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The purpose of this report is to provide you with the critical steps to take in preparing your company for a transition. You may be thinking about a transition in the near term, or that transition may be years down the road. Regardless of the timeframe, what you learn in this report will help you craft a strategy that will result in a premium price for your company. Please note that the intent of this report is NOT to give you legal or accounting advice, nor is the intent to give you advice about a particular transition strategy. You should consult with your professional advisors for help with your particular situation.
Common discussions when business owners get together at industry conferences or in their marketing group meetings center around business transition. These conversations typically start with questions like, “what are you going to do with your company?” or “do you have a succession plan in place?” or “how do you plan to retire/exit your company?”.
If you are like most of your fellow business owners, these discussions cause you to take one of two actions. Either you move to correctly position your company for a transition (be it in the near term or further in the future), or you bury your head in the sand hoping the problem will solve itself.
If you have not created a strategic succession plan, your challenge is only going to become greater. Forces beyond your control are going to have a dramatic negative impact on your company’s valuation if you are not prepared.
Step 1: Establish A Baseline Evaluation
Lots of things go into establishing the value of a business – innovation, intellectual property, client base, client/customer life time value, vendor/supplier/carrier concentration. But by far the most important element is the proven profitability of your company over time. You want a steady, strong history of making money. Minimize unnecessary expenditures and maximize your company’s profitability will improve your chances of selling for a premium.
Next, you'll want to determine the worth of your business to make sure you don't price it too high or too low. Locate a business appraiser to get a valuation. The appraiser will draw up a detailed explanation of the business's worth. The document will bring credibility to the asking price and can serve as a gauge for your listing price.
There are many types of appraisals and knowing what you need, and asking for the right type of appraisal is critical. Not all appraisers will adjust their process for the required type of appraisal for the task at hand which should be a Fair Market Valuation (FMV) appraisal based on arm’s length marketplace methods. In other words, you are trying to determine what FMV would be if you sold your business in the open market to a willing and able buyer without any undue pressure to sell.
Step 2: Corporation Documentation Review
Buyers are risk adverse and that is why they are acquiring an existing successful company over starting one from scratch. Too many problems, oddities, and situations requiring explanation and excuses scare off buyers. You need to build a strong “hair-free” business. Problem employees, too much supplier/carrier and customer concentration, failed products still bumping along, and underperforming locations are just a few examples of that dreaded aspect of deals the investment bankers refer to as “hair.” Know what will be perceived as hair and plan to trim it back at least several years before a sale.
Gather your financial statements (profit/loss, statement of cash flows, balance sheet) and tax returns dating back three to five years and review them with an accountant. In addition, develop a list of equipment that is included with the business. Also, compile any company contracts (carrier contracts, equipment leases, real estate leases), corporate docs (articles of incorporation, bylaws, shareholder agreements, operating agreement, capital stock/unit tables, company minutes), roll-off statements, claims rates and any other miscellaneous relevant paperwork such as employee details (hire date, job description, pay rate, bonuses, ownership). Create copies of these documents to distribute to financially qualified potential buyers.
Your information packet, also referred to as an Executive Summary, Pitchbook or Confidential Information Memorandum (CIM), should also provide a summary describing how the business is conducted and/or an up-to-date operating manual. You would be surprised at how a well thought out, well executed operating manual can impact your purchase price. To a buyer, this is a sure sign of a well-run company and the purchase price will reflect it.
Step 3: Build Business Processes
Prime the business for growth and prove it. Businesses declining or stagnated will face serious obstacles to exiting at all let alone for a premium. Buyers will only pay a premium when they feel certain that “growth is around the corner.” If you are relying on a recent growth trend to justify an aggressive growth forecast (and an increased valuation), the first thing buyers will do is ask if it is real, sustainable, and scalable. Buyers are always skeptical. Any reasonable buyer will be able to identify unsustainable growth that comes from an upward blip in the economy, from price discounting, a marketing blitz, or just luck. It is your job as a future seller to find the levers to top-line and bottom-line growth and deliver quantifiable results. It is not easy.
Step 4: Create Your Marketing Machine
Buyers want to see businesses with upside. When sales are declining is not the time to sell. Buyers might also get skittish if a single customer represents more than 5-10 percent of revenue, putting sales at risk if that customer is lost. If necessary, diversify the customer base or jumpstart sales with increased marketing and promotions.
Competition across all industries has never been greater. It is critical that you have a well thought out, well-executed marketing plan. You can no longer just send out an e-newsletter and wait for the phone to ring. Potential buyers are looking to see if you have an integrated marketing plan that drives producers to engage in a conversation with your agency. Components of this plan may include e-newsletters, direct mail, seminars, webinars, study groups, webcasts, podcasts, social media presence, landing pages, referral action program and even Facebook Live shows.
Step 5: Build A Self-Sustaining Agency
If you can subtract your ego and your involvement from your business, you are adding to its value. Your business is much more valuable if it can run without you. Start scheduling and taking vacations and force your business to flourish on its own, demonstrating that the agency will continue to thrive even after you no longer own it.
Plan your life after exit. Too many owners reluctantly decide to sell, begin the process, but then abort as a deal comes to the table or nears closing. Often it is because the CEO/owner has nothing to look forward to and equates selling their business as being put out to pasture. The best investment bankers will avoid any Seller they suspect of being reluctant or unreasonable because such behavior will cost them their time and all of their fees. Likewise, buyers will avoid reluctant Sellers to save time, due diligence expenses and opportunity costs.
Having the next chapter of your life clarified and in front of you will keep you rational as the process rolls along.
Step 6: Select Your Selling Team
Your business is your baby and you are emotionally wrapped up in it. Since you are going to be working to keep that business profitable during the process of the sale, you need someone who is more detached to keep an eye on the maximum return. Identify the capabilities needed and select a firm to fulfill them. A strong firm will know how to position your business, promote what is important to the buyers and create marketing materials to support the optimum strategy.
Run the sales process well. The sales process, although far from being the predominant element of M&A value creation, is a critical one. Investment bankers often play a critical role here but must be managed by the selling firm’s CEO. Do not delegate final authority and responsibility. Just like an attorney, investment bankers are expert advisors, but the final decision belongs to you. While some CEOs have some M&A experience, it is ideal to use investment bankers to get a step up in results that more than pay for their fees, speed up the offer/bidding process and reduce friction throughout the steps to closing.
In addition, you will need a strong attorney with lots of experience in business transactions and a similar accountant to assist with the best structures for beneficial tax treatment and liabilities analysis. In addition, if you are anticipating a healthy net worth, you might consider pre-transaction estate planning.
Step 7: Prepare For The Due Diligence Process
In today’s market, prospective buyers want as much transparency as possible. Buyers are performing more careful due diligence, kicking the tires on everything from a business’ financials to its supplier contracts, customer contracts, real estate and equipment.
There is a host of legal considerations when selling a small business. Among those necessary to close the deal is the asset purchase agreement, which is the legal contract for the sale and the purchase of the business assets, including physical as well as intellectual property. This comprehensive due diligence document—typically 25 to 50 pages long—will consist of exhibits such as non-compete agreements, asset lists, employee agreements and guidelines for the use of website domain names. The hardest part is collecting the required information.
An owner can avoid red flags by working with an accountant to present clean financial statements and business tax returns dating back at least five years and ensuring that all income is accounted for. As well as, a list of detailed owner benefits. Among the no-no’s are keeping family cars and boats on the business books. However, it is common to make adjustments or normalizations to the financials to account for such owner benefits run through the business. These adjustments are sometimes referred to as “add-backs”.
Also, do not be surprised if would-be buyers ask for year-to-date results.
Step 8: Participate In A Bigger Transaction
There is a big difference between Exit Planning and Exiting.
People buy companies for a number of different reasons. If you can figure out what your buyer wants, you can position yourself to your advantage. Some purchases are strategic acquisitions looking to expand by combining size and through cross-selling opportunities. Other purchases are defensive – your company is the chief competition, and by purchasing you, your competitor is poised to dominate the marketplace. Other purchases are simply to generate revenue – allowing the buyer to streamline processes and cut costs through consolidating. Find out what your buyer wants by being a part of a self-sustaining organization and sparking a bidding war as part of a much larger transaction than your own stand-alone value.
We have developed a proprietary exit process known as a Sponsor Roll-Up Pool, which allows smaller individual sellers to combine into a larger transaction for much higher multiples and valuations. This is not an Exit Planning tool. It is about Exiting.
The Sponsor Roll-Up Pool allows main street (less than $5M in value) agencies to participate in middle market (greater than $50M in value) transactions at higher valuations and/or provides an avenue of exit that would not otherwise be available to most main street agencies at their standalone enterprise values.
Who wouldn’t be interested in receiving an unsolicited offer to purchase their company for twice the fair market value? The Sponsor Roll-Up Pool gives sellers access to this very possibility.
CONCLUSION
These eight essentials are a tall order. That is why exit planning must be a part of your strategic planning effort every year, not just when the exit day is near. Take actions that keep your business ready for an exit at all times.
There are only three (3) things that can happen to a business; (i) it transfers internally, (ii) it transfers externally, or (iii) it goes out of business for whatever reason (death, industry change, vendor/supplier change, the problem it solves is no longer a problem, the economy, lack or lowered owner energy / enthusiasm / attention, etc.). The When and How are either proactive or reactive.
As we mentioned earlier, you really have two choices. Either you take action to position your agency correctly for a transition or you bury your head in the sand hoping the problem will solve itself.
Take action now with the 8 STEP PROCESS. The results will be well worth your efforts.
Next Steps
Roupp Acquisitions is the creator of the Sponsor Roll-Up Pool platform, which guarantees sellers a premium for their business, allows them to remain in control throughout the selling process and allows them to exit as part of a middle market transaction with uncapped upside participation. If you are interested in learning more about your baseline business health and how your company compares with others in your industry, contact Roupp Acquisitions Inc at;
inquiry@rouppacquisitions.com or give us a call at 206.915.9635.