Financial Buyer for Your Business

My partner and I met with the Managing Member of a Private Equity Fund recently who is currently seeking to make a new investment in a business with revenue between $2 million and $20 million. He was referred to us by someone thinking there could be synergy between our firm and his, as we are regularly in contact with business owners desirous of selling their business.  

As we sought to understand the nature of the business the gentleman was hoping to purchase, he informed us that he had been searching for some time, had not a few professionals searching for him, and that he had performed due diligence on a number of businesses.  

His due diligence includes tests for robust cash flow, a capable management team that was incentivized to remain in place at sale, a diversified customer base, operations that would support growth, financial controls and other value drivers.  Despite all of this effort, he was still searching for a business that met his parameters and demonstrated "transferable value".  Transferable value being the value of a business apart from its owner.  One other important point -- it is not like this gentleman has narrowed his search to one or two industries.  He made it clear to us that he would consider a business in any industry (other than a government contracting firm) within a 50 mile radius of Washington, DC.

As we explained to the gentleman our services and capabilities of building transferable value and exit planning, he responded "Based on my experience, there are many business owners who need what you do because they have not built a business that is transferable".  

A business that has transferable value is characterized by...

  • Next level management

  • Systems and operations to support growth

  • Recurring revenue

  • Diversified customer base

  • Proven growth strategy

  • Demonstrated scalability

  • Financial planning and controls

Will you and your business be ready if a "strategic" or "financial" buyer expresses interest in purchasing your business?  Do you know how much $$$$ you will need net of taxes?  Will you know if their offer is reasonable based on valuation and market conditions?  Will the business pass pre-sale due diligence tests of a capable management team incentivized to remain at sale, diversified customer base and financial controls?  

The gentleman commented that owners seem to think they can hurry up and get the business ready for sale when the owner is ready to sell, and how that simply isn't realistic.  To pass the due diligence of a financial or strategic buyer, who is willing to pay what you want or need, you need to begin planning and building years in advance.

An easy, low-cost way to get started is with our Free Exit Map Assessment 

Also, contact us today for a no-obligation introductory phone call.

Characteristics of an ESOP as an Owner Exit Route

As an entrepreneur who has spent years working to grow a privately held business, you are left with many questions about transitioning to the next stage of your life.  The biggest question usually is, "what is the most efficient way for me to sell my business?"  Since the increase in capital gains taxes and surge of baby boomers retiring, the use of Employee Stock Ownership Plans as a monetization strategy has been a growing trend.

An Employee Stock Ownership Plan (ESOP) is a flexible, tax efficient exit strategy that offers a variety of advantages to successful business owners.  ESOPs provide a unique way for business owners to sell a portion or all of their stock on a tax-advantaged basis, while simultaneously rewarding loyal employees.   In certain cases, with the right structure, the sellers can avoid the capital gains taxes from the sale.  After a transaction, if so desired, the selling owner has the ability to retain control of the company.  The company can also operate on a tax-advantaged basis with the right structure.

When considering an ESOP, it is important to understand what features make up a good candidate.  When having this conversation with clients and prospects, we like to break this down into quantitative and qualitative characteristics. 

What makes a good ESOP candidate?     

Quantitative characteristics:

·       The company must have positive cash flow and the ability to take on additional debt.  An ESOP is a leveraged buy-out and you need cash to repay the debt associated with the transaction.

·       The company should have at least 20 employees

·       The enterprise value of the business should be greater than $5 million

Qualitative characteristics:

·       The selling shareholder(s) should be prepared to stay on with the business for some amount of time to help with the overall transition

·       There should be a strong management team in place to help take over and run the business after the selling shareholder(s) leave

In conclusion, when used effectively, an ESOP is a powerful, flexible, tax and business succession tool for privately held companies.  We would welcome the opportunity to discuss ESOPs and the pros and cons with you or your clients.  Please call us at 202-585-5358.  Sincerely - Keith Apton, Managing Director-Wealth Management, UBS Financial Services.   

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.

 


Exit Planning and Your Heart's Desires

The Problem

As a business owner you pour your heart into your work and it has become part of you. But at times, the business you have carefully nurtured for years can become a burden - there's a part of you that yearns to do something else - travel, spend more time with family, enjoy more leisure, or even start another new business. You are confused. 

So when it comes to considering the future of your business, where is your heart?

Along with sound financial preparation, a major objective in a healthy exit planning process is helping you, the owner, identify your personal objectives after your transition from the business.  Determining your life’s course after you leave your business takes careful thought.  The process may involve serious family conversations as well as consultations with  trusted advisors. 

Unlike planning your finances,  planning what will make us fulfilled and happy is far more subjective.  Clear thinking  can often be clouded by emotions, hopes, dreams, fears and uncertainty.  The resulting lack of clarity can be paralyzing – so we do nothing.  But, there are some steps you can take right now to be sure you are on the right track.

Take Action

Grab a pen and do the following:

1.  Make a list of the things you want to do yet haven't had time to do. Consider, family, travel, hobbies, volunteering.  Be specific. Prioritize them and set some specific goals. 

2.  Considering your business,  make a list of things that you...  

a. Do for your business that you want to stop doing...

b. Under the right circumstances, would like to continue doing...

c. How much time per week would you like to spend on those things you want to continue with?

3.  What are the skills you possess that would be valuable to others?  How could these be re-deployed?

4.  Who else can provide you with input and ideas to plan for the next season of life?

5.  What are your fears and concerns when you consider the post-business future?

6.  Use the list you have developed as a basis for thoughtful discussion with your spouse, advisors, and trusted counsel.

Then, begin to develop a draft plan for near-term (12 months), midterm (3 years), and long-term (10+ years) goals.  Like any “strategic plan”, assumptions will change, and plans will change.  Take small steps to begin what you want to change, and don’t be afraid  to refine the plan.  

Planning ahead, before circumstances force you to act under pressure, enables you to strike a peaceful balance between reality and future heart’s desires. You will be able to minimize regrets.  The hardest part in effective long-term planning is taking the first step.  Start now!

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.


The Importance of a Strong Management Team in Building Transferable Value by Theresa Gale, Transform Inc.

Bruce, Heather, Brian, Pat and Tom all have one thing in common. They are business owners who one day want to reap the rewards of their hard work and commitment to businesses they created 20+ years ago.  Every time we talk, they ask, “How do I position this business to be saleable?” “Am I doing everything I can to build value in the company?” They may be ambivalent about when, how and to whom they would sell, but they know they want their businesses to continue long after they are gone. They also want to be compensated fairly for their “investment.”

When I first started working with each of these owners, they had individuals in management positions but all were frustrated that these individuals weren’t acting like managers. The owners felt their businesses were still too dependent on them, that the managers relied too much on the owners to make decisions and solve problems in the managers’ areas of responsibility, and the owners didn’t know how to change that. The answer was and remains – to build a strong management team charged with running day-to-day business operations. 

The business cannot be dependent on the owner. To be saleable, it must have strong leadership, effective management and operate like a well-oiled machine. I’ve built management teams for years and know that, for the most part, managers want the responsibility and authority to do their jobs, yet the conditioned behaviors of both owner and managers keep this unproductive, defeating cycle of dependence in play. 

So how do you create a strong management team?  It takes hard work from both owners and managers. Owners have to decide who will be on the team, be clear about the role they want the management team to play and what decisions managers will be expected to make and which the management team and owner will make.  Managers have to clearly understand what is expected of them as managers and as members of the management team and be held accountable to fulfill those expectations.

The real work begins when the management team meets for the first time. I typically kick off the new team with an off-site meeting.  The most important outcomes of that meeting are to 1) develop a shared vision for the company, 2) set company goals, and 3) establish operating agreements for how the team will communicate and work together, hold each other accountable, make decisions, hold honest and productive conversations with one another, and run their meetings. We also spend time identifying the conditioned behaviors that need to change for the team to work.  This requires that both owner and managers commit to change, which is not an easy task.

It is, however, truly magic when a management team becomes a relied-upon resource for the owner. Managers do step up and take responsibility, and owners let go and begin to trust that the managers can and will run the business smoothly with or without the owner present.  For owners, often they begin sleeping better at night, taking some time off and working “on” the business not “in” it.  At the end of the day, a strong management team is the solution to making your business stronger and more valuable so that when and if the day comes, the return on your investment is realized.   

Theresa Gale is a recognized keynote speaker and a valued resource to organizational leaders who seek her advice and counsel on building thriving, productive, and collaborative workplaces.

Theresa offers a thorough knowledge and understanding of how organizational and human systems work.  Theresa works with leaders to develop and implement the systems that facilitate the achievement of organizational and personal goals and improve team functionality, productivity and synergy among all employees.

Theresa holds a Masters Degree in Human Resource Management and is a Certified Business Manager and a Certified Enneagram Coach.  She also holds certifications in the use of several tools to facilitate maximum benefit from training and consulting efforts.
Contact Theresa at
tgale@transforminc.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.

Culture Drives Business Value: A Positive Correlation by Tim White, PeopleView Advisors

A positive correlation exists between the extent to which a business culture is effective and the performance of a business.  Business culture impacts performance. 

Businesses trying not just to survive, but to accelerate performance and grow business value, must define the core business values and drivers, plus ensure that peoples’ daily behaviors are aligned with and directly reinforce those respective values.  If the cycle connecting core business values and peoples’ daily work behaviors becomes compromised, business performance wanes.  For the ~15-20% of businesses working to develop and maintain effective business cultures, they are enjoying accelerated growth and success in KPIs versus their competitors because they work more effectively and better deliver for their customers.  Effective business cultures create sustainable market differentiation resulting in better performance and increased business value.  

The key to developing an effective business culture is to create appropriate core business values and connect those values to the daily behaviors of each person within the business.  The connection between values and behaviors is critical for a business creating and maintaining consistent growth.

Initially, there must be an accurate understanding of the current value of the business, plus an assessment of the strategy and how it is being implemented across all areas of the business.  A business valuation exercise will address cash flow, revenue, profitability, etc. and determine a more objective view of the business value absent emotional influence.   Business owners, equity owners and senior executives need to understand the difference between what they might think and feel a business is worth and what objectively can be shown as a value for the business.

Also, a clear understanding of how the business is performing and what is working and not working is required.  The business valuation will determine the current value of the business and the business assessment will set the stage for potential opportunities for growth and identify areas for improvement.  For example, a business assessment may show that the primary revenue stream from current customers is at huge risk due to a lack of timely product development or an implementation of inconsistent customer experience threatening customer retention. A business assessment will likely also identify any process(es) or system(s) that should be amended, changed or otherwise enhanced to increase effectiveness.

Once the business valuation and the business assessment are each completed, a strategy must be developed to build and maximize transferable value of the business.  Creating an effective business culture will focus the business on specific growth drivers and ensure that core business values are reinforced by peoples’ daily work behaviors – a cycle of reinforced business culture performance. 

An effective business culture will ensure aligned business focus and behavior across the board.  For example, if a core business value focused on the importance of being customer-centric, then practically almost every decision (big or small) should align to that business value, including how the business goes to market, how marketing and messaging are developed, how voice of the customer information is implemented, the type of people that are hired, how employees are on-boarded, employee compensation metrics, employee performance variables, how the business protects customer data, etc.  The core business value will be the ever-present guide to how people work and behave. 

It takes real effort to create the appropriate core business values and identify daily work behaviors (for all team members) that reinforce those core business values.  For those businesses focused on building value, the effort to instill an effective business culture will produce a stronger performing business with market differentiation and a clear plan to continually maximize business value.

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.

__________

Tim White is currently Principal at PeopleView Advisors, a people-focused business performance firm driving clients' business performance by developing effective business cultures.  PeopleView Advisors builds business value.  [See www.PeopleViewAdvisors.com]  Tim has 25+ years of business experience and has held senior global positions with Thomson Reuters, including VP of Culture & Business Transformation, VP of Market Development, plus VP of Business Segment Strategy.  Tim’s prior experience includes key positions in strategic marketing at LexisNexis, research management at Russell Reynolds Associates, plus other significant positions in corporate legal, professional sales and business operations.  Tim began his career as a corporate attorney.  [See https://www.linkedin.com/in/tim-white-3570574]