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Author Archives: admin

Fetch Storage acquired by Livible

Livible, Inc. recently announced its acquisition of Fetch Storage on September 29, 2017.  Full details available on the Livible website.  Seed to Harvest represented the shareholders of Fetch Storage in this transaction.

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The Number 1 Reason Companies Don’t Sell

I was chatting with a business owner this week, and he told me he’d heard statistics that less than 50% of companies are ever sold.  Why is this the case?  Over the last 30 years, I’ve discovered the number 1 reason that companies fail to sell, and it boils down to one thing:  Timing.

Timing impacts your ability to sell your company in a variety of ways.  Things that you can control include trying to sell too soon or waiting until it’s too late, but there are also factors over which you have no control that can impact timing.

  • Too Soon

Have you developed a product or service, and it just needs that last little push to get to market?  It’s probably too soon to sell.  Looking at your company from the buyer’s point of view, they want to buy the business after it has developed traction.  You need to have illustrated through increasing sales, that there is a need for your product or service.  It’s not just nice to have, customers NEED to have it.  If sales are still nascent and your competitors are thriving, without being worried about a disruption to the market from your new product or service, it’s too soon.  You may be a candidate for an investment from a financial or strategic investor, but your company isn’t likely to be of much interest as an acquisition candidate.

  • Too Late

Much more common is a business owner who waits until it’s too late.  You’ve spent years running and growing your business. Now you’re getting tired; you may have been taking your foot off the pedal, so sales have slipped a bit.  Or maybe a disrupter has come into your market and is starting to steal market share.  But for one reason or another, sales and profitability are on a downward trend.

Buyers are willing to spend money to buy future opportunities for growth and profitability.  Their return on investment comes from profits from the business after closing, and if sales and profits are trending down, they may not believe they can achieve a return sufficient to reward them for the risk they’re taking when they pay you for 3, 4 or 5 years of profits in advance. (“The buyer paid me 5x EBITDA,” means that at the closing, the buyer paid the equivalent of the next 5 years of cash flow if there is no growth.)  Buyers will think that if you, who knows the business better than anyone else, can’t get the business to grow, how could they?

A business owner came to me recently with a well-known business that has been around for 25 years.  Unfortunately, in each of the last 3 years, sales have declined by about $1 million, and the owner is clearly tired and ready to sell.  The owner told me “Listen, it’s a great business; all a buyer will need to do is to invest in better marketing, and do a better job managing the sales force and sales will turn right around.”  This business owner forgot one fundamental truth:  Buyers have limited resources of time and money and want to invest those resources in opportunities, not in risks.  They only get a return on their investment through growth, so if your company isn’t growing, they can probably find a competitor to acquire that is.  (And if they give you an offer anyway, it’s likely to be a low offer that reflects the risk and hard work they’ll have to do to turn the business around.)

  • External Factors

The first two issues with timing are within your control, but external factors are not.  In the external environment, you need to keep on top of four key things:

  • Availability of Bank Financing. Buyers who “pay cash” aren’t actually using cash on hand.  In almost all cases, a big chunk of that cash you’re getting is coming from a bank.  As we saw in 2008 and 2009, when the banks stop lending money, buyers stop making acquisitions.  And even if the banks are making loans right and left, your company must be finance-able.  Some of the things that you can control that impact the buyers’ ability to get financing include:  strong, experienced management team (below the owner); low customer concentration; stability of historical financial performance; and long-term customer contracts.
  • Industry Consolidation. Most industries go through periods of consolidation.  So, if you’re starting to hear about competitors being acquired, it may be time to sit up and take notice.  You don’t want to be the last one standing during a game of musical chairs.
  • Larger Competitors Being Sold at the Same Time. As a small business, you may find that your advisor can’t get attention from the largest, most acquisitive industry buyers if there are several larger competitors in the market at the same time.  Looking at this from the buyer’s point of view, it costs them as much time (sometimes less) and money in professional fees to complete a large deal as it does to complete a small deal.  In most cases, they’d rather invest those resources in a larger deal that will move the needle for them.
  • Economic Cycle. Remember that buyers get their return on investment from future results, so if the economy in general, or your industry in particular, is heading for a downturn, you won’t find a ready stable of buyers excited about making an investment.

Several years ago, I was representing a consulting company that worked with many government agencies.  The company was growing and had a stellar reputation in its field; however, the economy was beginning to slow, and more importantly for their future, the government was tightening its belt buckle and reducing its spending.  There were no buyers interested in buying a business whose only customers were the federal government, when said government had announced significant budget cutbacks.

If you’d like to talk to me in confidence about how to time the sale of your company, please contact me.

admin

5 Lessons from Home Depot’s Acquisition of Blinds.com

A colleague of mine, Frank Mancieri of GT Growth and Transition Strategies, shared a blog post recently that has valuable advice for business owners who want to generate sustainable, transferable value in their company.  The primary points are:

  1. Win the Make vs. Buy Battle
  2. Run the Company Like It’s Public
  3. Keep Most of the Equity
  4. Keep Investors Aligned
  5. Share The Love

Please check out the entire article here:  http://www.gtgrowth.com/

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More Growth, More Profit Using Information You Already Have

Many small business owners struggle to maintain their company’s growth and increase their profitability. Something you may grapple with is understanding why something is not working – or even more importantly, what IS working that you should do more of.  Your financial statements may have the answers. But as my friend, Marty Croyle, knows from first hand experience working with hundreds of business owners during his career as a CPA, many business owners can’t make sense of their financials, and have even less understanding about how to use this information to influence their company’s strategic direction and to become more profitable.

As the business owner and CEO, you are great at running your business, but may not have received financial training. You know the bank wants to see your financials and you need them to do your taxes, but beyond that, you’re most concerned with keeping the cash flowing.  Marty recently launched the Croyle Financial Academy, and I hope you’ll consider taking some of your valuable time to attend. Through a combination of lecture, case studies, and discussions with other business owners, you’ll learn:

  • What is financial reporting and why do I ignore it?
  • Why isn’t my company more profitable?
  • How financially stable is my company?
  • If cash is king, why don’t I forecast cashflow?
  • Why data should my company be measuring (metrics and key performance indicators)?
  • Where is my company headed (budget overview)?
  • How do I improve my profitability and cash flows?
  • I’d like to sell my company for top dollar some day – how are profitability and sale price linked?

The time you spend at Croyle Financial Academy will help you generate more cash flow today, and more value tomorrow. Get more information, as well as a free eBook titled “How to Overcome The 5 Reasons CEOs Ignore Their Financials” at https://www.croylefinancial.com/. Don’t wait! The next session starts in early November, and is sure to sell out.

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Business Owner Blind Spots: Part 2 – How Much Are You Getting Paid From Your Business?

When I ask a typical business owner how much they make from their business, they can tell me their annual salary that shows up on the W-2.  They can probably even tell me how much they took in distributions the last several years.  And that’s where the knowledge stops and the blind spot takes over.

Because almost every business owner I’ve ever met runs many expenses through their business that post-transaction will have to be paid out of their own pocket.  The most common expenses that fall into this bucket include:

  • Car Lease Payments
  • Gasoline
  • Cell Phone
  • Life Insurance
  • Health Insurance
  • “Wages” paid to the kids
  • Dining Out
  • Country Club and Golf Fees
  • Business Travel (that really isn’t)

When the expenses are paid by the company, they disappear from sight, mind and memory – until the day after closing, when all of a sudden you’re getting bills in the mail every day that you never used to have to think about.

Why should you care?  Two reasons:  valuation of the business; and understanding how much you need to sell the business for to generate enough income to support your lifestyle.

First, let’s talk valuation. When I’m recasting financial statements for presentation to a buyer, I want to pull out all of these expenses and show them as “add-backs” to the profitability of the company, since a third-party buyer won’t have those expenses, meaning your business actually generates more profits than it at first appears.  And since buyers are usually paying a multiple of earnings (4 times? 8 times? 10 times?), the value of these add-backs can be pretty significant.  I’ve seen these types of expenses add up to $25,000 or $50,000 on an annual basis for small companies, over $100,000 for larger companies.  Apply a 5x multiple to it, and that’s a lot of extra purchase price.

Which brings me to my second point – you’re going to need all the purchase price you can get!  Post-closing, you will be depending upon your investments to generate the cash flow that used to come from your business.  And that $50,000 worth of expenses that have been paid by the company in the past have also probably been deducted by the company, so you were paying them with pre-tax money.  Once you’ve sold the business and you’re paying them out of pocket – the IRS isn’t going to let you deduct them, so now you’re paying them with after-tax dollars – so instead of them creating a little tax shield, you need about $75,000 in pre-tax money to pay $50,000 in expenses.

Do you need help understanding how a buyer will view your business and how much they’re likely to pay for it?  Contact us to learn about our Business and Value Assessments.

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Top 5 Things to Do Now to Prepare Your Business For Sale

You’re not ready to sell the company today, so you don’t think you need to spend any time planning for that exit down the road?  Wrong – many times, the planning you do will take several years to create value, and in the meantime, anything you do today to create sustainable, transferable value tomorrow, is likely to increase your revenue and profits in the shorter term, too.

After more than 30 years of selling and buying businesses, I know how the buyer thinks, so I’ll share with you the top five things you should focus on today to build value for tomorrow.

  1. Focus on creating operational excellence.

You should have or put into place documented processes and procedures, for everything in your business – how you do what you do, or make what you manufacture; how and when you hire, fire and train employees; how you do your annual budgeting; how you track your sales pipeline.  Put key operating metrics in place, and then track actual performance against them.  This step alone will result in a company that is well-run and growing in revenue and profits.  When it’s time to sell, a buyer can clearly see the operational excellence, and this will help drive your valuation towards the high end of those paid for companies in your industry.

  1. Concentrate on customers.

There are two critical areas to focus on here.  First – look at your existing customer base:  Are you suffering from customer concentration (more than 5% of revenue from one customer/decision maker)?  If so, it’s time to look for several additional large (or a whole bunch of smaller) customers to drive that customer concentration down.  Yes, it’s great that XYZ corporation loves you so much that they keep giving you more and more of their business. However, from the buyer’s point of view, that’s a huge risk and I’ve seen them respond in each of the following ways:  a) buyers will decide they have no interest in buying your company at all; b) buyers will pay you a lower purchase price because of the risk profile you’ve created; or c) buyers will want to put a very large portion of your purchase price in the form of an earn-out, paid over time based on the retention of those large customers.

Secondly, you should maintain a pipeline of potential new customers, along with a standard system for tracking and maintaining the pipeline.  Remember that buyers are buying the FUTURE performance of your business, so your ability to show them a history of tracking and winning new business will help them to believe that the financial projections you provided to them are reasonable and achievable.

  1. Prepare consistent, GAAP financial statements.

You don’t necessarily need to have an annual audit, but it absolutely helps.  An annual audit can uncover revenue recognition problems, which can result in significantly lower revenue and profits than you thought you were producing, negatively impacting your company’s valuation.  Rules for revenue recognition are getting more complex every day, so getting professional help is a must.  If a buyer finds out during due diligence that your financial statements have not been consistently prepared according to GAAP, it opens the door to a renegotiation of the purchase price, and by the time you’re in due diligence, your negotiating leverage has been severely reduced.

  1. Build depth in your team.

As a business owner, you’ve probably done every job in the company, but building a company with sustainable, transferable value means creating a company that can run without you.  Remember, the buyer is about to put millions of dollars in your bank account – they will have a concern that once you no longer own the business, you won’t be as focused on running and growing it as you are today.  You want them to believe that if you go sit on the beach, the team left behind can ensure the continued success of the company.  The top three areas where buyers will want to see a team include:  sales/customer relationships; operations; and financial reporting.  And if you build out your team before you sell the business – you might even be able to take that two week river cruise in Europe your spouse has been begging for!

  1. Maintain complete, organized and accurate corporate records.

I once had a client who couldn’t find his corporate record book – no problem, he thought; the attorney can just recreate it.  So the attorney did.  But three days before the closing, the corporate records showed up, and it turns out the share ownership was different than the seller believed!  This caused the closing of the sale to be delayed for several weeks while the paperwork was sorted out.  Time is the killer of every deal, so be sure that you can get your hands on your corporate by-laws, shareholder records, and articles of incorporation, and that they are kept up to date.  Additionally, be ready for due diligence – be sure that you have fully executed copies of all customer contracts, leases, and vendor agreements; and that you can quickly provide prior year tax returns and payroll tax returns.

If you focus on these five areas today, you will create a business that runs more efficiently, grows faster, and is more profitable today – and worth more tomorrow.  If you would like to talk about how a buyer might view your business, contact us.

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It’s Going to Take HOW LONG To Sell My Business?

Business owners often have a mistaken idea of how long it will take to sell their company.  Depending on the type of process used to sell the company, it typically takes at least 3 months, and could be 12 months or longer.  According to a study completed by Pepperdine University, and reported in the 2017 Private Capital Markets Project report, only 22% of transactions closed in 6 months or less.

 

Source: Pepperdine Private Capital Markets Project, 2017

Why does it take so long?  A quick review of the steps to sell your company can be informative:

Step 1 – Prepare Marketing Materials and Develop Buyer List

There are two primary marketing documents that must be prepared – a confidential information memorandum (often called a “CIM” or “the book”) and the one-page executive summary.  It can take 4 to 6 weeks to prepare these two documents, but timing is highly dependent upon how prepared you are for the volume of information that is required to prepare them.  Occasionally, while reviewing the information that has been provided, we may unearth some issues with your financial reporting or operational issues that need to be fixed before we can present the company to buyers.  It also takes time to develop the optimal list of potential buyers for your business, which may include competitors, companies who want to enter your market, or private equity firms.

Step 2 – Buyer Outreach

During this stage, while you focus on running your business, we are using email and phone calls to reach out to the list of potential buyers we identified in Step 1.  Depending on the time of year and the number of buyers, it can take from 1 to 3 months to reach everyone and get their feedback.  During the summer and the holiday season, it takes much longer to reach the decision maker.  And unfortunately, we can’t force buyers to respond to us in a timely manner!

Step 3 – Buyer Meetings and pre-LOI Due Diligence

These activities can take from 4 to 8 weeks, as buyers review the CIM and preliminary due diligence information.  Once they’ve submitted an Indication of Interest (your first insight into how they look at valuing your business), a select number will be invited to meet with you and your management team.  Coordinating the schedule of half a dozen or more busy people can be a challenge, so it can sometimes take longer than expected to get these meetings on the calendar.

Step 4 – Receive and Negotiate Letters of Intent

By this point, you are at least 3 to 4 months into the process of selling your business.  Depending upon how many buyers have submitted Letters of Intent, it can take several weeks to negotiate these Letters of Intent.  If we’re successful in getting multiple interested buyers to the table at the same time, we will be negotiating purchase price and deal structure with multiple buyers at once, ultimately leading to a set of offers for you to consider, and hopefully one that is attractive and exciting.

Step 5 – Buyer’s Final Due Diligence and Lawyers Haggling

You decided which buyer to sell your company to and signed that Letter of Intent.  So the deal is done, right?  Not so fast…  Once the LOI has been signed, the buyer will follow up with an unbelievably long list of information requests for their confirmatory due diligence.  Your ability to provide the information they need on a timely basis has a huge impact on how long it takes to get to a closing, so you may need to bring additional employees under the tent to help you.  At the same time as the due diligence is being completed, the buyer’s attorney and your attorney will be haggling over the legal terms in the purchase agreement.  (Most of the business issues will have been ironed out in the Letter of Intent, but there are an unbelievable number of legal issues that the attorneys will argue over to decide how to allocate risk.)

Step 6 – The Deal Closes!

Today, the cash paid at closing hits your bank account.  It’s been 6 months or more since you started this process, but now the heavy weight of business ownership is off your shoulders.  Congratulations, and welcome to the rest of your life!

I hope this article has provided insightful information about why it can take longer than you anticipate to sell your company, but if you have any questions, feel free to contact me http://seedtoharvestllc.com/index.php/contact-us/.  And if you’d like to learn what you can do now to reduce the time it takes to sell your company down the road, watch this space for next month’s blog post “Top 5 Things to Do Now to Prepare Your Business For Sale”.

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The Top 5 Questions to Ask an M&A Advisor Before You Hire Them

Deciding to hire an M&A advisor to sell your company is a big decision.  This is likely to be a once-in-a-lifetime, life-changing transaction, so you want to be represented by the person or firm who will work the hardest to get you a deal that meets your needs – financial and otherwise.

  1. Is a transaction of this size the right fit for your firm?

If your deal is much smaller than the typical deal the M&A advisor handles, then you may find that your transaction, which is critically important to you, ends up at the bottom of the M&A advisor’s priority list.

  1. Who will be managing my transaction, and how many transactions are they working on at once?

In larger firms, there may be junior staff who will do some of the heavy lifting in terms of financial analysis, writing the marketing materials, and researching buyers.  But you want to be sure that a partner will be doing the buyer outreach and be the primary point of contact for all buyer discussions.

You also want to know that the partner has time for your deal – if they’re working on more than 4 deals at once, your deal may not get the attention it deserves – especially if your deal is smaller than they typically work on.

  1. How many and what kind of buyers will you target?

If the advisor tells you that they have personal relationships with the top 5 or 10 buyers in your industry, so they’ll find one of them to buy your company – move on to the next guy.  The truth is that none of the top 5 or 10 may be in a position (or have an interest) to acquire your business at this time.  And if the advisor sells companies to this same group of buyers all the time – is his or her top priority really getting you the highest price?  Or is it keeping a good relationship with the buyers?

Another thing to consider is whether buyers outside your industry may be willing to pay more for the strategic value you’re bringing to them.  If the advisor doesn’t ask, you’ll never know.  You can get further insight into my opinion on buyer lists in last month’s blog post “Selling Your Company: The Top Three Reasons You Want a Broad Buyer List.”

  1. How do you keep me informed about progress?

As the business owner, it’s critically important that you keep your eyes focused on running the business during the process of selling the company.  The number one reason businesses fail to sell is because their performance starts to decline during the sale process, because the owner is focused on selling, not growing.

That being said, it’s hard to focus on your business when you’re wondering what your M&A advisor is doing, and if anyone at all is interested in your company.  So be sure that the advisor has a plan to keep you informed on a regular basis, while protecting your time so that you can keep your focus where it belongs – on continuing to grow your business.

  1. How much do your services cost?

Sometimes business owners are afraid to ask this question – somehow it seems rude to ask how much a professional service costs.  However, this is likely to be the largest transaction of your life – and the fees are likely to be the most expensive service you’ve ever paid for as well.  So ask the question – you don’t do yourself or the advisor any favors if you wait to get a proposal from them weeks later, and then discover their services cost twice as much as you expected.

In general, most M&A advisors have some kind of upfront fee – sometimes called a valuation fee, a marketing fee, or a retainer – that may get paid when you sign their engagement agreement, or over a number of months.  If an advisor tells you that they’ll take your engagement on without an upfront fee, I humbly ask you to consider if they’re going to give your deal the attention it deserves.  It may sound great that they don’t get paid until you get paid, but in reality, what that means is that they’ll focus their time and attention on deals that are easy to close.  The minute your deal gets difficult, your deal becomes their last priority.

When your company sells, there will be a success fee paid at the closing that’s calculated as some percentage of the sale.  Every business broker, M&A advisor or investment banker calculates their fees differently – there’s no such thing as an industry standard.  However, your M& A attorney (yes, you need a specialist attorney who’s an expert at getting deals done) can tell you if the fees proposed by your advisor are within “market.”

Do you have any other questions about how to select someone to sell your company?  Contact me, and I promise a sales-pitch-free, honest conversation.

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Selling Your Company: The Top 3 Reasons You Want a Broad Buyer List

Recently, a topic has been on several different blogs discussing whether, when your business is being sold, you should go to a small number of buyers, or a broad buyer list.  Based on the title of this blog, you can probably figure out my point of view.

Often when I’m talking to a business owner who is considering selling their business, they tell me, “I know my 5 closest competitors, and they’re the ones most likely to buy my business.”  Here are the top 3 reasons why I think it’s important to think outside the box when creating a buyer list.

  1. Your top competitors may not be in the market for an acquisition at the same time that you desire to sell your business. They may have just completed an acquisition so now they need time to digest it.  Their sources of financing may be tapped out.  Their performance may be terrible, so their bank or their Board may not be willing to support an acquisition right now.
  2. More buyers at the beginning of the process generally mean there are more bidders later in the process. A competitive bidding situation leads to a higher price for the seller.

    A few years ago, I sold a small company in the healthcare sector.  Based on comparable M&A transactions, we expected the company to sell for about $8 to $10 million dollars.  Our ability to create a competitive situation resulted in a final purchase price of $13 million, more than 30% higher than expected.

  3. A buyer who is not a direct competitor may pay more for your business. Companies outside your industry may want access to your customer base, your product and service offerings or your geographic location for strategic reasons — and be willing to pay higher multiples than your competitors.  Additionally, someone from outside the industry may not know the “standard multiples” in the industry, leading them to be willing to pay more.

When I am putting together a buyer list for our clients, I generally think about it in terms of a series of concentric circles, with the most obvious buyers in the center, but companies in related industries, up or down the value chain, in the outer circles.   That is often where I can find the highest value for our clients.

If you’d like a conversation about who these outside the box buyers might be for your business, contact me.

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The Number One Thing You Need to Do Before You Try to Sell Your Company

I often meet with business owners who are several years away from wanting to sell their company.  When they ask what they can do to get ready, my first answer is:  Start a relationship with a financial advisor and do some planning.  They key question you want answered is this:  “How much do I need to sell my company for in order to support my lifestyle through retirement?

Once you have that answer, meet with an M&A advisor and find out how the market is likely to value your business.  The value of privately-held companies is difficult to determine, since there are few publicly-announced deal metrics, but any M&A advisor should be able to give you a range within which they believe your company would sell.

Once you have these two key numbers, you’ll know if there is a gap between how much you “need” and how much you’re likely to receive.  Often, business owners discover that they “need” more than they can expect to sell the company for.  If that’s the case for you, here are your options:

  1. Hold onto the company for a few more years. That has several benefits:
    1. It enables you to pull more money from the earnings of the business and invest it elsewhere (retirement accounts, for instance), so that you have a larger nest egg to start with, and thus can afford to sell the company for less.
    2. At the same time, if you’re growing the business, then you’re likely increasing the value of the company so that when you go to sell it in a few years, it’s worth more.
  2. If you’re totally burnt out and can’t stand the idea of continuing to run the company for a few more years, then you also have a few options:
    1. Work with your financial advisor and your spouse to figure out where you can cut spending – both now and into the future.
    2. Or if that’s not going to fly, then you might consider hiring an interim CEO to run the business for you for the next five years and position it for a sale. Yes, it’ll reduce your company cash flows in the short term, but it may ease your stress and help you to hold on until the company’s value is sufficient to meet your retirement needs.

If you need an introduction to a financial advisor who can help you figure out how much you need, or an interim CEO to run the business for you, email me, and I’m happy to make a referral.

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