Blog | This Way Out Group
Transition planning takes years not months.
Owners should build a transition plan early and use that as a framework for every decision they make to better prepare the business, their team, themselves, their family and their finances for their optimum outcome.
Tuesday, January 26, Anaheim CA
Wednesday, January 27, Solana Beach, Del Mar CA
Thursday, January 28, Los Angeles CA
Get your company on the road
to Rapid Growth of
Revenue, Profit and Asset Value
Discover the simple steps you can take now to Accelerate Revenue Growth and operating results in this free breakfast seminar. This seminar is a brisk overview of how to achieve revenue goals and build value by discovering and leveraging the unique Value Drivers of your company.
Value growth & exit strategists Kerri Salls and Scott Warner will demonstrate how discovering the key drivers of your business can significantly accelerate growth of revenue, earnings and enterprise value. Learn how to create reliable forecasts that lead to significantly higher valuations.
This 45 minute seminar provides an in-depth look at the how using the right tools and data can substantially simplify executive decision-making and create the leverage to grow your company.
Who should attend
- CEOs and business owners looking to accelerate growth of revenue, earnings and the intrinsic value of their organization whether to capture that value in a liquidity event or simply to produce greater cash flow.
- CEO advisors looking to learn more about this topic to better serve clients.
This seminar is most appropriate for companies with current annual revenues of $2M to $50M.
Cost: Free (breakfast included)
7:00 Breakfast & Registration
7:30 Seminar starts
We will be available for a few private consultations after the program. Contact us to register for your 30 minute session between 8:30 – 1.
Wednesday, January 27
Courtyard Marriott Solana Beach/Del Mar
717 South Highway 101 Solana Beach, California
Thursday, January 28
Zuber Lawlor and Del Duca (Sponsor)
777 South Figueroa Street 37th Floor Los Angeles, CA 90017
Your Momentum Partners at This Way Out Group LLC
Preregistration is required. Registration closes January 22.
Limited seating at each venue. Register early.
A 2014 Deloitte survey of private equity groups raised an area of concern that has always been costly to buyers and sellers but not addressed. In this survey, 54% of the private equity groups see the failure to integrate upon acquisition is an area of concern. They said:
“the inability to integrate effectively ranked not only as the most critical area of concern when pursuing a transaction, but also THE top concern for companies striving to achieve success in an M&A deal.”
And 87% of these survey participants identified the risk of integration failure as their 1st or 2nd most important concern.
Why is portfolio integration so important to private equity groups?
In pursuing a deal, the assumption is that portfolio integration will ensure that the goals, assumptions, and returns that the acquisition promised you, are achieved.
What does not get addressed is the planning and process of integration to achieve those goals, assumptions and financial returns. Acquirers over simplify the integration. They assume that integration involves visiting the acquisition for a week/month for six months and then they’ll naturally be acclimated and assimilated into their processes and culture.
The costs of not addressing integration before and after the deal
- The cost to buyers – the deal implodes before you break even on the investment
- The costs to sellers – the deal implodes before you achieve your earn out
In terms of survival, the best research we’ve found says:
- Businesses under $5M at sale – only 3:10 deals survive three years
- Business over $5M in Lower Middle Market at sale – only 5:10 deals survive three years
But that means up to 50-70% of all transactions result in a net loss! That’s a high risk to incur on every deal for both buyers and sellers.
Areas of Integration
That high risk of integration failure is avoidable. Successful integration includes a range of activities over an intended timeline leading up to the transaction and through a transition period. Start by opening a discussion in advance of the transaction to scope out differences and changes to address throughout integration. The basics start with:
- Corporate culture differences
- Employee retention and integration
- Economies of Scale
- Geographic Differences
- Cross-selling Opportunities
- Reporting structures
Buyer and Seller should agree on who should be involved in the integration process. When the seller is engaged in a positive way, he has a voice to ensure company success, team integration, and he can be a champion of the deal for everyone. However, when the seller is engaged in a negative way, because he may be opposed to the plan terms and outcome, he may unintentionally sabotage the plan.
Seller sabotage is real. But it’s rarely intentional. Without a transition plan and integration plan, the seller maybe just can’t let go. There may be too much friction between how she ran the business and how the acquirer or private equity group will run the business.
Most owners figure they can plan for their reinvention ‘after they get the deal done’, which is too late. Without a reinvention plan of purpose and passion pulling them forward, they fall back to what they have always known and their role in the ‘business family’ they have always had – which immediately handicaps integration success and their total return on the transaction itself.
Your integration plan can mitigate or prevent seller sabotage. Incorporate an integration plan into every transaction and transition plan.
A survey from M&A Today reports that 85% of all business owners have no exit strategy.
The average private business owner has over 75% of their net worth tied up in their business. That’s an illiquid asset. It’s also a business value risk. Indeed, it is a commitment to the business they built and a confidence in the future of the business as being a good bet. Illiquid business value is not a healthy distribution of your wealth portfolio for security, growth, liquidity or balance.
The survey also says 65% of all business owners do not know the value of their company. I’d say that number is low. Owners know their revenue and profit numbers but not their market value. Unless they are looking for capital or seeking liquidity, it’s not a metric they use to make every day decisions. Yet, when you look at business value in your space, in your industry, you can use it to make decisions that reduce risk, identify operating efficiencies, as well as grow both revenues and profits.
Without this understanding of your business value and business value risk:
- How can you plan for growth for next year? Where do you start?
- How can you realize that true value if you don’t have a handle on today’s value as a baseline?
- How could you leverage that value to open new markets or extend your product line?
- How can you monetize the business you built to afford the retirement of your dreams?
According to a survey by the Rasmussen Group, as many as 42% of all small business owners have no plan or path to retirement. Without a plan, 22% of the owners surveyed, said they’ll just close the business. That means that they are willing to walk away with no return (nothing!) for the time, equity, risk, and commitment they invested in the business, rather than focus on the value opportunity latent in their business and achieve a liquidity event to fund and secure that retirement.
Do you want to be part of the status quo, the 85% who do nothing and when you can’t continue, just walk away with no return? Or do you want to develop your own roadmap, maximize the value of your business and command a higher premium for the business you built before transitioning to that retirement?
Most business owners think they are too young and too busy in the business to ask or answer questions about their exit strategy. Why should they start planning their exit strategy now?
You’re not one of them. That means your eyes have been opened to the imperative of thinking about your exit from the outset of your business – or at least from today forward.
You realize that you have no intention of working this hard for another 5, 10 or 20 years. You’ve built a business you are proud of, that rewards you nicely today and you want to be able to walk away on your terms on your timeline.
Simple and Reasonable
Sounds simple and reasonable. But for many logistical, emotional, and financial reasons, it can’t happen overnight. Unfortunately, most business owners neglect the topic, don’t consider the decisions, and leave the process to the last moment. Unlike their decisive leadership that got them to this point, they’ve sidestepped the following questions. You don’t have to.
There are five key questions about your exit strategy you do want to spend time considering. Explore the tradeoffs of different answers. Sometimes the answer to one dictates the answer to others, but if that one answer changes, you open up other latent possibilities you’d never thought of before. When you lay out your answers to these questions, you will be in a better position to take timely steps and integrate all the necessary elements for your ideal exit. You will be in control of effectively negotiating a successful business transaction to achieve your optimum transaction and transition to reinvention.
- How much longer do you want to be actively involved in the business?
Vague answers like ‘at least 5 more years’ are a way to avoid the question. Dig deeper. Is there an age or a date or a milestone at which time you want to bow out? Maybe it’s easier to look at what you want to accomplish in the business before you’re ready to walk away. This date is important because it triggers every other action, trigger and date along the way to get there.Most successful exit transactions take long-term strategic planning. They can’t and don’t come together in 60 days. You must start the process before you ever thought it would be necessary because it takes far more time than you imagined to line up all facets to suit you.To maximize the value of your business when you do exit, you need to have a clear goal for the company and a plan for your own/your family’s future.
- Who will be your likely successor?
Have you thought about who should be your successor? Should it be your children, one of your children? Should it be your employees? Or would you look for a buyer well-suited to the business, who can take it to new heights? Maybe you think it’s in your customers and staff’s best interest to be acquired by an industry giant or your biggest competitor?There are many options. What’s optimal depends on you, your goals, your industry, your company culture.
- What do you need out of a transaction or transition to have the financial independence for your next venture/adventure/retirement?
This is really two questions and to answer the first half, you need to answer the second half first.
What will you do next? Do you have a plan? Do you have a project, venture, hobby in mind? Will you travel for 2 years and then build a house up in the mountains? Will you go back to school as a student or professor? Will you volunteer?
Your plans for your next steps or avocation create the baseline of your financial requirements from any transition or transaction you decide on. Think through your aspirations for the lifestyle you want and the goals on your bucket list you want to fulfill once you exit this business. Clarify what you’ll be doing and what it will take to fund your financial independence. That will set some parameters on your company valuation and the structure of your exit to ensure your future.
Run the numbers so you know how much you need from the deal so you know with relative certainty that you can pursue and achieve your life’s goals. That has to include basic living expenses, health care costs, long term care costs; and any education funding for children or grandchildren, travel costs, replacement vehicles, vacation home, weddings, philanthropy, legacy planning, or tax liabilities.
In his book, Money, Master the Game, Tony Robbins outlines four levels of planning for the future:
- Financial Security – to cover the basics
- Financial Vitality – to cover basics plus 50% of regular ‘extras’
- Financial Independence – to cover 100% of current lifestyle
- Financial Freedom – to cover current lifestyle plus a few luxuries
What would those numbers look like for you?
- Do you know what your business is really worth on the market?
You need two numbers. In the end it’s up to you to make sure they match. You need to know how much cash you need to take away from the sale of your business, regardless of the form the transaction takes. And you need to know with brutal honesty the market value of your business – what it is actually worth, not what you think it’s worth. Market value always trumps what you ‘need’ out of the business. Don’t get trapped into terms you don’t like because you were only looking at a buyer’s offer number. Use independent experts to value the business before you get locked in during a negotiation. They can often show you some strategic changes to make now to increase market value in your favor that will increase your leverage with potential buyers.
- What should you be doing now to minimize your future tax liabilities?
Don’t look at taxation in isolation. Revisit your business plan now and consider the tax implications for every investment, your projected growth and even your own compensation package. Expand your strategic planning to include contingency planning, succession planning, transition planning, and then run some financial models to see which options look most attractive for your future.
Whether you intend to sell your business in the next couple years, or you’ve set a date 5-10 years from now, it’s never too early to start the planning process. Planning now will help you clarify the ultimate goals you are aiming for. Early exit planning allows you to use your exit plan as a framework for every decision you make for the lifetime of your business.
You built your business as the primary vehicle in your portfolio to provide the financial freedom you intended to secure for yourself and your family. Ask and answer these five questions now to ensure your business will deliver on that promise for the future.
It’s a big step to consider hiring an exit strategist. When you decide you want an exit strategist on your team, hire someone who will help reduce risks, maximize the value of your business, and prepare you and your business for sale or succession. Here are ten fundamentals to qualifying your ideal exit strategist.
Qualify Your Ideal Exit Strategist
- Hire someone who has done what you set out to do (e.g., launch a new product line, bring in $10M new revenue, streamline production to eliminate all late and lost jobs) to maximize the value of your business.
- Work with an advisor who has built businesses, has taken leadership, ownership, and accountability to get things done; hired the team and has risked everything themselves.
- Work with an advisor who teaches you more than one way to get things done, so you can customize the learning to you, your team and your company as you prepare for a transition/transaction.
- Work with a mentor who will sit with you to collaborate, rather than a consultant who keeps himself or herself apart. You need someone so engaged in your company and committed to your goals they are always thinking of better solutions for you, a virtual partner at your side.
- Work with an authority, someone who delivers specific ideas and solutions to run your business more effectively not just ‘If you fix this, your valuation will be higher’. Work with an authority who also offers training programs engaging your entire team to increase company valuation.
- Work with an advisor who is a peer, who has been in your shoes, and who teaches you at your level. You want a mentor who understands your size business, your industry, your challenges, who recognizes and values both your short-term and long-term objectives.
- Decide if you need a specialist in marketing/sales/service/HR/finances to solve a specific problem in one area; or if you want a mentor who will help you assess the entire operation to institute and/or refine business fundamentals to add value and leverage before you get to a transaction.
- Decide if you want to give away your core value to an outsider to get a task done; or if you want guidance and direction from a virtual partner who will help you integrate systems and strategies to take your whole company to the next level so you can achieve the financial success you know is possible.
- Decide if you want to hire a trainer to get you started in a specific skill set; or if you want to hire a mentor who will stick with you to achieve very specific results, in this case preparing for an exit on your terms, on your timeline.
- Do you need information that a one-time consultant will produce? Or do you need the ongoing insight, experience and expertise of an exit authority to turn information into knowledge you can integrate into your business, adding value every day?
The advisors you choose to surround you, in preparation and through the transaction process, directly impact the outcome you achieve. Know why each person is on your team, the value they add, and what they deliver. Hire the best you can find, not just the best ‘you can afford’.
Hiring the team you need to cash out on your terms is an investment that offers you a high return while reducing your risk to get there.
Use your exit strategist as a resource working with your advisors, integrating them effectively into your team, as the conductor of your orchestra (advisors) performing your symphony (exit plan).
Your exit strategist is central to ensure the success of you and your team of experts in any sale, scale or succession plan. Use these 10 fundamental qualifications to help you identify your ideal exit strategist.
It’s a tough market for potential sellers. Are you making it tougher? Is your business at risk?
Too Many Businesses Are At Risk
Did you know that for every 100 businesses in the lower middle market:
80% of companies are not ready for a transaction. When they approach an intermediary (broker, IB, M&A)
they get turned away. (80 not ready)
40% of the remaining 20% will fail as well from poor planning/preparation. (8 fail)
>50% of M&A transactions fail because of low valuations (<$5M). (6 fail)
We can double those valuations in the years leading up to a transaction
>80% of mergers and acquisitions never meet their long-term objectives.
(9 never hit long-term objectives)
50% of sellers are already under compulsion to sell when they reach out to an M&A. (3 compelled to sell)
That leaves <3 who prepare, sell successfully, and meet long term goals.
Will you be one of those 3:100?
1.You can proceed alone and assume all the risks,
2.You can reduce risk, maximize value and follow a holistic 4 step process using tools that drive value, to meet all your objectives. Check out Build Your Business Value to get started.
You’ve heard these phrases for a life time:
Be Prepared, Be Proactive, and Begin with the End in Mind.
These are core disciplines for success and prosperity as a business owner too.
For the Boy Scouts of America, the Boy Scout Motto BE PREPARED means a scout is always in a state of readiness in mind and body to do your duty.
The motto of the Girl Scouts of the USA also is BE PREPARED. For Girl Scouts, this means being prepared at any moment to face difficulties and even dangers by knowing what to do and how to do it.
Stephen Covey wrote The 7 Habits of Highly Effective People®, almost 20 years ago. It’s been a top-seller for proven principles of fairness, integrity, honesty, and human dignity. These habits are still essential and apply equally when you are planning to complete the lifecycle of your business. We’ll only look at the first two habits here.
Habit 1: Be Proactive
Being proactive is about taking responsibility for your life. Proactive people focus their time and energy on things they can control. The problems, challenges, and opportunities we face fall into two areas–Circle of Concern and Circle of Influence.
Proactive people focus their efforts on their Circle of Influence. They work on the things they can do something about.
Habit 2: Begin With The End In Mind
Sometimes people find themselves achieving victories that are empty–successes that have come at the expense of things that were far more valuable to them, e.g., playing 1000 hours of a video games instead of attending classes and flunking out of college.
If you don’t have a blueprint to build a house, the framework you build may never qualify for an occupancy permit. If you don’t have long-term as well as short term goals and objectives, you could Begin With The End In Mind is-the ability to envision and plan for what you cannot see at present. excel in the moment and never build a nest egg for the future.
It is based on the principle that all things are created twice. First we create it in our minds. Second, is the actual physical creation/execution.
To Begin With The End In Mind for your life, start by drafting your own Personal Mission Statement focused on what you want to be, do, and have (in that order). It is your plan for success, reaffirming who you are, focused on your long-term goals. Your mission statement makes you the leader of your own life, creating your own destiny and securing the future you envision.
Plan Your Exit From The Outset
When it comes to your business, now and long-term, you must roll up all three of these principles:
- Be Prepared
- Be Proactive
- Begin With The End In Mind
into one and Plan Your Exit From the Outset. If you take business ownership responsibility seriously, then it’s integral to your job to be prepared, to be proactive and to begin with the end in mind.
As an owner, that means, you will:
- Design Your Business Mission Statement
- Communicate it to all stakeholders
- Be prepared for all contingencies (death, divorce, disability, disagreements, and departures) and continuity challenges (severe weather (fire, flood, or blizzard), power outages, dangers (hostage, crash, or a state of emergency). Can your business withstand any of these surprises? How prepared are you, your team, your business, your systems?
- Eliminate excuses and procrastination that murder your business
- Be proactive about building your business as a wealth-producing asset not just an income stream:
- Develop Clean financials
- Grow cashflow balances
- Complete and up to date books, records, minutes, resolutions
- Document systems, procedures, policies
- Execute succession planning and leadership development
- Reduce customer or vendor concentrations
- Drive operational excellence and benchmarking intrinsic value
- Track and measure value drivers
- Become more strategic and redundant to day-to-day operations
- Expand market position
- Explore your endgame in the business and beyond
- Begin with the end in mind
At its core this means having your affairs in order and your plans for a business transition mapped out early to ensure you can cash out on your terms and on your timeline and transition to the reinvention of your dreams (some combination of a new venture, adventure, avocation or simply your favorite hobbies) knowing your legacy and dynasty are secure. This can only be achieved with early and consistent long-term planning, over the 2-5 years before a transaction is in sight.
That’s why early exit planning is the only option if you are committed to all three principles of Be Prepared, Be Proactive, and Begin With the End in Mind. If you’d like to have a conversation about being prepared and being proactive in your business, call us at 508.820.3322 or email us.
August was a rollercoaster ride for stockholders. Triple digit wins followed by even larger losses left the average investor reeling and were a good reminder that markets move in both directions.
Valuations of privately held business have also been somewhat turbulent of late.
Have you missed the opportunity to sell your business at the peak?
Maybe. But should you care? Probably not.
The thing many of us forget is that when you sell your company—possibly your largest asset and the biggest wealth-creating event of your lifetime—you have to do something with the money you make.
These days, that means you’ll have to turn around and invest your windfall into an asset class that is arguably somewhat ‘bubbly’ in historical terms. The stock market has more than doubled since 2009. The price of residential real estate has been growing at a rate of 1 percent per month in many major centers. The same trend can be seen in many markets that offer exclusive beach houses or ski chalets.
Who Is Richer: Samantha or Scott?
Indulge me in a hypothetical example. Let’s look at two imaginary business owners, each running a company generating a pretax profit of $500,000. Let’s imagine that Samantha sold her business into the teeth of the recession for three times her pretax profit back in 2009. She would have walked away with $1.5 million pretax to invest in the stock market.
Now let’s imagine business owner Scott who decides to try and time the market. Scott waited out the recession and sold his business last month for four times pretax profit, walking away with $2 million before deal costs. At first glance, Scott looks like the winner because he sold at the peak and got four times profit instead of Samantha’s three times. But when we take a closer look, Samantha would probably be better off today. Assuming she had invested her $1.5 million in the stock market back in 2009, when the Dow was trading below 7,000 points, she would now have more than $3 million, or a third more than Scott, who waited and sold at the “peak.”
Is there a perfect time to sell your business?
Timing the sale of your business on the basis of external markets is often a zero-sum game, because unless you’re going to hide the proceeds of a sale under your mattress, you’re probably buying into the same market conditions from which you’re selling out.
A better approach is to optimize your business by reducing risk, improving operations, and maximizing value to showcase the elements ideal acquirers look for when they buy a business, regardless of what’s happening in the economy overall.
To find out how your business is at risk, where to shore up your operations and how you could maximize your valuation in a few short years, check out our Build Your Business Value 12 month program here.
Sell your company while things are going really well.
Makes sense. Sounds straightforward enough.
In this context, ‘well’ is a metric of success that will make ideal buyers take notice. What would make your ideal buyer/acquirer take notice? It could be any and all of the following:
- Number of users on your ‘app’
- Viral growth
- New channels you are opening
- Market monopoly opportunity
- Recurring revenue streams
- Happy customers
- Caliber of channel partners
- Growing diverse client base
- Penetration of the marketplace
- Operational excellence
- Strong leadership
- Strong corporate culture
- Achieving revenue, profit margin,
and growth goals
- Measurable value drivers
- Strong forecasts
- Reduced risk
- Maximizing value
- Do you run your business on metrics that can be measured or do you run your business from personal experience?
- Do you hit your goals for the business? Is your business a showplace to be proud of?
- What more could you do so that your ideal buyer starts to take interest in your business?
Timing an External Sales Process
So when is the right time to consider selling the business? When should you launch an external sale process?
First, get clear on your exit criteria. If you don’t know your criteria that would make you say yes to a deal, start there. It’s time for thoughtful consideration of your exit criteria, dreams and goals in terms of:
Second, monetize what you built. To sell well, you should secure:
- the business
- your team
- your family and
- your finances
before starting the transaction process.
Third, determine the best timing before committing to the transaction process.
- What’s the best timing for you personally – 3 years from now, or 3 decades from now?
- What’s the best timing for the business – is it already a turnkey operation, do you have a successor groomed, is the business at or approaching its peak?
- What’s happening in your market – is the market expanding, is it consolidating, are there opportunities your company is in a position to leverage?
Changes and Challenges
Pay attention to personal and family factors, which impact us all. Any number of changes and challenges from retirement, health, or family obligations can compel a sale, even if, those same challenges (e.g., conflicts, litigation, shareholder diversity, disability, etc.) can reduce the value of the business or make the business un-saleable!
You Can’t Sell Well In A Vacuum
In addition to attracting your ideal buyer/acquirer, you also must prepare:
- your company
- your team
- your family and
- your finances
or you won’t be in a position to sell well.
That preparation, planning and forethought takes time, commitment, focus and resources to position your business to sell well. That’s time you can’t be tied to day-to-day operations of the business. It’s imperative that your team can shine hitting your numbers independent of you at the helm. It’s time you need to focus on the strategic imperatives of an ideal transaction and your successful transition.
To Sell Well, Surround Yourself With A Team
It takes a team of experts around you to get all the pieces done and done right. You want all-star specialists around you. Do not accept ‘dabblers’ in any role on that team. Check out the whitepaper: How to Manage a Gaggle of Advisors to Build Your All-Star Exit Team.
The lead-time investment in pre-transaction/pre-transition planning will pay handsome dividends when you sell well to your ideal buyer/acquirer.