Archive for the ‘Exit Strategy’ Category

5 Tips For Ensuring A Smooth Transition In Ownership

Tuesday, March 18th, 2014

There are 3 things that a business owner must do to ensure their exit plan goes well. The first is to pick the right buyer – and I talked about that last week.5 things that will help make the transition to the new owner go smoothly

The second is to make the transition to the new owner silky smooth. Here are 5 things that can be done to make that happen.

1.  Identify the stakeholders. Regardless of whether the company is sold to a 3rd party, members of the management team or to a family member, there are 5 groups of people who will be affected.

They are the employees; customers; suppliers; bank or other investors; and family members.

And there may be a sixth – a “regular” or Advisory Board.

2.  Communicate with them. There is some information they will all need to be given. But there is some that only has to be shared with specific group(s).

And the method, e.g. face-to-face or in writing – and timing of the communication will vary.

3.  Time the transition well. Ideally that would be:

  • When the economy is forecast to do well.
  • After 3 years of good results.
  • When the seller is still in good health.
  • At a time of year that is not the company’s busiest period.

4.  Plan and project manage it. Many ‘baby boomer’ owners seem determined to avoid thinking about their exit until the last moment. That creates problems from a tax planning, and every other, point of view.

Careful planning is vital when one family member is to be chosen over others. It takes time to assess business acumen and to design and implement a development program.

5.  Anticipate the 3 things that will happen during the transition. The first is that productivity will go down. People will be preoccupied trying to guess what the future holds and what the change means for them.

Not everyone will be happy. Some key employees may leave and, worse, some family members will feel slighted.

Finally, there may be more mistakes because people are distracted. And there are unexpected problems at every other time, so it’s logical to expect them during the transition.

Most business owners will only sell one business during their life. And there are very few other things they will do only once.

Doesn’t that make putting time and effort into getting it right seem like common sense?

 

If you enjoyed this post you’ll also enjoy Being Profitable and Strong Increases Valuation

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Jim Stewart is the founding Partner at ProfitPATH. He has been working with business owners for over 16 years to increase profits and improve the value of their companies. LinkedIn

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6 Tips For Finding The Right Buyer

Tuesday, March 11th, 2014

Last week I was one of three speakers at the Toronto Star’s Small Business Club event, “Exit and Succession Planning”.Finding the right buyer or successor for your business

My talk included 6 things a business owner can do to ensure she/he finds the right buyer or successor.

1.  Money. The seller must be satisfied that the buyer has the funds to complete the transaction.

In a sale to a third party, for example, the seller must obtain evidence – from a bank or accountant – that the buyer can meet their commitments.

But having money isn’t enough – particularly if part of the purchase price is to be paid from future profits.

2.  Knowledge of the Industry. The better a buyer’s knowledge of the industry, the more likely the transition will succeed.

In a Management Buy Out (MBO) or family succession, the current owner knows the key players’ level of knowledge.

If the owner has been planning ahead, they will, for example, have given the players opportunities to build relationships in industry associations.

3.  Business Acumen. The purchaser or successor must have proven they know how to make money.

For example, a third-party buyer may have been a successful CEO or owned other businesses. A family member may have done well for a company in another industry or country.

4.  Appetite for Risk. When you’re watching someone else run a company it’s easy to underestimate the risks they are taking.

For example, as an MBO progresses, the management team begin to understand fully the risks that come with ownership.

That’s one reason why MBO’s collapse more frequently than sales to third parties or transfers to family members.

5.  People Skills. A seller must look for evidence that a third-party purchaser has successfully led people and built strong relationships with customers and suppliers.

By planning for an MBO or transfer to a family member, the owner can give the key players opportunities to prove their capability.

6.  Business/Strategic Plan. Regardless whose it is, a business plan has to pass 4 tests.

  • Don’t attempt too much too quickly.
  • Have clear Action Plans to ensure implementation.
  • Provide adequate resources to support the Action Plans.
  • Have a clear follow up and review process.

Hopefully they’re all common sense. If so, the transition will go well – and the party can begin!

 

If you enjoyed this post you’ll also enjoy Don’t Destroy the Long Term Value of Your Company……

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Jim Stewart is the founding Partner at ProfitPATH. He has been working with business owners for over 16 years to increase profits and improve the value of their companies. LinkedIn

Top Ten In 2012……

Tuesday, January 15th, 2013

The votes (page views) have been counted, the results can be announced!

Our top 10 blog posts in 2012 were:

1.    Do You Know What You Don’t Know? was the winner by far. It talks about how consultants and business owners are doing the same thing wrong, with the same outcome.

2.    Why Would Anyone Hire A Management Consultant? is a question put to business owners whose businesses have stopped growing.

3.    6 Ways a Business Owner Can Influence Culture outlines how a business owner can influence the culture in his/her company.

4.    10 Tips To Improve Your Public Speaking Body Language, written by Mark Bowden of TruthPlane, is the first of our guest posts to make the list.

5.    Things Really Good Consultants Say outlines what consultants who get results and deliver a great service say while pitching for business.

6.    Strategy, Culture and Leadership deals with how these 3 things affect the development and the execution of strategy.

7.    3 Times When You May Need To Change Your Strategy explains when a company should review its strategy and what makes that review and any subsequent actions necessary.

8.    6 Challenges Fast Growing Companies Face discusses the 6 challenges of execution which, if not dealt with, could prove fatal.

9.    Why You Need A Consultant With Hands-On Experience is one of several posts we wrote during the year about how to work with consultants.

10.    So Tell Me, What Is Strategy? In some cases strategy and strategic are being imbued with mystique and complexity in order to create a need for “expertise”.  Here are 2 reasons why should we care.

If you haven’t seen them before, here’s your opportunity!

When “What If?” Becomes “What Now?”…

Tuesday, September 4th, 2012

 

This week’s guest is Howard Lerner, Partner at SBLR LLP Chartered Accountants, a full-service accounting and business advisory firm located in mid-Toronto.  With 9 partners and over 40 team members, including a strategic tax department, SBLR specializes in providing creative income tax solutions and high-level growth and exit strategies for profitable, privately-held companies.

 

One of the most important – but often ignored – reasons for preparing for the future succession of your business is to minimize the fallout from the unexpected.  While things don’t always go according to plan, the business has a much better chance of surviving if you’ve made preparations, in advance, for it to continue without you there.

The following is based on an actual story, illustrating the importance of planning ahead.  In a real-life situation, Karen, 56, started Staywell Corp, a health services business, 23 years ago. Her son John, 27, and daughter Beth, 24, have worked in the business since graduating from university.

Karen recently contracted a life-threatening virus leaving her paralyzed and unable to work.   Not having developed a strong senior management team, much of the business knowledge resided with Karen.  With the help of a few loyal employees, Karen’s children kept things together for several months, hoping in vain that their mother would quickly return to work.

Karen and her family never discussed what would happen in case of a tragic event, so John and Beth were completely unprepared for the responsibility resulting from their mother’s lengthy absence.  After six months of declining sales, John and Beth realized it was necessary to sell the business. The value received for Karen’s shares was substantially less than it should have been, as much of the intellectual capital was tied up with her.  The proceeds still resulted in a taxable capital gain to Karen of $1.2 million, thereby costing her family $110,000 in capital gains taxes.

After the sale, John and Beth left the company; only one has since found new employment.  Karen’s disability insurance, a fraction of her former CEO’s salary, means the family is struggling financially, as Karen needs full-time nursing care, and the after-tax proceeds were used to pay down debt.

How could this family have experienced a better outcome?  The answers all have one thing in common:  PLANNING.

1. Succession Planning – Karen could have developed a strong and capable management team and delegated as much responsibility as possible to the team, with the objective of making herself redundant to day-to-day operations.

2. Insurance Planning – At least bi-annually, life and disability insurance policies could have been reviewed to provide adequate coverage in case of death, illness, or disability.  Insurance strategies can often include funding the premiums using corporate assets certain situations.  This planning also involves the preparation and updating of proper wills and powers of attorney.

3. Tax Planning – A proper corporate structure also might have allowed Karen to multiply the Capital Gains Exemption on the sale of Staywell Corp’s shares, possibly eliminating all of the $110,000 of capital gains tax.

4. Exit Planning – Karen could have been developing and communicating her plans for the business, so that the key stakeholders (her family and senior management) would know and understand Karen’s wishes and how to execute them in case of disability or sudden death (yes, that happens, too).

5. Financial Planning – a solid financial plan could have established family assets in addition to the business investment, making the group less reliant on Staywell Corp for support.  Debts could have been managed to maximize interest deductibility.

Karen and her family have a tough road ahead of them but their situation offers an important lesson to the rest of us. Call your trusted advisors today and put some plans in motion to mitigate the implications of unexpected yet potentially disastrous situations.  After all “What if” can often turn into “What now?” but with a phone call or two, you can avoid that.

For more information, please contact Howard Lerner at SBLR LLP Chartered Accountants at 416-488-2345 Ext. 222 or at hlerner@sblr.ca

Being Profitable and Strong Increases Valuation

Wednesday, November 9th, 2011

In my last post I talked about 4 things every owner of a successful business must think about. They are the 6 reasons a company is sold, the 2 factors which apply to each of those situations and what being “profitable” and “strong” mean.

I promised then that I’d talk about how to make a company profitable and strong. So here we go.

1. How do you achieve consistent profitability? Here are 6 things every business owner can do to increase the odds that her/his company will produce consistent, industry beating profits:
a. Develop a strong product line – not only having width and depth in current products but also always having new products under development.
b. Build a great reputation – and recognizable identity or brand – in your target market(s) by delivering quality products and services, on time, that meet your customers’ needs.
c. Be in more than one market (which ideally do well in different phases of the economic cycle).
d. Have a broad customer base built on strong companies or affluent consumers.
e. Generate a stream of recurring revenue rather than working solely on projects which have to be replaced when complete.
f. Innovate – and create some intellectual property, products or processes, which can be protected, creating a sustainable advantage or a barrier to lock out competitors.

2. How do you make a company strong? Here are 6 things an owner can do to survive the loss of key people and keep his/her company’s balance sheet ratios looking good:
a. Document all processes. Especially the sales process which can be mapped, then managed, using a CRM system.
b. Involve all of the key people in a formal, annual business planning (and budgeting) process, which is completed 2 months before the start of a fiscal year and which includes formal, quarterly reviews.
c. Maintain strong internal financial controls, including cash flow forecasting, and insist on timely, monthly reporting.
d. If the management team doesn’t know and understand the drivers of the key balance sheet ratios have your accountant run a training program for them.
e. Always put leases and contracts – for everything and everyone – in writing.
f. Make Human Resources management a key part of your strategy and culture by e.g. driving accountability and responsibility through job descriptions; making decision making independent of the owner; identifying talent and training people for growth.

A company which is profitable and strong can survive the prolonged absence of the current owner as a result of injury or illness because it will continue to: 
• Execute its proven strategy.
• Be innovative, building barriers against competitors.
• Operate day-to-day without missing a beat.
• Produce revenues and profits at, or above, previous levels.
• Keep and attract good people.
• Attract financing should it be required.
• Survive any unexpected crises in the industry or economy.

The ability to do that also makes this type of company very attractive to a potential buyer – because the risk of the company failing in the short term is reduced significantly. And that means the valuation of the company – which determines the selling price – will be at the high end of the scale.

So by doing the 12 things I mentioned (and, in all fairness, some others like them) a business owner wins in 3 ways.

She or he makes great money while they run the company. They build security for themselves and their families in the event they are injured, fall ill or even die. And they maximize the return on the long hours, missed vacations and risks they’ve taken by getting a great price for the company if it’s sold.

How good is that?

If you enjoyed this you will also enjoy The 2 Truths Every Business Owner Has To Face and The Future Of Your Business: Succession or Exit

4 Things Every Business Owner Must Think About

Monday, November 7th, 2011

A few years ago one of our clients was unexpectedly made an offer for her company. It took her totally by surprise and so we had to react quickly to the situation.

She thought the offer was low and she tried to negotiate it up.

That’s when I realized that, until then, she’d given no thought to selling and even less to maximizing the valuation of the company.

That situation taught me there are 4 things every owner of a successful business must think about. Here they are.

1. The 6 Reasons A Company Is Sold. We now tell business owners that there are 6 things that will make them sell their company. They:

1. Accept an unsolicited offer.
2. Become so ill they are no longer fit to continue running the company.
3. Die young and unexpectedly.
4. Choose to retire.
5. Are no longer able to run the company – but this time because of old age.
6. Die of old age.

Some of the owners laugh saying that it will never happen to them. Some get annoyed that we even bring it up saying things like “I’m far too young to have to worry about that now” or “I’m not ready to retire/I will never retire.”

But the one thing they cannot do is argue that the 6 reasons are illogical or incorrect.

2. The 2 Common Factors. Then we tell them there are 2 factors common to all 6 situations:

a) They will only get an unsolicited offer, for top dollars, if the potential buyer believes that the business is profitable and strong.
b) They may not have to sell if they become ill – even so ill they can’t run the business – or if they retire. But if they retain ownership the company will have to run without them. And to do that it has to be profitable and strong.
c) If they do have to sell because of illness or when they retire, they will only maximize the return on their hard work – get top dollar – if the business is profitable and strong.
d) If they choose to retire; become too old to continue running the business; or die – young or old – they, their estate or their heirs have the same choice. They can either retain ownership or sell. And, once again, to get the most money out of the business it needs to be profitable and strong.

So what does it mean to be “profitable” and “strong”.

3. A “Profitable” Company is one that consistently produces industry beating profits.

Why consistently?  Because that’s the only test that making a profit was more than just luck. (As an old friend used to say – never confuse success with a growth market.)

Why industry beating?  Because what’s to say that even consistent profits couldn’t be improved. What better comparison than with other companies in the same industry? It removes one major variable – because every company in the industry goes through each phase of the economic cycle at the same time. And key indicators are available by either looking at the annual reports of public companies or by using the industry data published either by (some) associations or magazines like Inc.

4. A “Strong” Company can meet 2 criteria. One, it can maintain profitable operations despite the loss of 1 – or more – key personnel. Who are key personnel – the owner and anyone with specialist knowledge which would be hard to replace. Two, all key balance sheet ratios – liquidity, debt to equity etc. – are in great shape – in other words the company could borrow money from the most conservative of lenders.

What makes a company profitable and strong? I’ll tell you in another post.

By the way there are at least 2 other reasons a company could be sold – divorce and the break-up of a partnership. We’ll also deal with those in another post.

The Future Of Your Business: Succession or Exit?

Thursday, May 5th, 2011

Our guest this week is Jim Pullen of Concert Partners. His career has included cross-border mergers and acquisitions of international technology companies. He is a senior advisor to Tequity, a specialist M&A firm in the technology sector.

Succession or exit – it’s a stark choice, but since we are all mortal, one of these is going to happen!

A recent study of Canadian businesses showed that while 70% recognized that a transition or exit will have to take place, only 7% had a plan! And incidentally, selling at the best price at the right time doesn’t constitute a plan!

I worked for an international mergers and acquisitions company in both London (UK) and Boston (USA). While I was there we carried out a study of 250 M&A transactions we were involved in, over a span of 8 years.  The transactions took place in Europe, US, and Canada. 

We wanted to find the key areas that buyers looked for in a transaction.  Based on the study, we developed a framework for ranking and assessing a company on the factors that were proven to drive a valuation.

The main areas of value enhancement that emerged are described below.

1. Financial

This category includes basic financial metrics such as profitability and revenue growth.  Companies with high profit margins and high rates of revenue growth obviously command a higher valuation. 

Other aspects include the type of revenues a company generates.  Recurring revenues can add to a valuation as it makes the company’s cash flow more predictable. So, for example, a company that sells big ticket one-off products could look to build up more of an offering around maintenance and post-sales services for their product – where they can sign their clients into multi-year maintenance contracts. 

Companies with strong cash generation are also more attractive to buyers.  They are able to take on more debt that can be used to finance growth.  It also makes a leveraged buy-out possible.

2.   Market & barriers to entry

In this category the factors include the strength of customer relationships and degree of uniqueness the company enjoys in its market.  Companies that have a direct and strong relationship with the end users/purchasers of their product will get a higher valuation.

Brand, which clearly has to be part of a long-term strategy, plays a large role in the value a buyer places on a company.  We found that a strong brand can make up to 70% of the value in a company.

In terms of barriers to entry, companies should use many mechanisms to defend their position. Examples are legal protection though patents and trademarks, exclusive relationships with key suppliers, and building internal expertise through strategic hiring.  Anything a company can do to make it harder for competitors to enter their space will help command a premium on valuation. 

3. Human resources

In this category, the framework looks at both technical skills and management skills.  As companies grow, it is important to distribute the key skill sets deeply across the organization.  Often after an exit, the founders will want to leave, either because they have a large financial gain or they prefer to be entrepreneurs over working in a large corporation.  A buyer will place a premium on a deep management team so the company can continue to innovate and execute even with the loss of the founders.

4. Strategic fit

This factor relates to the degree that the company being acquired is a strategic fit for the buyer’s product portfolio.  We have seen cases where buyers are willing to pay a 50%-70% price premium for a company that fills out a missing piece of their product portfolio and gives them access to the markets and expertise. 

Partnerships are an excellent way to lay the foundation with a potential buyer.  A partnership is a low-commitment way for them to get deeper experience with a potential acquisition. If things work out well and strategic synergies start to develop then it is easy to take the step towards a deeper relationship.
 
5. Governance

The last factor involves good governance.  We have found that a strong board of directors can add a 25% premium to the value of a company.  This is due to the buyer having more assurance that the company has been well governed and there will be no unexpected surprises they need to deal with.

A Few Final Thoughts.

There are 3 main ways in which the succession issue can be handled: a younger generation of the family takes over; the executives buy out the owner via a management or leveraged buy-out (MBO/LBO); or there is a liquidity event (the shares are given some realizable value) by means of a trade sale or listing on a public market (Initial Public Offering or IPO).

Whichever route is taken, it is clearly in the shareholders’ interest to maximize the value of the business prior to that event.  The ideal time to begin that process is on day one, but it may not be too late; 2 years is a realistic timescale in which to groom a company for sale/transition.

Let me leave you with 2 thoughts. Begin thinking about it today. And get some help from people with experience.

Jim currently provides corporate development consulting services and mentors early stage businesses at the ventureLAB in Markham. You can contact him at jpullen@concert-partners.com

The 2 Truths Every Business Owner Has To Face

Tuesday, May 3rd, 2011

There are 2 truths every business owner has to face.

You can’t sell a business which isn’t successful. No one’s going to buy a company that hasn’t consistently produced good profits and cash flow – which they believe will continue after the change in ownership.

No one is immortal. So, every privately owned business is going to be sold, to the next generation or a third party, at some point in time.

Why some owners ignore the second truth.

Building a successful company requires vision, developing a flexible strategy and actually implementing that strategy. Then there’s finding funding, hiring and keeping good people, dealing with customers and suppliers, managing/leading and I’m only getting warmed up…………………..

When building a successful business is totally absorbing and fulfilling why would you consider selling? When all of your time and effort is focused on dealing with what is happening now, thinking about an exit strategy seems irrelevant.

Here’s another reason. While all business owners start their companies because they have an idea they think is a winner – their baby – the people who currently own businesses come from at least 2 different generations. And with this, as with everything else, each generation views things differently.

Many older owners – if they even think about it in these terms – didn’t get into business for the capital gain at the end of the day. They got into it to provide an income for their families over their working life time and to build something tangible.

However, younger business owners – those in their thirties and forties – are more likely to be focused on selling before retirement age and doing something else with the money they make on cashing out.

Why you can’t ignore the second truth – especially if you’re older.

If you’re older you are, by definition, closer to the end (however you define it) of your career. And we know that a large number of Canadian business owners are closing in on 65 or 70 – or more. We also know that the majority of them haven’t begun planning for succession or a sale.

This is bad news. Here’s why.

If you build a successful company but make no plans for your exit you destroy the value you’ve created. It’s only a question of the degree to which you do it.

It’s not logical to end a career spent laboriously creating value by doing something that gives that value away.

So if you are an “older” business owner – or if you know someone who is – do something about it now.

It’s not too late – but it will be very soon.

If you’re not sure where to start speak to us – or others like us.

Should I Sell Or Succeed?

Tuesday, April 26th, 2011

Suspend your first reaction – i.e. has Jim finally lost his mind – just for a moment. This is a question we are asked more often than you would think. It may not be posed in those exact words, but it’s always the fundamental, real question.

Let me tell you why it’s asked and then give you our answer.

Frustration and Unexpected Curve Balls.

Business owners like to think they’re superheroes, capable of absorbing unending stress and working mind numbing hours day after day after day. But they’re not, they’re human beings and so – occasionally and less frequently than most – even they get frustrated, tired or worn out.

It often happens when a new initiative or project takes longer, runs significantly over cost, or generally creates more headaches than anyone imagined – even in their wildest dreams.

Another trigger is a completely unexpected event. A competitor dramatically drops prices, a long term supplier goes out of business or a partner walks in and says they’ve decided to retire.

It could be a tough, slow market because of a recession. Or the owner could have reached an age where he/she is ready focus on other aspects of life.

It could be a combination of the above.

But the result is the same – the business owners say the equivalent of “You know what, I don’t have the desire/motivation to do this again. It would be easier just to sell.”

That’s when we hear the question.

You Can’t Do One Without Having Done The Other.

Consultants (it is said) always answer a question with a question. In this case we ask something like:

• “Can you be sure that a company – in the middle of a major project or facing major price competition or about to lose a key player/founder/owner or some combination of the above – will continue to be successful?” and
• “Would you pay top dollar for a company in any of those situations?”

Buyers want to minimize risk when purchasing a company. So the likely answer to both questions would be “No”.

Sellers want to maximize the selling price so the business owners pretty quickly figure out the answer to the “Should I Sell Or Should I Succeed” question for themselves.

A fresh mind can often quickly see a solution to the types of challenges that cause business owners to consider selling in the first place. And this is one situation where we – and other consultants like us – add value.

The Bottom Line.

As a rule, you can’t sell unless/until you succeed.

But, as with many rules, there’s an exception to this one. Want to guess what it is?

3 Surprising Strategies (Or Not)

Thursday, April 14th, 2011

At the end of March we emailed our quarterly survey to over 600 people in our database (see commentary on the November survey here).

We asked them 4 things.

To describe their strategy for this fiscal year; which actions they were taking to execute it; how they had gone about planning for the year; and what they did to evaluate progress at the end of the first quarter.

The first surprise – no one’s planning to retire.

Only about 5% of the respondents described their strategy as “planning for exit”.

There have been stories in the media for some time now about the number of companies which will change hands as baby boomers retire. Many articles talk about how far in advance business owners must begin to prepare, particularly if they intend to sell their company.

As a result we were surprised at the low number of owners planning for exit. (We’re even in the process of launching a new service to help owners get the highest price and the best terms possible when they sell.)

However, this may reflect other surveys, by e.g. the banks and CFIB, which found that only a relatively small percentage of baby boomer owners are actively preparing to bow out.

The second surprise – everyone’s staying home.

Just over 70% of companies said they were pursuing a growth/ expansion strategy. But entering new domestic or overseas markets ranked 8th in a list of 9 actions being taken to increase profits.

Once again we were surprised. This time by the relatively low number of respondents who said they would be entering new markets. The North American economies are not the ones which are expected to show the most growth in the next few years. This is a good time for Canadian companies to be expanding into export markets.

But the answers to this question could be influenced by the (small) size of some of the companies responding to our survey.

By the way most companies are using a combination of increased promotional activities, new strategic alliances and improved internal systems/processes. Many said they intended to increase their prices.

And the third surprise – someone’s not planning to follow through.

As you might expect, most large companies said they held a 1-2 day planning session with their management team/key individuals before the beginning of the financial year.

So did many smaller companies. But they appear not to have used the opportunity to develop action plans/budgets or specific targets for measuring performance.

Then we asked what techniques respondents used to assess their progress at the end of the first quarter. Many of the smaller companies which used planning at the start of the year now said that they used none of the quarterly follow up techniques.

There have been a number of research studies which have tried to determine why planning fails. One of reasons given for failure is the lack of follow through by management. It is easy to assume that the owners of smaller companies are likely to be more involved in day-to-day operations than owners who have management teams in place and so find it easier to overlook quarterly follow ups.

So, to sum up……..

There’s good news and bad news.

The bad news is that some of the companies in our database – even larger ones – appear to be overlooking a number of external and internal factors which are critical to success.

The good news is that it can all be fixed – if the owners are willing to try. We’re certainly willing to help.

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