Tag Archives: Exit

What Should You Look For in Selling a Company? Eleven Points

Situation: The owners of a company wish to sell the company. The CEO is 50% owner and some senior employees are partial owners. Ideally the CEO wants to maintain the company’s culture for the good of the employees. What should the CEO look for in an acquiring company or a merger? What pitfalls should be avoided?

Advice from the CEOs:

  • Key Considerations – Define the exit objectives. Understand that pursuing an exit will take time away from other activities. Know your buyer’s team.
  • Stakeholder Alignment – Make sure various stakeholders agree in advance on exit objectives.
  • “Keep an eye on the ball” – Selling a company can be a distraction. Focus on running the company, not on the novelty of selling.
  • Watch Out for Deal-Killer Individual – One member told of a CFO of a buyer company who sabotaged a sale at the last minute.
  • Qualify the Buyer’s Decision Process – It is valuable to understand the process that the buying company will follow to made the acquisition.
  • Broker or M&A Specialist? – About 50% of private party deals are not handled by a broker. These are sales within the industry. Few sales to insiders, such as employees or family, are handled by brokers. The same is true for synergistic companies that are already familiar with each other.
  • Avoid Over Reliance on a Broker – One member told of losing touch with important details of a sale transaction when using a broker. A better alternative was a transaction advisor as opposed to a broker paid by commission.
  • Consider an “Insider” Sale – Some businesses cannot be easily sold to outside buyers. In this case selling to insiders, employees or family may be a good solution. Employee Stock Ownership Plans (ESOPs), or “S” ESOPs using an S-Corp entity, have been numerous and successful.
  • Consider Private Equity – One member spoke of selling to an investment group or private equity group that specializes in buying smaller companies.
  • Buying on the Come – Buyers look for growth. Showing a history of profitable growth is highly desirable. Having a plan for future growth in place is also valuable.
  • Leverage Strategic Partners to Boost Value – One way to increase equity value is to partner with another company. Examples include a partner that provides greater distribution and sales, or which can validate the viability of a technology. That partner can become a future purchaser.

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What is the Role and Value of an M&A Consultant? Four Points

Situation: The owners wish to sell a company. One option is an M&A consultant to assist with the sale. The CEO wants to know about others’ experience. What is the role and value of an M&A consultant?

Advice from the CEOs:

  • The first step is to assess the strengths and weaknesses of a consultant to determine their value.
    • The cost of an M&A consultant is inexpensive relative to the value of the business.
    • Accounting rules and M&A practices of public companies do not always apply to private companies. Valuation is affected by variations in profits year-by-year, so consultants typically use 3 to 5 year historical results for comparison against industry standards.
    • Technology companies may have a different value than service-oriented businesses, particularly if significant IP is involved. Look at the creativity of potential consultants’ solutions.
  • Consultant alternatives:
    • Business brokers, accountants, and valuation specialists can all offer valuations.
    • Investment Bankers who charge an upfront fee may be more strategically oriented. Typically, the more strategic the valuation exercise, the more dollars involved.
  • Be cautious in choosing a consultant.
    • Many business owners spend a lot of time and money with accountants and lawyers when they could save by working with a business broker paid on a commission basis.
    • Business brokers are skilled at getting business sold – however the deal is not necessarily in the best interest of the owner. Brokers are paid by commission and so may not have the best interests of the owner at heart.
  • What should you look for in a consultant?
    • Maximization of sale value with a minimal tax exposure.
    • A consultant who will help the owner figure out what they want from their business and exit – who will help to establish owners’ exit objective, a key to a successful exit.
    • A consultant who will help choose the right team of advisors.

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How Do You Guide a Company Through a Sale? Five Thoughts

Situation: A company was built on capital equipment complemented by annuity sales of supplies used by the equipment. The company is moving toward automation of technology and offshore production of OEM equipment. An OEM partner will take on the equipment side of the business and the company will focus on automated supply solutions with sales direct to the end customer. The OEM partner has approached the company with a purchase offer. How do you guide a company through a sale?

Advice from the CEOs:

  • It is important to determine the value proposition, both from the company’s standpoint and the standpoint of the OEM buyer. The company’s objective will be to optimize the intersection of these two views of the value proposition — to its benefit.
  • Look at current employees and the technology and determine what to do to preserve their positions and interests. This will become part of the negotiation, but it is essential to have a clear idea of how this meshes with the CEO’s personal priorities.
  • Look to outside experts for advice on exit and succession planning.
  • Determine the CEO’s vision and path of involvement up to the sale. This involvement is negotiable, but should remain consistent with the CEO’s vision during the negotiation.
  • What is the company’s patent position, and the value of the patents in terms of future revenue? IP produces a future revenue stream. Consider the valuation to be in the range of 4 years of IP value.

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What Are Your Five- and Ten-Year Plans? Five Points

Situation: A CEO is considering her exit strategy between five and ten years out. She wants to do what is best both for her, the company and her employees, assuring that both personal and company needs are met and the company is ready for transition. What are your five- and ten-year plans?

Advice from the CEOs:

  • The personal side and the company’s future are closely linked. The solutions and strategy must fit both the CEO’s priorities as well as those of the company. By looking at the CEO’s role, the current and future needs of the company, and any changes that need to be made, the CEO is preparing for an eventual exit.
  • The CEO must decide what lifestyle she wants – both as she prepares for eventual exit and as she prepares the company to continue under new leadership.
    • She must decide what she wants to do with her time in an ideal world. What will make her happy as she prepares for the future?
    • This must be considered both for herself and her business partners. Have conversations to align both business and personal expectations.
    • Conduct a strategic planning retreat on the future of the company as well as the transition of leadership.
    • Have a talk with significant others to align personal expectations.
  • What changes in leadership are necessary to implement the plan? What are the key roles and who will fill them? What is the succession plan for each key role? Are current personnel in place to fill these roles, or is additional hiring and training necessary?
  • Consider an ESOP or a virtual stock program to enhance employee incentives and sense of ownership in the company’s future.
  • Decide what exit means on a personal level.
    • Transitioning from founder to leader gets the CEO more involved in the company.
    • Meditate on priorities and engage in ongoing discussions with key personnel to jointly plan the future.

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How Do You Replace Aging Talent? Four Options

Situation: A CEO is concerned that all her key personnel are over 50. This includes software engineers who are experts in languages which remain at the foundation of many customers’ databases, but which are no longer formally taught. How do you replace aging talent?

Advice from the CEOs:

  • Look at which areas potentially limit the company’s growth. Is it technology and software expertise, or marketing and sales? Based on this assessment, rank the critical positions to be filled and start hiring staff who can grow into the most critical positions.
  • Take a cue from the Japanese. For years their aging workforce was predicted to limit the country’s growth. Instead, they chose to retain employees through their 70s and this has helped them to maintain both productivity and employment.
    • Many Baby Boomers are finding that they don’t have the savings to retire and are working well past the historic retirement age.
    • Other Baby Boomers retired but found themselves bored after a productive career and have returned to the labor pool.
    • These factors may delay the company’s need to replace aging talent.
  • The bigger question is what to do if a key player is lost. Focus on hiring back-ups to key personnel and allow several years for them to come up to full speed. Current employment trends suggest that numbers of experienced people are returning to the labor pool. Look for a few good people to add to the team.
  • What are the plans of the company’s key clients? Do they plan to stay with the company’s products and expertise, or to sunset these and replace them with new technology? Adjust operational objectives, as well as the exit strategy, to achieve desired growth given customers’ timeframes.

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What is Appropriate Compensation for a Founder CEO? Four Points

Situation: A founder CEO established her company with a significant personal loan, which is being repaid. To compensate herself for the original investment, she is considering several options including an employee stock option plan (ESOP) through which employees would be able to establish ownership of a certain percent of the company. What is appropriate compensation for a founder CEO?

Advice from the CEOs:

  • The critical question is: what is the CEO’s goal? The next question is – what options best serve to achieve goal?
    • If the goal is long-term goal is maintaining or increasing current income combined with long-term security – like a Trust Fund – seek the counsel of a financial advisor who can help model how the options under consideration will satisfy the goal.
    • This individual can also evaluate the tax advantages associated with various options.
  • Is there a clear exit strategy in place?
    • Every company needs a written exit strategy, as well as a plan to put this strategy into action.
    • The simple existence of a strategy and a plan does not preclude adjusting either the strategy or the plan as conditions or opportunities change.
  • There are two important corollary points:
    • Having a strategy and plan is the only way to build a structure of accountability within the company; and
    • Recalling a lesson from Jim Collins’s book, Good to Great, the successful companies selected a solid strategy and stuck with it; the less successful comparators continually changed strategy and never allowed momentum to build.
  • To assist establishing an exit strategy, seek the advice of one or two consultants. There are several highly qualified exit advisors that can be researched through current professional contacts or via the Internet.

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How to You Generate a Predictable P&L? Three Solutions

Situation: The CEO of a consulting company is frustrated by lumpy revenue and profits. From quarter to quarter it has been difficult to predict either number. Unpredictability reduces options in valuation and exit exercises, as banks and acquirers favor predictability. How do you generate a predictable P&L?

Advice from the CEOs:

  • The objective is to construct a revenue base built on predictability, even if this is at lower margins. Given a predictable base, the company can complement predictable revenue and profits with higher dollar and margin opportunities as they arise.
    • Analyze the projects that the company contracts for both revenue and profitability. Some projects will be bread and butter situations which are more common and predictable, but which generate less revenue and profit per project. Others will be customer crisis driven. These latter projects will have higher revenue and profit, particularly if the company is the vendor of choice; the tradeoff is that the frequency of these contracts is unpredictable.
    • If the objective is predictability, the company’s base should be built on bread and butter projects. As the company grows, focus on this base. Customer crisis projects can then be added as they arise to bump both revenue and profit.
    • The objective will be to become one of the top 2-3 outside vendors of the choicest clients. Target projects may be ongoing maintenance of older projects in the client companies’ portfolios.
  • How would this model be pursued?
    • Focus on the company’s top 5 customers. Reduce risk by optimizing customer leverage as a proven entity and offer them strategic deals.
    • The focus is long-term project based with guaranteed delivery at lower cost.
    • Identify the fear or insecurity that exists within the customer and provide sleep insurance.
    • This model works well in the new economy – get lean, manage infrastructure size and cost, and grow with the economy.
    • Alternately, identify an area where the customer may not have enough resources and provide a solution that allows them to address this without adding additional personnel or by using existing personnel more efficiently.
  • Another option is to develop a virtual office model. Provide resources for $X per month, with an evergreen provision.

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How Do You Structure a Small Company Board? Five Suggestions

Situation: A small tech company’s Board of Directors is made up primarily of founders and advisors. The CEO wants to know how other companies structure their Boards. Concerns include increasing accountability of management, obtaining an objective view of company operations so to counteract group-think, and accessing opportunities for strategic alignment. How do you structure a small company Board?

Advice from the CEOs:

  • In a small company, the fewer the number of board members and owners, the better. There are two considerations: control of the destiny of the company and complexity of the transaction in case of an investment or buy-out opportunity.
  • It is important to differentiate major from minor shareholders, including incentive-based owners.
  • What are the advantages of a Board of Directors?
    • Sounding Board – a group that can help management evaluate product and market opportunities.
    • Accountability – Board meetings provide an opportunity to assure that leadership and management are focusing on the best opportunities for the company.
    • Exit – knowledge of the industry, ties and introductions to potential acquirers.
  • Given new Federal regulations, the proper role of a Board has changed. Key responsibilities of Boards include:
    • Oversight of Corporate Governance.
    • Fiduciary Responsibility – to the shareholders.
    • Work with local or regional experts on Board role and structure. Experts can provide introductions to potential Board members that fit the company’s needs.
    • Good Board members will want Directors and Officers Insurance coverage.
  • Consider developing an Advisory Board, to compliment a stronger Boards of Directors.
    • Look at the key talents that the company is missing internally.
    • Ask friends, business partners and associates who they know who can add these talents.
    • Before kicking off a formal Advisory Board, start with informal discussions. Consider a facilitated dinner to share ideas.
    • One company has eight outside advisors who each receive 1/8 of a percent of the shares of the company for three years of service. The share offer required for service may be a function of the eventual forecasted exit value of the company.

Special thanks to the late Bill Rusher for his insight and contribution to this discussion.

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How Do You Prepare for an Acquisition? Six Suggestions

Situation: A company is purchasing another company to expand its product offering. The CEO is concerned that the employees need to stay focused through the closing date. He is also concerned about retaining key employees both of his company and the company that he is buying. How do you prepare for an acquisition?

Advice from the CEOs:

  • Until the deal closes, don’t change anything about your current direction.
  • As you negotiate and move to close, be mindful of competitive bids.
    • This will help to keep the deal in place.
    • It may also open the option to put together the deal and then seek competitive bids to fund the deal through private equity groups.
  • Get three second opinions – learn what could go wrong with this deal so that you can plan and anticipate.
  • To assure that you retain key staff take the following steps:
    • Hire consultants: HR, financial, see what they recommend.
    • Offer key employers favorably priced options for a combined minority position in the company. This offers them an upside and will be an effective retention package.
  • What else can be done to retain key employees.
    • Let them know how this acquisition will position the company as the Dream Team company in your space.
    • Explain how this acquisition gets the company closer to a true exit strategy which will be financially beneficial to them.
  • If you can assure key employees that they will not experience any change in their job, title, responsibilities or compensation, retention may not be an issue.

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How Do You Evaluate Marketing Partners? Six Observations

Situation: A company is interested in partnering with a larger company to market a suite of services. They have identified two good candidates. They haven’t worked with partners in the past and are curious about how other companies work with marketing partners. How do you evaluate marketing partners?

Advice from the CEOs:

  • The danger of working with a single marketing partner is that all of your eggs are in one basket. Your success in this relationship will depend upon the success of the marketing partner. This, in turn, will depend on the amount of attention that they pay to marketing your services, and on how actively their sales department sells your services. The danger to you is loss of control over the marketing and sales process.
  • Another company had a similar situation several years ago. At that time, the advice of the CEOs was to not select an exclusive partner, but instead to work with two different marketing partners, even though they are competitors. The company followed this advice, and it has worked like a charm.
  • Start with a position that you want a non-exclusive relationship. If a potential partner insists on exclusivity then ask for fixed guarantees of business and fixed minimums.
  • Other companies around the table work in partnership with competing companies all of the time. All of the partners value the services that these companies provide, and the relationships are harmonious.
  • If a possible partner insists on an exclusive relationship, another alternative is to split territories and supplement your agreements with most favored nation clauses.
  • Going back to the original question, provided that the terms offered by the marketing partner/partners are favorable, you won’t really know how they will perform until you establish a relationship and monitor it over time. Exit clauses and conditions will be an important part of any marketing agreement.

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