Tag Archives: Sale

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.

[like]

What’s Your Exit Strategy – Both Timing and Price? Four Considerations

Situation: A CEO is considering an exit strategy for the company that she founded. The company has been very successful, and the CEO wants to optimize the value of the company on sale. She seeks advice on how to both maximize the company’s value and how to best prepare for a sale. What’s your exit strategy – both timing and price?

Advice from the CEOs:

  • Value is tied to revenue and profit growth. Revenue growth is based on expansion of the customer base and reshaping the product offering to optimize its market appeal.
    • Consider a usage-based price for the offering. Accompany this with a range of usage offerings based on current customer use patterns.
    • Consider tiered pricing or pricing/use to access lower tiers of the market.
    • Consider bundled products, for example along with complementary products of another company with whom marketing partnerships could be formed.
  • As part of the valuation exercise, determine the best exit strategy and timing:
    • Identify the companies that could be buyers.
    • In each case, identify why they would buy the company.
    • The most compelling reason to purchase the company will be strategic, not financial.
    • Identify the key decision maker in each of the potential buyers.
    • Also identify any factors that would make the company less desirable to any potential acquirers and develop remedies for these.
    • This exercise may help to plan the timing and to understand more about the price that could be fetched.
  • To appeal to a buyer, optimize the organizational chart.
    • If the CEO occupies too many seats on the chart this presents a substantial risk to an acquirer if the founder leaves.
  • Evolve the organizational structure to support growth.
    • If there is no compelling reason to sell in the near term, then staff the company with professional marketing, financial talent, and so on.
    • A lack of talent in key positions limits both the company’s growth and its appeal to potential buyers.
    • In the case of this company, the most important hire will be in marketing. Note that marketing does not equal sales. The company is creating a market and convincing people to change their habits. This is a marketing task, not a sales task.
    • If the analysis of the factors mentioned above determines that now is time to sell, then stay slim.

[like]

How Do You Fund Business Growth? Four Observations

Situation: A company is looking at options to fund growth. These include selling a stake in the company, bank financing, organic growth. or partnering with another company. There are trade-offs to each option. How do you fund business growth?

Advice from the CEOs:

  • There is a question that should be answered before talking about funding: what is the vision for the business?
    • Think about building the business that the founders want to run. What size company feels comfortable from an operational perspective? What does it look like?
    • Does the company have the right people and infrastructure to support planned growth? Are current direct reports capable of taking on additional projects and monitoring both current facilities and additional sites?
    • As the company grows, can the bottom line be increased as fast as the top line?
  • Commit the 5-year plan to paper. Before deciding how the company will grow, determine the vision, the growth rate to support that vision, the organization required, and the strategic plan to get there.
  • The funding decision is an investment decision. What’s the return for a multi-million-dollar investment?  What incremental revenue and earnings will it produce?
    • Estimate how much revenue the investment will generate in 5 years. At the current gross margin, what is the incremental gross margin per year.
    • Given this estimate, what is the projected EBITDA? Does the annual EBITDA represent a reasonable rate of return on the investment?
    • The investment ROI must be known – both from the company’s perspective and for any lender or partner who invests in the planned expansion.
  • How high do the company’s relationships extend in key client companies? Do client upper management realize how critical the company is to them?
    • If the answer is not high enough, develop these relationships. This could open new funding opportunities.
    • For example, if the CEO knows the right people at a key customer, let them know that the company may want to build a facility near them. The customer may be interested in partnering with the company to finance the facility.
    • A multi-million-dollar joint venture plant investment is a modest investment to a large customer if it gains them a strategic advantage.

[like]

How Do You Plan for Retirement? Three Strategies

Situation: The CEO of a family business is anticipating retirement in the next two years. Currently, there is no succession plan. Other family members do not seem interested in running the company. What steps should the CEO be taking? How do you plan for retirement?

Advice from the CEOs:

  • To set the stage for your successor, make sure that you are being paid adequately for your job. If you are being paid less than some of your key employees, nobody else will want your job. Raise your salary to a point where it is appropriate for a CEO, and so it is attractive enough to entice a qualified successor. This will also help attract a buyer should you decide to sell or merge the business. Raising your salary will also help your bottom line if your company is an S Corporation.
  • Once you identify a potential successor, bring this individual into the business as soon as possible so they have an opportunity to understand the business fully and can receive on-the-job training from you. 
    • Understand the numbers and red flags that give you the information and authority to run the company and the respect of your employees. Teach these to your successor so that this person has the same overview of the company that you command.
    • Look at what skills your successor needs to be CEO and start mentoring that person on those as soon as possible.
    • You may need to delay your planned retirement so that you have time to select a successor and prepare that individual to take on your responsibilities. Your current 2-year plan may not work, at least without compromises.
  • Without a management succession plan, the company may not bring in as much in a sale or merger as you expect. It is important that you improve the numbers to maximize the value of the firm if you choose to sell or merge the business.
    • Look at your current range of projects. Focus on those which are most profitable to you and emphasize these. You may be able to reduce staff and expenses by being more focused.

[like]

How Do You Structure an Earnout? Five Perspectives

Situation: A founding CEO is evaluating a purchase offer for his company. The buyer wants the CEO to retain some ownership interest to assure a smooth transition post sale, and ongoing assistance from the CEO so that the company continues to succeed post-sale. Should the CEO retain a minority share of the company? How do you structure an earn-out?

Advice from the CEOs:

  • The ideal option is full payment up-front. However, if the CEO is perceived by the buyer as critical to the company the buyer will want to have some assurance of continued services for some period.
  • An earn-out of fixed payments over time is acceptable provided that the language of the agreement is acceptable. However, performance-based earn-outs make no sense if the CEO no longer has control over the decisions that will impact performance. Don’t structure the payment as an earn-out, but as a retention bonus and assure that the terms are favorable.
  • Post-sale a minority share of your old company holds no value if you can’t monetize it. Holding a small share of a non-traded company has the same challenges.
    • It is all about liquidity.
    • If the other party offers this, ask what is the value is to you of the retained share.
  • Minimize the earn-out if one is demanded, but don’t count on it.
  • If there isn’t a strategic fit between the buyer and the company, the value of the company in a sale will be lower.

[like]

How Do You Raise Capital for an Expansion? Five Guidelines

Situation: A company needs to expand to meet growing demand and has opportunities to expand in several locales. They can finance this expansion through bank loans, or by selling either a minority or majority interest in the company. How do you raise capital for an expansion?

Advice from the CEOs:

  • Minority shareholders have appeal. Just be aware that they have rights. If they own interest above a certain percentage, they gain legal rights such as the ability to force liquidation. Research this percentage, and figure out a percentage of minority ownership that will work for you. Based on this, look for a minority partner who will give you the capital to expand for ownership below this threshold.
  • Consider a hybrid solution combining a smaller loan with sale of a limited percent of the company.
  • This is a risk equation.
    • The loan option is risk / reward for long term profit. You may have to secure the loan with personal assets.
    • On the other hand, selling a minority interest could set you up for life.
    • Look at both options, plus your personal goals and decide which combination of risk, reward and personal security fits you best.
  • One sale option is a phased buy out.
    • Example: sell 30% now, with options under conditions that you accept, to buy a larger share of your company later.
    • Continue to involve the key stakeholders in these discussions.
  • Assure that you secure your own future, and then secure the future of other family members.

[like]

Which is Preferable C or S-Corp Status? Six Suggestions

Situation: A company’s accountant advises them to transition from a C Corporation to an S Corporation. Remaining a C Corp would force them into accrual accounting with significant tax consequences. The accountant also advises that it is easier to sell an S Corp to a buyer, and S Corp status would relieve problems with retained earnings. Which do you think is preferable, C or S Corp status?

Advice from the CEOs:

  • Accountants disagree. Get a second opinion. Also consult a tax or corporate lawyer who will provide another perspective.
  • Another company looked at S vs. C status and found two key factors:
    • S Corp status is great if you expect to lose money for a few years because of the benefit that it can offer to personal taxes. Over the long-term you should look at the difference between personal and corporate tax rates and set your strategy so that it makes the most sense.
    • An S Corp cannot have non-U.S. shareholders.
  • There is more flexibility with C Corp status in your ability to grant options, sell shares, etc. For a suitor, purchase of C Corp shares prior to a full acquisition is like a date before deciding on marriage.
  • C Corp status is good if you are building an empire. S Corp status is better if want to have employee ownership under an ESOP as an option for exit.
  • Since taxes are a significant part of this decision, think carefully before you shift from cash accounting.
    • Once you commit to accrual accounting you can’t go back to cash basis.
    • To the extent have an accrued tax liability you can extend payment of this liability over multiple years.
  • You also may want to consider a hybrid accounting method:
    • Accrual for sales
    • Cash for service
    • Look at whether there are tax advantages to a hybrid model.

[like]

How Do You Plan for Contingencies Post-Deal? Three Insights

Situation: A company is in the midst of due diligence for sale of the company. Chances of closing the deal are 50/50. The CEO, key staff and the Board must plan for both contingencies. How have you planned for contingencies whether a sale goes through or not?

Advice from the CEOs:

  • You have to assume that the company will be a going concern. If there’s no hope for the future, there’s no power in the present. Without hope, you can’t establish a motivating vision around which to rally the team. Whether or not the sale goes through:
    • It is essential that the owners and Board make a commitment to the key employees, if not to the long term business.
    • Absent a long term commitment to the business, customer initiatives and alliances may prove difficult, because major customers will know that an offer is on the table. They want to be sure that they can count on you for ongoing needs.
  • The Board and Leadership Team must create a strategy for moving forward.
    • Key to success will be material and financial commitments from the Board to motivate the Leadership Team to stay on-board.
    • Retention plans may include:
      • Sizeable retention bonuses to the team.
      • If an employee stock-ownership program is in the works, there must be assurance that this will be put into place.
      • Rules of engagement in the case of future due diligences that will preserve the financial interests of the team.
  • For the CEO, support of the Board is crucial. It is imperative that the CEO impress on the Board how critical their support is to both the company and their own financial and fiduciary interests. If the Board fails to make commitment to the team and company moving forward, it will be difficult to create a winning strategy.

[like]

What Questions Do You Ask to Build an Exit Strategy? Five Topics

Interview with Norman Boone, CEO, Mosaic Financial Partners

Situation: Many entrepreneurs who started companies in financial services and other industries are now 55+. They may be ready to move on, but not necessarily ready to move out. What questions should they be asking as they plan their exit strategies?

Advice from Norman Boone:

  • The most critical question is what you want to do with the rest of your life. Most people don’t give this enough thought. It all starts with what is most important to you.
    • Start with a self-inventory assessment – what are your resources, options, and what do you want to do or accomplish?
    • Discuss with your significant other or partner what will work for both of you.
    • Answering these questions helps to lay out the alternatives. Now, thinking about your company, what is important to you? Is it legacy, the future of your employees and business partners, the future of your clients?  Does your business continue, or to you see a sunset?
  • If your business will continue, do you see an internal succession, or sale or merger of the company? If internal succession, here are the issues.
    • Who will be the new leadership? Do you have good candidates on staff, or do you need to hire someone who will take over?
    • Be careful not to expect your successor to be a mini-you. They need to be able to bring their own talents and perspectives to the leadership role, not try to duplicate you.
    • Do you need to beef up the training of current staff to increase their managerial capacities?
    • Is an employee buy-out an option? There is a variety of choices to investigate.
    • What will be your role during and after the transition? Will you accept that new leadership may take the company in new directions?
    • To be most effective, this needs to be a 5 or 10 year process. Ideally you will have two to four successor candidates to evaluate.
  • Do you sell to the highest bidder? Many of the questions here are like those above.
    • Will you sell to the highest bidder, or to the bidder who seems the best fit for your stakeholders and clients?
    • How much voice, if any, will you offer your employees and / or clients in the selection process?
    • What due diligence will you do on potential buyers?
  • Do you merge with a similar company?
    • If you can find a compatible merger partner the combination may be the best of two worlds.
    • What is the culture? If different, what will be the impact?
    • A merger of like companies may assume that the other party has a commitment to ongoing operation: but this is not guaranteed.
    • What will your role be, and what is the transition plan? How will you involve your key people in the transition?
  • The other option is to sunset the company. Here you must have enough in savings so that you can forgo future income from the business.
    • What about the other stakeholders and clients who’ve invested their careers and business in you?
    • Try to time your exit with the expiration of leases and other obligations to minimize exit cost.
    • How will you assist the transition of stakeholders and clients to new opportunities and providers?

You can contact Norm Boone at [email protected]

Key Words: Entrepreneur, Retire, Exit, Self-assessment, Options, Alternatives, Succession, Buy-out, Sale, Merger, Sunset, Staff, Stakeholder, Client, Plan, Control, Culture

[like]

How Do You Evaluate Strategic Options? Three Suggestions

Situation: A company has developed and shipped equipment that puts it into a new market. They can continue to pursue this direction or make a significant shift that will open up a larger opportunity. What are the most important considerations to this decision?

Advice from the CEOs:

  • There are a number of points that you need to clarify before making this decision:
    • What is the magnitude of difference between the two opportunities?
    • How much of a shift in technology is required to make the jump to the larger segment?
    • How much of the expertise to make this shift do you have in-house, and how much must you bring in, acquire or develop through partnerships?
    • What is your most likely exit strategy and how will each opportunity impact it?
  • Are you being realistic in your ability to meet development timelines?
    • If you don’t have deep expertise in the area that you want to develop, the answer is most likely yes. If you do you can often beat your initial estimates.
    • If the shift includes both there is risk that you will underestimate the time required to develop both the prototype and to turn the prototype into production quality technology.
  • If your ultimate objective is to sell the company, be aware that selling any company can be tricky, and you may not be able to sell the company for the value that you need to support yourself after the sale.
    • Study other companies in your geography and market, and determine both the price that they received for their companies and how they positioned their companies for sale.
    • As an alternative to selling, consider hiring a general manager to run the company. This can free you to concentrate on your passion and also increase the value of the company if you decide to sell at a future date.

Key Words: Strategy, Technology, Equipment, Market, Decision, Opportunity, Expertise, Timeline, Exit, Value, Sale, Positioning, Manager

[like]