"I want to sell my business in 1-2 years..."

Many baby boomer business owners are thinking they "are ready" to leave their business in next 1-2 years and begin their retirement or third act in life.  With the economy growing and the number of investors seeking quality businesses to buy, many are thinking it could be an opportunity to "sell high" and accomplish their financial goals.

If indeed there is a desire is to sell within 2 years, and minimal or no exit planning and pre-sale due diligence has been achieved to this point, following are a number of the key planning issues that should be addressed in the first 60 days:

• Establish owner-based exit goals (desired buyer, sale-price, values-based goals, etc.) and do whatever possible to prepare for life after the sale. Survey data indicates most business owners are not happy in life two years after the sale of their business.

• Select a transaction intermediary (Investment Banker or Business Broker).

• Get an estimate of business marketability and value.

• Begin tax planning and pre-sale due diligence.

• Assess and, if possible, enhance business value drivers.

• Take steps to protect the value of the business during transfer (i.e., employee incentive plans/stay bonus).

• Select the remaining needed members of your Deal Team (i.e., CPA, M&A Attorney).

• Review your estate plan and business continuity arrangements.

• Make decisions pertaining to a plan for communicating your plans to employees.

This is not an exhaustive list and only represents what should happen in the first 60 days.  There is much more to do throughout the 2-year period to give yourself the best chance at a successful exit.  So, an immediate priority should be the selection of a trained and experienced Exit Planner to assist with the management of the exit planning project.  Typically someone is going to engage a knowledgeable project manager or general contractor to manage the process for building their "dream house".  In selling a business, there is much more at stake than building a dream house.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Why Bother Doing It The Hard Way?

Whether you want to sell your business next year or a decade from now, you will have two basic options for an external sale: the financial or the strategic buyer.

The Financial Buyer

The financial buyer is buying the rights to your future profit stream, so the more profitable your business is expected to be, the more your company will be worth to them. Strategies that are key to driving up the value of your business in the eyes of this buyer include de-risking it as much as possible, creating recurring revenue, reducing reliance on one or two big customers, cultivating a team of leaders, etc.

The Strategic Buyer

The alternative is to sell to a strategic buyer. They will care less about your future profit stream and more about what your business is worth in their hands, typically calculating how much more of their product they can sell by owning your business. Strategic buyers are usually big companies, so the value of being able to sell more of their product or service because they own you can be substantial. This often leads strategic buyers to pay more for your business than a financial buyer ever would.

For example, Nick Kellet’s Next Action Technologies created a software application that takes a set of numbers and visually expresses them in a Venn diagram. Next Action Technologies was generating approximately $1.5 million in revenue when they received their first acquisition offer; Kellet’s first valuation was for $1 million, a little less than revenue, which is a pretty typical from a financial buyer.

Kellet knew the business could be worth more to a strategic buyer, so he searched for a company that could profit by embedding his Venn diagram software into their product. Kellet found Business Objects, a business intelligence software company looking to express their data more visually. Business Objects could see how owning Next Action Technologies would enable them to sell a whole lot more of their software, and they went on to acquire Kellet’s business for $8 million, more than five times revenue – an astronomical multiple.

Preparing For Every Eventuality

The question is: why bother making your business attractive to a financial buyer when the strategic buyer typically pays so much more?

The answer is that strategic acquisitions are very rare. Each industry usually only has a handful of strategic acquirers, so your buyer pool is small and subject to a number of variables out of your control; the economy, interest rates, the competitive landscape and a whole raft of other variables can all impact a strategic acquirer’s appetite to buy your business.

Think of it this way: imagine your child is a promising young athlete who’s intent on going pro. You know that becoming a professional athlete is a long shot, fraught with unknown hurdles: injury, the wrong coach, or just not having what it takes to compete at the highest levels. Do you squash her dream? No, but you do make sure she does her homework, so if her dream fades she has her education; you make sure she has a back-up plan.

The same is true of positioning your company for an exit. Sure, you may want to sell your business to a strategic buyer in a spectacular exit, but a financial acquisition is much more likely, and financial buyers are looking for companies that have done their homework – companies that have worked to become reliable cash machines.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Focus On Driving Your Multiple

The value of your business comes down to a single equation: what multiple of your profit is an acquirer willing to pay for your company?

Profit × Multiple = Value

Most owners believe the best way to improve the value of their company is to make more profit – so, they find ways to sell more and more. As experts in their industry, it’s natural that customers want to personally engage with them, which means spending more time on the phones, on the road and face-to-face to increase sales.

With this model, a company can slightly grow, but the owner’s life becomes much more difficult: customers demand more time and service, employees begin to burn out, and soon it feels like there are not enough hours in the day. Revenue flat lines, health can suffer and relationships get strained – all from working too much. Does this feel familiar?

If you’re spending too much time and effort on increasing your profit, you could find yourself diminishing the overall value of your business. The solution? Focus on driving your multiple (the other number in the equation above). Driving your multiple will ultimately help you grow your company value, improve your profit and redeem your freedom.

What Drives Your Multiple:

Differentiated Market Position - Acquirers only buy what they could not easily create, so expect to be paid more if you have close to a monopoly on what you sell and/or are one of the few companies who have been licensed to provide the specific product or service in your market.

Lots of Runway - Most founders think market share is something to strive for, but in the eyes of an acquirer, it can decrease the value of your business because you’ve already sopped up most of the opportunity.

Recurring Revenue - An acquirer is going to want to know how your business will do once you leave – recurring revenue assures them that there will still be a business once the founder hits eject.

Financials - The size and profitability of your company will matter to investors. So will the quality of your bookkeeping.

The You Factor - The most valuable businesses can thrive without their owners. The inverse is also true because the most valuable businesses are masters of independence.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Is Your Brand a Successful Business Growth Tool?

There is one key question every business should ask when it comes to their branding:  Does your brand enable your prospective clients or customers to see themselves in your experience—in your services or products?  If your prospects see themselves in your experience—they will become part of your experience.  If your brand doesn’t accomplish this both visually and verbally then your brand isn’t doing its job. 

How can businesses ensure that their brand is accomplishing this critical goal?  This is achieved through a value proposition-based brand.  The foundation of an engaging, effective, brand that drives business growth is a company’s value propositions.  They answer the questions: 

• Why choose your company? 

• What sets you apart from the competition? 

• What unique assets do you provide to your clients or customers? 

• What unique assets do you provide to the community (the giving-back component)? 

If the answers to these questions are showcased both visually and verbally through your brand, you can be assured that your prospects will see themselves in your experience and be drawn to become part of your experience.

Engaging, effective branding combined with proven technology, compelling content, engaging design, and a results-driven outreach strategy fuels vibrant and sustainable business growth. 

Liz Johnson, President & Principal Consultant, Mountain View Marketing. If you have questions or would like additional information, please reach out to Liz at liz@mountainviewmarketingllc.com . 

What's an "Earnout"?

The term “earnout” is often mentioned by an advisor or business owner when describing the terms of a business sale. If an owner has as part of their deal an earn-out, they have been asked by the buyer of their business to stay on for a specified period of time in a senior leadership role within your acquirer’s company. In this role, they will be charged with achieving a set of goals in the future (i.e., revenue or profitability goals) in return for additional compensation for their business. This approach is used when the successful operation of the business being bought is dependent on its owner, and/or the buyer needs to bridge the gap between what they are willing to pay for the business and the amount of money the owner wants for the business.

Earnout terms average three years in length and are very common in service businesses. The assigned earn-out goals are often linked to revenue and profit, the retention of specific accounts or customers, or any other metric that the buyer considers important and the seller is willing to agree to.

Earnouts at times can work extremely well for both parties. At the same time, all too often it doesn’t work out with the selling owner leaving prior to receiving their earnout. A common reason for an owner leaving early would be the fact that they are now an employee of the company they have invested years in building, and that can be a very difficult adjustment.

We talk a lot about planning to exit “on your own terms and conditions”. Leaving on your own terms and conditions might look like not being forced into an earnout when you sell. If you begin planning your exit well in advance, you can think through what roles you would be willing to play when you leave (i.e, lender, employee, shareholder), and which roles you wouldn’t be willing to play. For example, if there is just no way in the world you’d ever want to be an employee of the business you’ve built from the ground up, at the time of sale you will need a business which does not depend on you — and building a business like that can require a lot of time.

You can take advantage of our FREE ExitMap® Assessment which will provide you with a 12-page report scoring you in these four key planning areas: Finance, Planning, Profit/Revenue, Operations. It will take about 15 minutes of your time and we do not ask for confidential information.

ennislp.com | email@ennislp.com | 301-859-0860

Know The Value Of Your Business

The business is often the largest asset in a small business owner’s overall investment portfolio. And, as a result, they typically see the future value of the business as playing a key role in retirement or whatever they decide to do next after the business. A critical and foundational element to designing and creating an effective exit plan would be what we refer to as an “accurate financial gap analysis”. Simply put, this is a calculation subtracting the value of all current assets (including the business) from the amount needed for financial security or post-exit goals. If there is a significant “financial gap”, then it will usually need to be filled by increasing the value of the largest asset, the business.

The “fair market value” of a business is the amount agreed upon by a willing buyer and a willing seller, neither of which is under any compulsion to buy or sell, with both parties having knowledge of the relevant facts. And, so as a business owner, you may have the thought or question as to why even bother trying to value the business until a buyer comes along. Why not just wait and see what they offer? The following are some quick responses to that understandable question:

• In planning for the future and how much you will need, you need to know the value of current assets to perform the calculation. The point here is to obtain the best estimate based on financial analysis of the business and current market conditions for a meaningful gap analysis.

• If in performing a financial gap analysis, you learn that there is indeed a gap to be made up by increasing the value of the business, it will be important for you to know the real value now and what you will need to do in order to maximize sellable value to attain your goals.

• If you receive an offer at the deal table and have not obtained a prior estimate of value from a valuation specialist, you will not be in your strongest position for negotiations. As a result, you may experience doubts during the negotiation, and regrets if the deal actually goes through.

These are just a few reasons to know the value of your business. There are others. We like to say, “Don’t wait until you feel pressure to begin planning”. If you wait until you’re ready to exit to obtain an objective analysis of the value of your business and perform an accurate financial gap analysis, you may find that you’re nowhere near ready to leave.

Don’t wait until you feel pressure to leave your business to begin planning. Get started today in completing our 15-minute exit readiness assessment, and receive a 12-page report with scores in 4 key planning areas. We do not ask for confidential information.

The Most Common Reasons To Grow Through Acquisition

Jim has done all he can to grow his business organically, however, growth in both sales and profit have come to a screeching halt. He remains confident, based on research, in his market, and he has taken countless steps to reduce costs to improve the bottom line. So, with his goals for growth and increasing business value being greater than what he’s currently realizing, Jim is now wondering if external growth through acquisition makes the most sense.

David Braun, in his book Successful Acquisitions, A Proven Plan for Strategic Growth, suggests that Jim, and any owner considering growth through acquisition, should consider the following “ten most common reasons to acquire”.

1. Increase top-line revenue.

2. Expand in a declining market.

3. Reverse slippage in market share.

4. Follow your customers.

5. Leverage technologies.

6. Consolidate.

7. Stabilize financials.

8. Expand your customer base.

9. Add talent.

10. Get defensive.

We highly recommend David’s book for anyone considering acquisition as an external growth strategy, and please contact us if we can be of assistance with your organic growth or decision as to which growth path you should choose.

Invest 15 minutes and take our FREE Exit Readiness Survey HERE. We do not request any confidential information.

301-859-0860 | email@ennislp.com

What Is A "Stay Bonus" And How Is It Helpful?

Simply put, a Stay Bonus is an amount of money paid to “key” and/or “important” employees to prevent them from leaving when an owner either voluntarily (i.e, sale to third-party) or involuntarily (death or disability) exits the business.

Lifetime Stay Bonus example: An owner is approached with an attractive offer by a potential Private Equity buyer. The selling owner is excited about the offer and wants to move ahead with the proposed deal. As the buyer’s due diligence process is implemented, the key employees, who have not been incented to remain during transition periods, are all getting “nervous” regarding the uncertainty of their future with the business. One actually leaves and the others are “looking around”. If the selling owner had implemented a Stay Bonus prior to a potential sale it could alleviate this potential deal-killer.

Stay Bonus Upon Death example: In a meeting with a client and her estate planning attorney, the attorney was recounting the story of a business owner who recently passed away and how his passing impacted the family and business. Of course it was emotionally agonizing for the owner’s spouse and family, but what compounded the pain of the situation was there nothing in place to keep key employees in place to continue to run the business. Hence, key employees left and so did customers and the value of the business (which the owner’s wife was depending on) decreased significantly. A bonus that had been planned and structured to retain key employees during this time would have saved the family, the employees, and the customers from much pain and uncertainty.

Key considerations:

• Plans designed for a short period of time must provide a meaningful payout in a short period of time if the business is sold.

• Keeping key employees is almost always necessary for the business to be sold at a maximum sale price.

• The benefit should be greater when the business is actually sold while more affordable when a potential sale went through due diligence but did not sell.

• Key employees are often asked to do even more during transition periods than what their regular job description calls for.

• As all cash sales to third-parties are the exception, owners are often exposed to post-sale financial risk that can be increased with departing or unmotivated key employees.

Invest 15 minutes and get our FREE Exit Readiness Assessment HERE. We do not ask for confidential information.

Goalposts, Goals and Your Business Exit

In this week’s episode of our ExitReadiness® PODCAST, we interviewed negotiation expert Randy Kutz of Scotwork USA on “key ingredients of a successful negotiation”, with an owner’s sale of their business in view. One of Randy’s main points had to do with “goals and goalposts”, and how an owner’s goalposts can continually move during a sale transaction if they don’t have strong convictions about their goals and objectives heading into the negotiation process. This uncertainty can easily result, and often does, in either seller’s remorse or a deal not getting done.

We have found in working with owners, that when giving any thought to their inevitable exit, they will often have a time frame for leaving the business (i.e., 5 years) and “their number”, or sale price in mind, but even these objectives haven’t been thoroughly tested and evaluated. Goals such as tax minimization, a plan for life after the business, care for key or important employees, sustaining the culture they’ve worked hard to create, family harmony, leaving on their own terms and conditions, may have received a head nod along the way, but frequently get little to no planning attention ahead of a potential transaction.

As a business owner, there is never a more critical event or time to be clear about what you want than when you exit your business. A reason being, there is a tremendous amount at stake…all that you’ve built…all that stakeholders have come to depend on…and all of your financial and values-based goals are at stake when you transition out of the business. And, you could at any time find yourself suddenly facing an offer from a potential buyer so it’s advisable to begin gaining clarity well in advance so that you can indeed move forward with conviction. If you’re not clear on what you want and need financially, what you value in regard to the future of your business in the hands of a new owner, or what you will do post-business to replace the significance and impact you’ve experienced as a successful owner, the likelihood of you experiencing regrets is quite high.

It is essential to “crunch all of the right numbers'“ in any transaction, and it is also critical to do the hard and often neglected “soft skills” work of establishing firmly your goalposts for a successful and satisfying business transition. Contact us at email@ennislp.com or 301-859-0860 for assistance.

Access the ExitReadiness® PODCAST with Randy Kutz HERE.

Invest 15 minutes and get a FREE Exit Readiness Assessment HERE.

What Exit Route Should You Choose?

There are not many absolutes in owning a business, but there is one thing that is absolutely certain….all business owners will stop being business owners at some point…100%. Along with death or permanent disability, the following are routes for leaving your business:

1. Sale to one or more key employees.

2. Sale to one or more co-owners.

3. Sale or transfer to children or family members.

4. Sale to an Employee Stock Ownership Plan (ESOP)

5. Sale to a third party (full or partial).

6. Become an absentee owner.

7. Engage in an IPO.

8. Liquidate for asset value and close the doors.

As you would expect, there are advantages and disadvantages to each of these exit routes, and other than liquidation, each can require much planning and time to execute in a way that will accomplish all of your values-based as well as financial goals. Certain exit routes will lend toward a higher financial payout, while others afford more control for values-based goals like sustaining culture and care for employees.

We believe that it’s imperative for business owners to understand all available exit routes and the particular characteristics of each, and how they align or misalign with their goals for the future.

Begin increasing your knowledge today with our Exit Routes eBook. You can download it for FREE on our ExitReadiness® site under PRODUCTS.

Focus On Net Proceeds And Not Just Sale Price When Selling Your Business

John was excited as “today is the day!” Twenty-five years ago this month he had started his home remodeling business with a truck and a tool belt, and today at 3pm he was going to the deal table to sell his business to a much larger remodeling company. It would be a strategic purchase for the buyer who was willing to pay a premium with a goal of expansion in the region. With the check received today, John knew he could now do everything he and Kim had thought about doing for years — travel, more time with the family and for hobby’s and other interests they both enjoyed.

The amount received actually exceeded John’s “number”, and hence, he and Kim spontaneously pulled together a celebration dinner with family and a few close friends at their favorite restaurant. John had done a great job through the years building a “sellable business” focusing on a strong management team, strong financial performance, a plan for growth, up-to-date systems and processes and other value drivers which and now he was reaping the rewards. There was indeed much to celebrate!

Fast forward, six months later: John has come to realize that his number needed to be quite a bit larger than what he had originally calculated. In whatever way he had performed his calculations, he failed to consider to the extent needed, or at all, the following important factors in the equation:

• Of the $10 million in proceeds, he was going to net approximately $6 million after these charges/expenses:

  • Transaction and professional fees.

  • An asset sale was negotiated and there was income tax on some asset depreciation recapture.

  • $1 million in business debt needed to be repaid.

  • Capital gains and affordable care act taxes.

  • Miscellaneous expenses including “stay bonuses” for two key employees.

John was in a small percentage of small business owners who have built a sellable business and actually sold it for their “number”. For that, he is to be commended and congratulated. At the same time, John was now experiencing much regret and was actually concerned about his financial ability to do everything he and Kim had planned on. What could have John done differently when planning for this most significant event? Worked with his exit, financial, transaction, and tax advisors well in advance of the sale in calculating the real number… net sale proceeds…and whether or not he and Kim could do all they wanted with that number.

If you need help contact us at 301-859-0860 or email@ennislp.com. Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Protect Business Value with a Legal Audit

When selling your business a potential buyer will conduct their own due diligence process assessing risk. Any risk exposure identified would result in a lower offer and perhaps the buyer walking away from the deal. And an area that can be easily overlooked by owners until it’s too late is the legal affairs of their business, including practices, procedures, and documents.

We have found that owners can assume that if they have legal documents in place the documents are adequate indefinitely when in actuality they seldom are. Due to changes in the law, business relationships (i.e, vendors; suppliers), or changing goals of the owner, documents can become ineffective, outdated, or even damaging. This can also be true for practices and procedures that have legal implications and potential liability, with employment practices and procedures right at the top of the list.

We recommend that business owners have a business attorney perform an initial “legal audit” years in advance of when the owner plans to sell their business. The initial legal audit should include a thorough review of basic corporate documents, all operating documents, and ongoing policies and procedures, followed each year with a review. Again, if you’re planning to sell at some point in the future, the potential buyer(s) will certainly do a legal audit as they conduct their due diligence process, and they will not want to acquire your business if it’s loaded with risk.

You will end up minimizing stress as well as legal fees (and significantly increase your chances for a successful transaction) if you prepare well ahead of time in a more measured way, rather than having to do a mad scramble during negotiations. Protect your business value with a legal audit.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Which is Better, a Financial Buyer or Strategic Buyer?

If you decide to sell your business to an outside acquirer, you’re going to have to decide between a financial and a strategic buyer—understanding the different motivations of these two buyers can be the key to getting a good price for your business.

A financial buyer is acquiring your future profit stream, so they will evaluate your business based on how much profit it is likely to make and how reliable that profit stream is likely to be. The more profit you can convince them your company will produce, the more they will pay for your business.

But there is a limit to how much they will pay, because financial buyers are playing the buy-low, sell-high game. They do not have a strategic rationale for buying your business. They don’t have an army of sales reps to sell your product or a network of retailers where your product could be merchandised. They are simply trying to get a return on their investors’ money, so they tend to buy small and mid-sized businesses using a combination of this investment layered on top of a pile of debt, and they want to buy your business as cheaply as possible with the hope of flipping it five or ten years down the road.

Because financial buyers are usually investors and not operators, they want you and your team to stick around, so they rarely buy all of a business. Instead, they buy a chunk and ask you to hold on to a tranche of equity to keep you committed.

A strategic buyer is a different cat—usually a larger company in your industry, they are evaluating your business based on what it is worth in their hands. They will try and estimate how much of their product or service they can sell if they added you into the mix. Because of their size, this can often lead to buyers who are willing and able to pay much more for your business.

Tom Franceski and his two partners had built DocStar up to 45 employees when they decided to shop the business to some Private Equity (PE) investors. The PE guys offered four to six times Earnings Before Interest Taxes Depreciation and Amortization (EBITDA), which Franceski deemed low for a fast-growing software company.

Franceski was then approached by a strategic acquirer called Epicor, which is a global software business with a lot of customers who could use what DocStar had built. Epicor offered DocStar around two times revenue—a much fatter multiple than the PE firms were offering.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Selling In A Buyer's Market

The demographics of the Boomer transition are not very encouraging for business sellers. We are rapidly approaching the worst imbalance between small business sellers and buyers in history, and it will continue for the next 20 years.

The most generous estimate of the population born in the twenty years following the Boomers is that they are 9 million fewer (69 million vs. 78 million.) More importantly, the bulk of that group was born in the late 1970’s, when birthrates began to rise again following the “Baby Bust” of the late 60s and early 70s.

From 1953 through 1957, over 21 million children were born in the US.  From 1973 through 1977, there were only 16 million new births, 23% fewer. What happens to pricing and competition when there are four sellers for every three buyers?

If the problem was limited to the numbers alone it would still be dramatic. In addition, there are other factors that make the numerical shortfall even more pronounced. The profile of the buyers, and the values and the choices of Generation X, will exponentially increase the gap between Boomer sellers and the people to whom they expect to sell their businesses.

The value system of this buyer generation doesn’t fit the values that are predominant in Boomer entrepreneurship. The concept of devoting 50 or more hours a week to a business, and doing it for 20 years or more, is antithetical to most Gen Xers preferred lifestyles.

From 2018 to 2023 the boomers will be reaching age 65 at a rate of 10,000 a day. About 9% of those aging boomers are business owners. Even if the next generation had the same competitive instincts and work ethic as the Baby Boomers, the number of available buyers would be short by over 200 daily.

Based on the numbers alone, small business buyers will have ample choice in the marketplace. Having had little opportunity to build up savings, they won’t have much cash to put down for a successful Boomer business. This will create a large number of sellers who will be forced to finance an acquisition themselves, rather than walk away from the business with nothing.

Of course, the best Baby Boomer businesses will still find qualified buyers. In order to successfully sell in a competitive market, they will need profitability, systems, and a track record that is better than that of their competitors. If you would like to assess the status of your business and its chances for successful transition, please give us a call.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

© 2014, MPN Inc.