First a goal, then a plan, and only then a sale, advisers to closely held businesses recommend when the time comes. Or maybe not–sometimes a partial exit is best. Experts run down the options for owners to maximize the value of their life’s work.
Time is right to sell for owners with a detailed plan, CPA says
TODD LURIE,
Lurie Besikof Lapidus
ABOUT ACTIVITY: I’m seeing this as a really good time and opportunity for a lot of business owners who are reaching a point in their life to make a decision to sell their business. It’s a good environment to sell right now, maybe not as good as it used to be with the tax rates, but still pretty good potential multiples. Multiples are getting stronger.
ABOUT BEST ADVICE: No. 1 is sell when you don’t have to. Don’t be forced into absolutely needing to sell. No. 2 is to develop that cohesive, comprehensive plan, otherwise getting to the goal line of selling the business is difficult. I don’t see that plan in a majority of cases, and we help them develop the value drivers, as I call them, to get the best value for their company.
ABOUT VALUE DRIVERS: We help them focus on increasing cash flow; developing their operating systems that improve the sustainability of the cash flows and their internal controls; helping them document that sustainability of their earnings, and oftentimes the recommendation is to do audited financial statements; making sure they’ve solidified and diversified their customer base; and lastly and certainly not the least important, helping them build a solid management team that can run the business.
ABOUT INCREASING CASH FLOW: It’s a focus on cutting their costs, or watching their bottom line as to what’s driving their cash flow, and trying to cut out some of the things that an owner really wouldn’t need to operate their business. Obviously trying to grow the top line is also of utmost importance, and still trying to expand their business and increase sales. Watch what they pay for from a capital standpoint—hold off on that if they don’t need to, but at the same time don’t overlook the need to potentially invest if it will help build value.
ABOUT SUSTAINABLE EARNINGS: Historical data is important. Buyers want to see a good past three to five years of performance, and documenting that and having the systems in place to sustain the operation. You want to make sure it’s not a one- or two-year fluke that they incurred a profitable year.
THE BOTTOM LINE: Owners, if they have made the decision to sell and have their plan in place, should draw on the experience of their board of directors and/or trusted advisers.
Todd Lurie, Lurie Besikof Lapidus & Co., Minneapolis: 612.381.8804; tlurie@lblco.com; www.lblco.com
Not so fast, adviser says, when owners want to sell: `harvesting’ may be better
JIM REDPATH,
HLB Tautges Redpath
ABOUT SELLING: Many times selling is the plan, but many times it isn’t. We’ll sit down and say, here’s what we believe are the areas you need to address to achieve your goals. We start with saying you need a governance system; a management team and a management team succession plan; a strategic planning system; an ownership transfer plan; and then it ties into your estate tax and distribution goals. A lot of people start with estate tax and say that’s the end-all.
I think it’s ownership planning. Ultimately what does selling mean? It means taking the risk off the table. I always start with, do you need to sell? Can you be in a position in your life so it’s OK to have the business and harvest the business?
ABOUT HARVESTING: Most of them feel guilty about harvesting. They say, I just don’t feel right taking a bunch of money out of the company. Succession planning isn’t necessarily selling. Now, lots of my clients do sell a business, because there’s less risk. But that’s part of creating the succession plan.
I had one entrepreneur that built a business and it was beautiful. I had breakfast with him recently, and I said, you know what, I don’t think you’re the best owner for the business right now. It got too big for you. The right owner is going to take care of you and your employees.
It’s amazing how many owners are concerned about the employees. That’s why we look at ESOPs, employee stock ownership plans, as an alternative, or we look at management buyouts, or a partial buyout. Most of the financial buyers want the existing owners to stay in the game a little bit. They might want to buy 80 or 90 percent of the company, but a large number of existing owners still retain a percentage.
ABOUT A PARTIAL SALE: One option is selling a portion of the business, not having all your eggs in one basket. The other is leveraging it. Some will find debt and borrow half the value, and take some equity off the table. I always start with this: can you get this running in a way that you can get key management to run it, retain what you need to grow and put it in your piggy bank?
It’s interesting that getting these things in order—a governance system, a strategic planning system, an ownership transfer plan—those things all add value to your business if you do sell one day.
ABOUT GOVERNANCE: Governance deals with separation of ownership and management, by using a governance mechanism such as a board of directors. A good board is valuable and a bad board is a waste of time and money. A good board balances the needs of ownership and the needs of the business.
ABOUT STRATEGIC PLANNING: It’s all about, where are we going, what do we want to look like in 10 years, and then how are we going to get there? What are we going to do in the next three years to get where we want to get in 10 years? What are we going to do in the next year to get where we want to get in three years? It’s amazing when people start putting this in place, how they change.
I’ve run into so many businesses that don’t even have half a plan.
I see they don’t have any strategic plan and they don’t know where they want to go. The other interested parties, like the customers and employees and vendors, those people all have an interest in where this company is going and they’d really like to know. Or they have a plan so complicated that you don’t even read it. A strategic plan should be about three pages, not a 100-page book.
THE BOTTOM LINE: A business can do so much good for so many people. I start with, what can we do without selling it? If we can’t hold on to the business, then we look at what is the best way to sell it, and who is the best owner?
Jim Redpath, HLB Tautges Redpath, Woodbury: 651.407.5802; contact@hlbtr.com; www.hlbtr.com
ESOP, management buyout are among options for owners
PAUL HALVERSON,
Chartwell Capital Solutions
ABOUT OPTIONS: If you start to go down a list of choices, first off I could sell it to a strategic buyer, someone in my industry, a known player, and they would combine the companies and increase market share. Second, I could do a transaction with private equity, where a financial buyer comes in, and I leave some equity on the table and we grow the company.
But there are alternative options to purely selling your company to a third party. I can do a family sale, and that’s a big deal in and of itself, kind of its own category. Then there are two that we spend a fair amount of time in. There is a management buyout opportunity, and we see a fair amount of that. So versus selling off to a strategic buyer, the management team can buy out the company. It’s less disruptive than a third-party sale. But there are issues there, like how does the management team get the capital, mostly.
ABOUT GAINING SUCH CAPITAL: There could be third party capital providers, senior debt lenders, mezzanine lenders, and oftentimes there’s seller financing involved, and the business owner finances part of it and continues with an equity stake. They might sell 50 percent or 30 or 60, and continue to be involved in the business, and at a later date sell the balance. It may not preclude a third party strategic sale in three years or five years.
ABOUT ONE MORE OPTION: The other option is an ESOP, or employee stock ownership plan. It’s a non-disruptive transaction, where you’re basically selling all or part of the equity to employees through a retirement plan. There are tax advantages to that. What you have is a government regulated retirement plan that becomes a shareholder. So there’s certainly another layer of complexity in selling an ESOP owned company. There are barriers, but there are many successful ESOP companies that have implemented a sale down the road.
ABOUT OBJECTIVES: Some owners have the objective, maximize the after-tax dollars in my pocket, and that’s their only concern. And that’s fine. Some have other issues they like to achieve, such as long-term success and stability of the company, continued involvement in the community, where the legacy issue becomes very important.
We work on that to make sure we reach the desired outcomes. There are probably 10 or 15 topics that come to mind. We will take those objectives and compare and contrast them with different options they have. So what does it look like if you do a management buyout, or a sale to private equity, and then we compare those outcomes, and determine which one matches up best.
ABOUT DIFFERING OWNERS: It does vary. Some people are very focused, they know exactly what they want to do and they go do it. Others are more vague, because they’ve spent 30 years building the business, and they’re trying to decide what is next. They’ve heard about challenges about one transaction type or another. It does get to be a personal exploration with the business owners.
THE BOTTOM LINE: There are more creative solutions that exist today. Even a private equity transaction, it used to be they bought a majority stake. Now there are private equity firms that buy minority stakes. There are more sophisticated structures today than we had years ago, which is great for the owners because they have choices.
Paul Halverson,
Chartwell Capital Solutions,
Minneapolis: 612.230.3110;
paul.halverson@chartwellcapitalsolutions.com; www.chartwellcapitalsolutions.
Planning allows time to fill any gaps, which in turn boosts valuation
GREG LOESCHKE,
Lingate Financial Group
ABOUT THE MARKET: It’s still definitely a seller’s market. A lot of work that we do is retiring entrepreneurs and generational transitions and partner transitions. The businesses we’re seeing now for the most part have recovered from the recession and the timing’s right.
We drop back and we put a buyer’s hat on as we talk to potential clients. If you were to look at a bulleted list that helps with a transition down the road, it would be: Do you have compiled or reviewed financial statements, for a period of time so there’s consistent financial statements. Do you have a management team, two, three to five people in key positions in the company that are going to be staying after the transitions.
ABOUT THE REQUIREMENTS: What’s the state of your business systems; do you have a business management system that’s linked to your accounting system, are they relatively current. Do you have a formalized sales structure or sales organization, are you employing some best practices there. More times than not businesses could use some additional horsepower in the finance and the sales/marketing area.
Most of the companies we work with are being referred into us by their accountant or lawyer, and we’re happy to meet with people ideally two, three, four, five years in advance, because we can give them a perspective on what the market’s doing and a broad brush look at what the value of the company would be.
ABOUT SUCCESSION PLANNING: One of the things that buyers look at, say you have a retiring entrepreneur. The buyer wants to understand, what’s left in the business if the owner/entrepreneur is making 100 percent of the business decisions, they have 100 percent of the sales calls, or the owner is setting up all of the machines before the production run, what real value is there left behind in the business once the owner leaves? So what we’re looking for is, in order to maximize the value of the business, the owner needs to have started the process of transferring the secret sauce of the business.
ABOUT THE BUYERS: We talk to private equity funds all over the United States that are actively looking for businesses to buy. We tend to focus in the lower end of middle market, which typically goes up to $250 million in revenue, so we focus on $100 million or below.
THE BOTTOM LINE: There’s so much money out there looking for businesses. The estimates, from a couple of different sources, they’re saying there’s $2 trillion of cash right now on the balance sheets of public and private companies. And then private equity funds have about $500 billion in committed capital, and that doesn’t include individuals looking to buy businesses, and also available bank capital.
Greg Loeschke, Lingate Financial Group, Golden Valley: 763.546.8201;
gloeschke@lingate.com; www.lingate.com
Does sale make sense to family, career, legacy? Answers are important
Dan Young,
Lommen Abdo
ABOUT ACTIVITY: I’ve seen two categories of succession planning. One tends to be consistent with closely held business and family businesses, that deal with the aging population of the elder. That happens regardless of the economy. That tends to be pretty steady.
The second is succession planning as non-age related issues. So folks that are doing mergers, acquisition work. That tends to ebb and flow with the economy. As the economy heats up, those deals heat up. As the economy cools down the structure changes.
We’ve been working on a number of different types of deals, both strategic mergers, strategic joint ventures, they’re strategic in that they hope it will make strategic sense to the acquiring company. Then the financial buyers that just buy it for financial reasons, that doesn’t seem as prevalent any more. They’re not buying things just to buy things, there’s always a strategic component.
ABOUT BEST ADVICE: There are two different areas. One is the fairly straightforward advice of tax implication, the legal implication, the structure—asset purchase vs. stock purchase, long-term capital gains. There tends to be a definitive answer or general advice as to what we give our clients.
The other part, which falls into a broader category from a trusted adviser client, we would ask, does it make sense to you in the short term, medium term and long term? Does it make sense to your family, your career, your legacy? Of course, we don’t have the answers to those. All we do is pose the question to the client, to make sure they’ve thought through the non-financial aspects.
ABOUT THE CHANGE: Usually folks have given their whole life, blood, sweat and tears to an industry, and a succession plan can be a big change, and if it’s not thought through it can go very badly.
ABOUT INTERNAL CANDIDATES: Non-family member folks that have interest in being part of the succession plan, there are definite positives and definite drawbacks. The positive is, key employees know the business intimately, the pros and the cons, they probably have some very specific ideas of how to grow or change the business that may not have been able to be implemented.
The downside is, we seem to find most internal candidates that would be able to acquire it have issues getting the capital to adequately fund the acquisition. In that case you’d have to be a little bit more creative as to how to do it, and it tends to need a lot of cooperation with the firm that’s being acquired.
With a family member you have similar issues, except you just add the whole family element to it. That just adds complexity.
THE BOTTOM LINE: The two areas that tend to be very important are financial: make sure the structure and the tax aspects are addressed early on in the negotiating process, so the owner doesn’t get too far down the line with the buying company and can’t back out with the structure of it.
The second is this intangible aspect of it, visualizing yourself not being the owner. Does that make sense to your family, your legacy, your career? If it does, great, but if it doesn’t address it internally so you can be prepared when it happens. You don’t want to wake up and be at a loss when you aren’t going to the office.
Dan Young, Lommen Abdo,
Minneapolis: 612.336.9343;
dyoung@lommen.com; www.lommen.com
Five years ahead of desired exit is ideal time to start
TERRI KRIVOSHA,
Maslon
ABOUT ACTIVITY: The demographics of baby boomers are making people think about exit. People don’t necessarily have plans, and the best time to think about it is before it’s too late. This is a five-year process. You don’t wake up one day and decide to sell. I always encourage them to think about some sort of plan, which may or may not come to fruition, but then you can adapt it.
What happened in late 2007, 08, 09, was there was no sense to trade in their business assets for cash because they were better off investing in their businesses with the valuations so low. Now I’ve got clients looking to acquire businesses, and clients looking to exit.
ABOUT BEST ADVICE: The first thing to think about is what you mean by exit. Do you want to step away from the business and continue to own it? If that’s the case you need to develop a leadership group that you trust. Do you want to sell the business, and if that’s the case you need to think about how to retain your employees. I’m seeing that more to figure out rewards for employees so they’ll stick it out for the long haul. If you stay with us for the sale we’ll give you compensation.
ABOUT PITFALLS TO AVOID: An exit strategy can be a full-time job. They can forget to run the business and then the business devalues. You have to keep running and operating the business, so that’s why it’s good to get professionals that can help you, or to get one person designated to be in charge of that, so you as an owner can focus on continuing to grow the business.
Don’t share your plans with your employees until the business is sold, because they’ll leave or hold you hostage. It’s important to find advisers that you can talk about with this, but to be very private about it. Sometimes you’ll have to bring your financial person into the planning, and then you have them sign an NDA, a non-disclosure agreement, and they’ll get some kind of bonus.
ABOUT ADVISERS: The other advice I would give is, if you have partners you absolutely have to be on the same page. I’ve been buying companies for clients who are three brothers, and two want to sell and one’s not so sure and you get to the end. Before you enter into any sort of process to sell the company, you have to make sure your partners all agree, because that can be a total sideshow.
THE BOTTOM LINE: You don’t heal yourself when you’re not a doctor. And look for somebody that’s got experience, and it may not be the counsel that you have used on a regular basis. Sometimes it’s important to find somebody with expertise in the area, to work with your counsel to give the extra level of expertise.
Terri Krivosha, Maslon, Minneapolis: 612.672.8340; terri.krivosha@maslon.com; www.maslon.com
