Free Webinar "Planning Your Exit"
Successful entrepreneurs plan their exit strategy from the early days of their business. In this webinar we'll discuss how and why to plan your exit from your business, and the role of private equity in middle market exit planning. Most owners find that these steps can help them build a more valuable business that is easier to own and operate. Our guest speaker, Mr. Chris Cheang from Post Capital Partners, will present an overview of private equity and how it can be advantageous for some business owners to consider private equity in their own exit planning.
Register at
https://www3.gotomeeting.com/register/761327878
At this webinar you will learn:
* Four main considerations in developing your exit strategy
* Who needs to be involved in your exit strategy?
* How the exit planning process is related to selling your business some day
* Tips on how to maximize the value of your business before you sell it
* The different types of business buyers
* What buyers are looking for and how that is relevant for you, whether or not you ever sell
* The types of transactions that private equity groups participate in
* The potential advantages of private equity as a buyer or partner for your company
Regardless of where your business is in its life cycle, you have nothing to lose and much to gain from learning more about planning your exit.
Date: September 19, 2012 (Wed.)
Time: 11 AM - 12 PM Central
Audience: Business Owners
Click to register, seating is limited:
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SEVEN REASONS TO SELL NOW
It seems like we're at a fork in the road: there are some positive signs that the economy is entering the earliest stages of a long term expansion, but at the same time, if we dare read the headlines, it seems we're destined to repeat 2008.
It's precisely because we're at this inflection point that we see a lot of business owners thumbing the eject button. If you've been thinking of selling your business, here are seven reasons to get out now:
1. You've lost the stomach for it
A lot of business owners took The Great Recession in the teeth. If you've got your business stabilized and the prospect of fighting through another recession leaves you panic-stricken, it's time to get out.
2. The worst is behind you
Let's say you were mentally getting ready to sell back in 2007. Then 2008 hit, and 2009 was your worst financial year in recent memory. You cut everything you could in 2010, showed a profit in 2011 and now you're starting to see some profit and revenue growth. With your numbers going in the right direction, now might be just the right time to get out.
3. The tax man is coming
Governments around the world are looking for money to fund the cost of an aging population. In the U.S., the capital gains tax rate is set to go up after 2012.
4. Nobody is lucky forever
If you're lucky enough to be in a business that actually benefits from a bad economy, congratulations. You've probably just had the three best years of your business life. But no cycle lasts forever and right now may be a great time to take some chips off the table.
5. The coming glut
As a business owner, demographics are not on your side. As the baby boomers start to retire, we're going to have a glut of small businesses come on the market. That's great if you're buying, but if you're a seller, you may want to get out ahead of the flood.
6. The closing window
It's been tough for private equity companies to raise money since 2008; many firms had their last successful round of fund raising in 2007. Many of these funds have a five-year window in which to invest; otherwise they are required to give the money back to the people who gave it to them. Some boutique private equity firms will make investments in companies that have at least one million dollars in pre-tax profits (larger private equity firms will not go below $3 million in EBITDA); so if you're in the seven-figure club, you could get a bidding war going for your business among private equity buyers keen to invest their money before they have to give it back.
7. A good time to be liquid
The stock market has been swinging wildly lately which is why it would be nice to get liquid. With cash in the bank, you will be able to take advantage of a fire sale on the stocks of good quality companies should the market sink.
If you feel like a gambler at a blackjack table with everything riding on the outcome of one hand, it may be the right time to take a few chips off the table.
Wondering if you have a sellable business? The Sellability Score is a quantitative tool designed to analyze how sellable your business is. After completing the questionnaire, you will immediately receive a Sellability Score out of 100 along with instructions for interpreting your results. Take the test here:
http://www.sellabilityscore.com/austin-dale-group/bob-dale
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Key Considerations
Questions such as the following will help a buyer (and a seller) better understand the business and help value the business more prudently:
What's for sale? What's not for sale? Does it include real estate? Are some of the fixtures and equipment leased instead of owned? What are the arrangements?
What assets are not earning money? Perhaps they should be sold off.
What is proprietary? Consider formulations, patents, software, etc.
What is the competitive advantage? Is it a certain niche, superior marketing, more efficient manufacturing, patents, copyrights, or intellectual property? What are the expirations, if any?
What is the barrier of entry? Capital, low labor, tight relationships?
Are there employment agreements or non-competes? Has management failed to secure these agreements from key employees?
How would someone grow the business? Perhaps it can't be grown.
How much working capital would someone need to run the business?
What is the depth of management and how dependent is the business on the owner or the key manager?
How is the financial reporting undertaken and recorded, and how does management adjust the business accordingly?
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Saving a Deal from Undue Diligence
There are a number of ways to avoid killing a deal as a result of due diligence. The most effective way is to divulge all the company's warts up front and get them on the table early on. Of course, you should also have explanations as to why or how the warts can be addressed and overcome.
For example, say your company has excessive customer concentration, a major concern for buyers. You should be able to either explain that this situation has successfully endured for the past five years or that you have successfully addressed this situation by substantially reducing your company's dependence on these customers over the past year.
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B2B Hot in the Gulf States
So far this year, private equity investors have invested in 118 companies headquartered in the Gulf Coast region, according to the PitchBook Platform. Deal flow in the Gulf States has been relatively spread out across the different industries. The B2B industry leads the activity with a 32% share of the deal flow, followed by Energy with 18%, Healthcare with 17%, B2C with 16%, and IT with 11%.
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 Welcome to our September newsletter. We have partnered with John Warrillow, author of Built to Sell, to offer our clients and colleagues the Sellability Score. To receive your business's Sellability Score, click on the image below and complete the questionnaire. At the conclusion of the questionnaire, you will receive your personalized Sellability Score. We will also send you a 26 page report on your Sellability Score and schedule a time to review the results with you - all with no cost or obligation. Our monthly webinar series resumes this month with "Planning Your Exit" with guest speaker Chris Cheang from Post Capital Partners. Chris will speak about the role of private equity and how it can be helpful to some owners of mid-sized businesses who are planning ahead.
We are an M&A advisory firm that specializes in IT and other technical companies, including health care IT, MSPs, SaaS, and cloud solution providers. We welcome your inquiries and appreciate your referrals.
John Austin & Bob Dale 512-327-0427 
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Closing the Buyer-Seller Price Gap
The price gap for middle-market businesses is real and not just posturing between buyer and seller. The main factor to bridge the gap is whether the principals are committed to doing a deal and whether their respective advisers are clearly helpful. Following are some suggestions on how to close that gap.
Ideas on How to Structure the Deal
- Acquire 70% of seller's stock with a call on the remaining 30% (10% each year for three years).
- Leave the real estate with the seller in order to reduce the price and then rent the facilities. Additionally, the seller can keep the major machinery and equipment and lease it to the buyer as well, thus reducing the transaction price.
- Structure royalty on sales rather than an earnout on gross margins or EBIT.
- Pay a higher rental as part of the package price, thus reducing the goodwill factor.
- Create a subsidiary for the fastest part of the business in which buyer/seller share 50/50 in that piece of the business that "takes off."
- The second generation sellers could take back preferred stock equivalent to 10% of the transaction amount.
Additional Tactics
- Sellers should be willing to hire additional and/or different advisers who are "real pros" on issues of valuation, structuring, tax, etc. The business transaction process is a delicate matter that needs careful communication.
- If a strategic buyer is principally interested in a product line within the selling company, make an offer on only the product line, leaving the balance to be sold off to another party.
- As a buyer, engage a third party (a straw) to buy the stock of the selling company (usually a lower price), then the buyer makes an asset purchase from the third party slightly above the stock price. Precaution: Consult your attorney and tax adviser for legal and tax advice before proceeding with this additional tactic.
- Find aspects of the deal, other than price, which are important; e.g., ongoing owner involvement, retaining the name of the company, employee retention, etc.
- As a buyer, meet the high asking price or bid high in an auction, then try to renegotiate the price during due diligence.
- Break down the prospective transaction into component parts (the seller, the buyer and the transaction itself) for further analysis and options. What leeway do the two parties have with stock or asset deal, earnouts, financial concerns, etc.? Regarding the transaction itself, use comparable transactions and fair market values for benchmarks.
- Get professionals involved with estate planning for the seller in order to structure more after-tax benefits.
Tactics for Overseas Transactions
- In an overseas transaction (a U.S. acquirer buying an Italian company, for example), the consulting agreement is paid by the U.S. parent to the individual Italian seller instead of having the new Italian subsidiary paying the fees. The seller might treat this as tax-free payments because it is not reported in Italy.
- In Europe, where pride of ownership is sometimes paramount, sell 49% to buyer, sell 11% to a trust controlled by the buyer, and leave 40% of the equity with the seller. It then appears to the community/employees that the seller still has a significant interest in the company.
- If the European seller establishes a holding company in Switzerland for the intangibles (e.g., trademarks and patents), then a separate payment can be made for these assets, thus avoiding the capital gains tax on that portion of the business.
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Doing Quick and Timely Diligence
The time from Letter of Intent to Purchase and Sale agreement seems to be getting shorter and shorter. The current timing for due diligence from the signing of the Letter of Intent can be as brief as 30 days, but is very rarely more than 60 days. This makes the diligence process even more important, yet more difficult to accomplish.
Which areas are most time-consuming or costly? What are ways to do quick, yet complete diligence and still keep the costs under control?
- Use outsiders. Make use of marketing consultants, environmental experts, valuation professionals, etc., more and earlier to perform due diligence.
- Form a team. Successful buyers have experienced teams that have done deals before and work well together. These teams are made up of both management and outsiders.
- Plan ahead. Organize diligence efforts well in advance.
- Prepare the other side. When dealing with private company sellers, it is necessary to pre-sell the diligence process, particularly the mountains of paperwork. The patience level of the seller must be gauged.
- Begin early. The earlier the due diligence starts on all fronts, often before the Letter of Intent, the fewer unpleasant surprises there are for both sides.
- Place more focus on indemnification. Reps and warranties generally are not a solution to a difference. Both parties need to resolve issues in other ways. It is helpful to place more focus on indemnification versus reps and warranties.
- Select the right advisers for offshore deals. When doing offshore deals, use advisers from the country of the buyer to assure advisers are loyal to the buyer.
- Look ahead for surprises. Look for potential surprises in the selling company such as the niche business not being as strong as purported, or the selling company not really being that well positioned for growth.
- Don't forget management. Buyers will want to conduct background investigations on the management of the selling company as an additional due diligence safeguard.
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Is This Your Company?
Have you charged yourself with the responsibility of evaluating the status of your company to be sure there are no "skeletons in the closet" and that you won't be trying to sell a "pig in a poke"?
If you have not already done so, it may be helpful to outline the three most important areas of concern -- finance, management and marketing -- and then review each of those areas using the questions listed below.
Finance
- Cash: Is your company taking trade discounts or able to buy at the quantity price? Do you pay trade payments on time? Does your firm have good cash management?
- Bank Problems: Is your company out of financial ratio? Is it under particular scrutiny from the bank? Has it used its complete credit line and/or have suspect relations with its bank?
- Outdated Financials: Does the company have monthly financial statements and detailed financial cash flow projections? Are the company's annual financial statements completed three to four months beyond year end, and are the statements unaudited?
Management
- Continual Crisis: Are you constantly interrupted by emergency telephone calls and demands for immediate decisions?
- Substantial Changes in Key Personnel: Would a review of the last three years of management show an unusual turnover in key positions, including CFO, sales manager and vice president of manufacturing?
- Substantial Lack of Change: Have there been little or few changes in senior management over the years? It may indicate a stagnant business not up with the times and dominated by the CEO.
- Company Pride: Does the company as a whole demonstrate a lack of pride in the company? While pride is somewhat subjective, one can often sense the tempo and spirit of the personnel by the tone of their voice and bounce in their stride.
Marketing
- Loss of Market Share: The key in evaluating market share is to be able to compare unit volume increase or decrease with the direct competition. Sometimes specific price increases will increase dollar sales, but the true measure is unit sales.
- Trade Shows: Does your company show interest and activity at the trade shows in the company's booth compared to the competition?
- New Products: The rate and success of new products, services, etc., is partially related to the extent of the company's ability to look ahead. Part of 3M's success is due to it's goal to generate 30% of revenue from new products introduced in the past five years. How does your company compare?
It is up to the owner and/or CEO to make sure their company doesn't peak or "turn south."
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Dealing With Growing Deal Prices
In a growing economy, what can buyers do to make more of these transactions economically viable? Buy smaller businesses? Add unique value? Consider joint ventures or minority interests? Implement creative financing, accounting and/or structuring?
- Buyers should be prepared to sit on the sidelines, be patient and wait for the right pricing or the right deals.
- Higher price creates greater risk for the financial buyer than for the strategic buyer. Buyers should stay with businesses that they thoroughly understand to mitigate the risk of the unknown.
- Have well-defined exit strategies or refinancing strategies.
- Look at out-of-favor industries and companies where multiples are lower.
- Increase proprietary deal flow and overall deal flow.
- Strategy and synergy should drive the deal. In other words, financial re-engineering, so popular in the '80s with leverage buyouts, is dependent on selling off extraneous units, slashing overhead and working capital. In today's marketplace, fewer companies are left that have not already been restructured.
- Assuming the buyer is a public company, use high P/E stock to help finance the transaction. Also, deals done with stock avoids the long-term write-off of goodwill; goodwill write-offs reduce reported earnings.
- It is necessary to do more due diligence when the acquisition multiples are higher because the higher price creates higher risk of financial success. Therefore, buyers need the best due diligence representation, and the buyers should take more time to analyze what's presented to them.
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