategy does not make it one.

This same approach applies to any other tools that might be appropriate for a business owner, but might also be horrible outside a carefully thought out strategy; e.g. Owner is presented A new life insurance strategy…Simple fact, life insurance is never strategic. It can be a powerful tool when tactically deployed, but don't let the cart lead the horse.

In our exit planning consulting practice, we take our clients through a value enhancement process that helps them achieve their strategic objectives and makes senses of the tactics and tools they will deploy in the process.

The unsolicited offer

Many business owners have told us that they get offers to buy their business all the time. Even in this down market for business sales, those letters keep coming.

Are those offers ever real? Not usually. Are they ever? Sometimes.

A few years ago we were working with a client on a consulting project—not a comprehensive exit plan—but more of a modular approach. The client showed us a letter he had received in the mail. After we reviewed it and discussed it with him we developed a plan. First, we would have someone other than him call in response. In this case, we introduced the client to one of our investment banking contacts. After the initial contact was made and it was determined that the solicitation was not a ruse, the client engaged the investment banker. THIS WAS CRITICAL. IF THERE WAS ONE BUYER INTERESTED, HOW MANY OTHERS MIGHT THERE BE??? The investment banker in this case did a tremendous amount of work where we left off. Getting multiple buyers to create a bidding war…Keeping the deal together every time it fell apart. And ultimately closing the deal for an amount that would make a major league all-star proud…

So for business owners who get an unsolicited offer and are inclined to answer it HERE ARE A FEW TIPS:

• DON'T make the call yourself. Have an investment banker, business broker or attorney make the call for you
• DON'T fall for the line about sending over your financials for review. "The worst that will happen is you'll get a free valuation, " they will tell you. NO! the worst that will happen is your competitor will have all your financial information.
• If you want to able to act on that call when it comes, start planning for it today. Exit Planning is a value enhancement process. If you do it your value goes up. If you don't do it your value will be discounted by your prospective buyer.

What exactly is a middle market business?

In our exit planning consulting business, we often describe our clients as the owners of closely-held Middle Market companies. What does that mean? We define this by saying that the companies we work with generally do between $5 million and $100 million in sales. This market niche we have carved out is consistent with other definitions of middle market that come in saying companies with revenues ranging between $10 million and 50 or 60 million meet fit the bill.

But the Middle Market is defined differently by as many people or institutions as use the terminology. Banks serving the middle market define their own range. Merger and Acquisitions firms announce they are going after the middle market and they make waves. Today's Wall St. Journal Blog ran a post ran citing this tidbit. Kim Davis, managing director of Boston-based middle-market buyout firm Charlesbank Capital Partners, said that Charlesbank defines mid-market companies as those with roughly $250 million to $500 million in enterprise value. The article further stated that Elliot Royce, a partner at AlpInvest Partners LLC, one of Europe's largest limited partners, said that their maximum for a middle market deal is $125 million…

While comparing revenues to deal size isn't apples to apples, you can see that the company sizes vary pretty widely…

 

2010: A Management Odyssey

Today's guest blogger is my partner, Susan Laine…

According to a recent Pricewaterhouse Cooper's Private Company survey, 57% of the CEO's interviewed plan to increase their total workforce expenses over the next 12 to 18 months. Only 5% expect a decrease.

This is great news for the economy. The future is looking brighter and owners are, once again, starting to think about expanding their businesses. To foster that growth, 39% of the same respondents indicated that they plan to invest in new talent, and also to invest in programs to develop existing talent. The CEO's goals are to better capitalize on their existing workforce and to attract high-quality talent to their firms. But how do you attract the right talent and spend your compensation dollars wisely?

In our consulting practice, we call this the 3 R's—Recruit Reward and Retain. Who do you hire? How do you imbue them with your corporate culture? How do you create a work force whose goals are aligned with both your short and long term goals? How do you compensate them?

These are hard questions to answer. You must sit down and think about these questions as part of your overall business strategy—what do I want to accomplish for myself, my business and my family? How does my staff and more importantly, my management team, help me to achieve my goals?

Only then can you design and implement a talent management program which moves you forward on the road to success.

This may sound out of place in an exit planning column, but as we learned from Stephen Covey, we must begin with the end in mind. Too often we have seen business owners give away stock to key employees in a haphazard manner, absent any strategic objective or planning only to face real difficulty later on. In one case, an employee left and both he and the owner both forget he owned shares. He later reappeared when he heard the company was being sold.

Before designing an incentive and compensation strategy, it is critical to know what the owner's exit goals are. When does he or she plan to leave? To whom does he imagine selling the company? Having a handle on these questions will help in the design of incentive strategies for key people.

The strength and depth of your management team will often be a key factor in the value of your business. Thinking of it as a strategic investment will pay dividends when you sell your company.

Exit Planning--Stepping into a buyer’s shoes

I had coffee a couple of weeks ago with a young professional who was on a mission. His goal was to buy a business.

Perfect timing, I told him, there should be plenty of businesses out there, and at bargain prices.

What I learned from him, though, is that the businesses for sale in his price range--$1 to $3 million--were being offered by owners with unrealistic estimations of what their companies are worth…He saw a parade of companies offered by transaction intermediaries that I know and like. All of the those comapniesy had owners who were unwilling to make concessions to the reality of market value.

This $1 to $5 million transaction size is a tricky arena. It is hard for a business broker to tell the owner to be realistic or refuse the listing…And only the very best company can attract a boutique investment banker. A lot of time gets wasted by serious minded people who want to make a deal. In this case, a 40ish, law school educated guy who has run companies and now has cash in his pocket to buy one and some high quality business brokers.

From an Exit Planning perspective, we represent sellers, in advance of their sale and the first thing we try to get them to do is to get realistic. WHATEVER THAT MEANS TO THEM... If they need a certain amount of money to retire and this business is not worth that much now, can they work and grow the business for a few more years? If they need to get out now, can they afford to get by on what the business is actually worth???

Exit Planning After the Great Recession

With a new year upon us it is a great time to reflect on the future.

I spend much of my time talking to business owners and the professional advisors who counsel them. What I am beginning to see is a pent up demand for these owners to sell their business interests, but a lukewarm audience to pay what the owners think is a fair price.

So owners must go back to the work of building value in their companies.

Our new White Paper, Exit Planning After the Great Recession—Advance actions business owners must Take now to drive value and exit their companies successfully is available by clicking here, or you may visit our website: www.sfpartners.net

Cash is not always king when it comes to compensation

Today's guest blogger is my partner, Susan Laine

You've cut staff, you've reduced salaries by 5%, 10% or more and now you have a leaner, meaner machine. You are breathing a little easier because you have cut your payroll expenses. In fact, an informal poll of HR directors suggests that many companies have cut their payroll costs by 15% or more. But have you considered that there are better and cheaper ways to motivate employees?

The results of a recent McKinsey survey on just this subject are stunning. Those surveyed about non-cash motivators, listed 3 non-financial incentives as equally or greater in efficacy than financial incentives:

• Praise and commendation from immediate manager
• Attention from leaders
• Opportunities to lead project or task forces

During my investment banking days, I knew the above was true, at least for me. I used to tell the Gary Davis, the President of AIG Trading, but he didn't get it, or just didn't think it was important. When I would close an especially important and profitable transaction, Gary always wanted to talk about how I could have done it better. There was always something to learn from this post mortem, but it would have been nice if it were preceded by some praise for a job well done…Positive reinforcement before the critique would have gone a long way. After that transaction, the once venerated Hank Greenberg, then chairman of AIG, sent Gary a note praising my work. Gary passed on the note without much comment. But the note from Hank Greenberg praising my work--that was a huge morale boost. And when Gary gave me the opportunity to run my area, that was also a boost. But if he had done a better job praising the work I was doing, I might have been happier and stayed with the firm longer .

Don't let this happen to your talent. Always look for ways to motivate your people—words and actions can be as valuable cash.

Susan the Ostrich Whisperer—An Exit Planning Tale

 

Today's guest blogger is my partner, Susan Laine, MBA

Sometimes I wonder if the laws of evolution are all wrong. I read a recent news article verifying the conventional wisdom that humans are descended from apes, but I'm not so sure. Based on my interaction with business owners, I really think we might be descended from the ostrich.  As we get older our wisdom grows in so many ways, yet I look across the landscape and see acres of business owners with their heads buried in the sand.

We know people don't like to plan for death. They stay away from life insurance agents and estate planning attorneys in droves. BUT EXIT PLANNING IS NOT ABOUT DEATH. It is about monetizing a valuable—perhaps your most valuable—asset during your lifetime.

Consider this: At any given time, approximately 25% of all businesses in the US are for sale. Less than 50% of those will actually be sold. The difference between those that sell and those that don't is often packaging the business into something a buyer will pay top-dollar for.

But some owners would rather stick their heads in the sand and wait for Warren Buffet to come and buy them out. But last I checked, Warren Buffet wasn't buying ostriches.

When will be the right time to sell your business? How will you position your company so that it has the greatest chance of selling? Do you expect to just wake up one day and be able to sell your business?

A few can, but the great majority have to plan, and that planning usually takes 2 to 5 years before the sale in order to reap the greatest benefit.

Don't be an ostrich…

Exit Planning and the price of waiting

In my last post, I wrote about how often a business owner wakes up one morning wanting to sell his company and begins the process that day having done no planning! With a company in a hot niche in a hot M & A market he might get away with it and make and succeed with this approach, most owners would be well advised to prepare for their exit.

What do buyers want to see?

Financial data—this is presented in the company's financial statements. In smaller companies, the balance sheet and the income statement will typically be prepared by the CPA. In larger companies, they may be prepared by the CFO or the CPA. Three years prior to the sale of the company, a company with over 10 million in revenue should be doing audited financial statements. This is where an outside CPA firm will verify the truthfulness of the financial data presented. Companies smaller than that can get by with reviewed financial statements, where their own CPA firm can examine their books to verify the data presented. Buyers won't pay for what they don't believe. Sloppy financial statements will yield a discounted offer or no offer at all.

Your customer base—because this represents cash flow. The buyer must believe that the cash flow they are buying is sustainable and not volatile. This is why a customer base that is diversified between consumers (and product lines, if appropriate) is attractive. That is why, having say 70% of your business with a single customer is considered risky. But sometimes 70% isn't really 70%. We met with the owners of a company last week that had 70% of their business with a single defense contractor, but with three separate divisions that are totally unrelated. A good investment banker could help a buyer understand there is some diversification in the customer mix that isn't visible to the naked eye.

Your systems—your unique processes for bringing your product to market. Your methods of manufacturing product, controlling costs, driving sales all these contribute to what makes you attractive to a buyer.

Your management team—this is big part of what the buyer is paying for and without it will often cause a big discount to their offer. The acquirer is buying a going business. Without you what is there without a well trained functional team to run it?

No lingering liabilities—Is your retirement plan up to code? Are there employment lawsuits waiting to be filed? Are there problems with your leases that will be triggered upon change of ownership? You will want to find these things out before you are in the middle of a transaction.

So why engage in exit planning? Why not just sell your business today? By starting the exit planning process two to five years prior to your target exit date and working on holes in your company in the above areas, not only will you net more for your company when it's time to sell, but you will be more profitable in the intervening years. Your business will run more smoothly and you will enjoy it more.

What are you waiting for?