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Selling a Small Business – 5 Tips for Baby Boomers Approaching Retirement

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The Point: As a small business owner, you pour your blood, sweat, and tears into your business! The day-in/day-out challenges associated with leading a business as it’s owner are supposed to be offset by the “golden” years of selling it and retiring. As the largest demographic in our society, the Baby Boomers, approach their exit it appears as though the golden years are turning to rust before our very eyes! So, in this post we’ll explore selling a small business with 5 tips for Baby Boomers approaching retirement… Enjoy! (NOTE: While the focus of this article is on Baby Boomers, it can be applied to any small business owner looking to successfully exit!)

The Baby Boomers

Baby Boomers born between 1946 and 1964 represent an estimated 73 million people in our society (The second-largest age group after their children, the Millennials, born from 1982 to 2000). Baby Boomers represent 41% of small business owners or franchise owners (Second to Gen X’ers born between 1965 and 1980 at 44%).

This demographic rapidly approaching retirement age (generally thought of as age 62 – the age at which a person is expected or required to cease work and is usually the age at which they may be entitled to receive superannuation or other government benefits, like a state pension). As they achieve this milestone, few appear to be financially ready/able to successfully retire. The top two reasons being that (1) they were the first generation expected to establish for themselves self-retirement tools/savings as opposed to government provisions and (2) the economic recession from 2008 reducing significant savings (if any were established).

Baby Boomer Small Business Owners

Statistics reflect that almost 40% of Baby Boomer small business owners feel they don’t have the financial confidence to retire before they’re 65, let alone three years earlier at 62! What’s more, a recent study suggests a full 72% don’t even have an exit strategy. Exit strategies for small business owners typically consist of the following (in popularity order):

  1. Liquidation
  2. Liquidation Over Time
  3. Keep Your Business in the Family (i.e., Succession Planning)
  4. Sell Your Business to Managers and/or Employees (i.e., Employee Stock Ownership Planning – ESOP)
  5. Sell the Business in the Open Market (i.e., Mergers)
  6. Sell to Another Business (i.e., Acquisitions)
  7. The IPO (Initial Public Offering)

Tips for Baby Boomers Selling Their Small Business for Retirement

As an active acquirer of small businesses (You can view my firms Acquisition Criteria here: https://tipofthespearventures.com/acquisitions/), I’ve compiled the following five (5) strategies or tips for successfully selling the Baby Boomer owned small business. (Note: As a somewhat conservative investor, I caution against the “all-your-eggs-in-one-basket” mentality when it comes to selling your business ahead of retirement).

Tip #1 – Diversify Your Money

One of the biggest strategies I see small business owners do is hinge their entire retirement on the sale of their business. A better strategy consists of acting well before the sale. It is important that small business owners take money out of the business from a personal standpoint and invest those funds no less than three years prior to an anticipated sale. Typically, most businesses will provide the most recent years financial statements as part of the financial packet to prospective buyers. Statements that reflect anomalies are scrutinized, leading to a sale multiple (3-5x) that will be less than or undesirable.

Tip #2 – Financial Statement Cleaning

Along those lines, the organization’s financial statements are the foundation reviewed during acquisition due diligence when selling any business. Updating the core documents like profit and loss statements can make a big difference to anyone exploring the enterprise.

Updated balance sheets and tax returns for at least the last three fiscal years is crucial in projecting the best financial position possible. The goal being to make sure everything ties together, making sense to potential acquirers and being easy to understand.

Tip #3 – Removing Yourself from the Business

Do you have staffing that’s able to run the business after your exit? As an active Owner Investor (as opposed to Owner Operator) I typically look for organizations that have depth of staff that will allow the organization under new leadership to continue on without current ownership running the entity day-in/day-out. Easing the transition here means hiring employees that will stay as the face of your business when the ownership changes. This strategy allows small business owners to potentially increase the value of their business and the likelihood it will sell.

Tip #4 – Operational Documentation

Having an Operational Guide is important for every business to successfully operate/run. These Operational Guides are critical details for manufacturing, distribution and sales. This guide that is written down and documented makes it easier for the new buyer to pick-up where the old owner left off and drive the organization forward. They also make it easier/less stressful for those employees remaining with the business.

Tip #5 – Identify Legal Barriers

Identifying if the sale of your business is an Asset (when a buyer is interested in purchasing the operating assets of a business instead of stock shares) or Stock (shareholders of the target company receive shares in the acquiring company as payment, rather than cash) sale will ease the exit process. Removing any of the legal hurdles can make the road to a sale less difficult for acquisition. For example, one that we keep coming up against is the transfer of the lease (Landlords using the sale of the business as an opportunity to renegotiate leases and up the rent can be viewed as undesirable to potential buyers).

SUMMARY

In this post, we’ve explored selling a small business with 5 tips for Baby Boomers approaching retirement along with 5 tips. All of these strategies are desirable for potential acquirers. As such, Baby Boomers looking to sell their business should look to complete them to position their business as they look to exit into their golden years of retirement.

Sam Palazzolo

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Mergers & Acquisitions: Slowing Down to Speed Up! Part 2

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The Point: When it comes to Mergers & Acquisitions, speeding up isn’t the answer. In fact, I typically see that if those that lead M&A would simply slow down, they actually achieve their objectives more quickly! So how then do Mergers & Acquisitions leaders and their teams slow down for success? In this two-part post (You can read Part 1 by CLICKING HERE), we’ll explore exactly how slowing down to speed up can be achieved in Mergers & Acquisitions… Enjoy!

In Part 1 of this post on “Mergers & Acquisitions: Slowing Down to Speed Up!” we explored how slowing down to speed up can be achieved in Mergers & Acquisitions. Specifically, we reviewed the effect of COVID-19 on M&A, a six (6) stage Mergers & Acquisitions Strategy, and how slowing down to speed up can result in M&A success. Here in Part 2, we will continue the discussion on potential challenges and how to navigate them.

Pricing Flexibility and Fairness

As mentioned in Part 1, a key issue when negotiating an M&A deal is the agreed to pricing mechanism or structure of the deal and related adjustments to be made. Know this: There is almost always a difference between what the Seller believes is the appropriate price and what they Buyer believes they should have to pay for a business. This valuation gap should contain contingency planning on how to deal with differences in lock box (fixed price plus an interest component), working capital, capex, and net debt adjustments and Seller Discretionary Earning – SDE or earnout.

The Breakup Clause or MAC

As a Buyer of businesses, we typically like to include clauses that allow for a clean “breakup” if need be. There’s considerable time and investment made, and nothing is worse than an ugly breakup! Including a Material Adverse Change (MAC) condition whereby “walk-away” privileges are preserved.

Keep in mind that a MAC should be used as a Buyer’s protection tool in the event significant differentiation presents itself in asset deterioration versus stated condition for example. A MAC should not be utilized as a “cool down” or buyer’s remorse prevention tool.

Targeted Due Diligence

The main issues identified for the business should be included in a targeted due diligence approach. This approach could be further supported by identifying and putting into place Representations and a Warranty & Insurance policy. These policies are used in Mergers and Acquisitions to protect against losses arising due to the Seller’s breach of certain representations made in the acquisition agreement.

With so much to consider when it comes to a Mergers and Acquisitions due diligence initiative, where should you start? In other words, if you don’t have a target to aim for, you’ll never know if you hit or miss it! Consider this due diligence moment as one similar to a VC exploring a Series B round investment. Here then is a list of 8 items to target as a part of your due diligence:

  1. Corporate Records and Charter Documents
  2. Business Plan and Financials
  3. Intellectual Property
  4. Security Issuances and Agreements Concerning Securities
  5. Material Agreements
  6. Information Regarding Disputes and Potential Litigation
  7. Information Regarding Employees and Employee Benefits
  8. Equity Grants

Competitive Analysis

A competitive analysis is a strategy where you identify major competitors and research their products, sales, and marketing strategies. By doing this, you can create solid business strategies that improve upon competitor’s market position. We recommend conducting a Competitive Analysis as part of your due diligence, primarily because you’ll need to identify the current role the organization plays within the existing business climate, as well as where potential lies.

In conducting a SWOT Analysis (Strengths, Weaknesses, Opportunities, and Threats), we recommend a deep-dive on competitors. You’ll need to identify who you’re really competing with so you can compare data accurately (An apple vs apple comparison, even if it’s two different varieties of apple is better than an apple vs orange comparison). Specifically, you’ll want to identify:

  1. Who are your direct competitors (Those competitors you that offer a product or service that could pass as a similar substitute for yours, and that operate in your same geographic area).
  2. Who are your indirect competitors (Those that provide products/services that are not the same as yours, but could satisfy the same customer need or solve the same problem).

Competitor analysis is something that you’ll also want to revise throughout the years of ownership. Why? The market can and will shift anytime, and if you’re not constantly surveying the competitive landscape, you won’t be aware of changes until it’s too late.

SUMMARY

In this post, Mergers & Acquisitions: Slowing Down to Speed Up! Part 2, we explored how slowing down to speed up can be achieved in Mergers & Acquisitions. Specifically, we reviewed Pricing Flexibility and Fairness, The Breakup Clause or MAC, Targeted Due Diligence, and Competitive Analysis.

Sam Palazzolo

Mergers & Acquisitions: Slowing Down to Speed Up! Part 1

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The Point: When it comes to Mergers & Acquisitions, speeding up isn’t the answer. In fact, I typically see that if those that lead M&A would simply slow down, they actually achieve their objectives faster! So how then do Mergers & Acquisitions leaders and their teams slow down for success? In this two-part post, we’ll explore exactly how slowing down to speed up can be achieved in Mergers & Acquisitions… Enjoy!

The Effect of COVID-19 on M&A

The pandemic has certainly had its impact on the economy. From lockdown mandates to the rebooting of the economy (and sometime unfortunate re-lockdown occurrences), we’re seeing a major effect on the bottom lines of organizations we’ve determined as prospective M&A market verticals. Even with the hope of antivirus on the not too distant horizon (hopefully!), there exists a number of companies that will be pressured by creditors to divest assets to pay down debt and avoid going into business rescue (or liquidation), or to assist in funding ongoing operations due to a cash flow crunch.

With abbreviated timelines, M&A activity now additionally has certain legal and commercial challenges for both buyer and seller at play. Think asset preparation for sale issues give the shortened timeline, providing the buyer with accurate information and time to conduct thorough due diligence ultimately sets the stage for deeper valuation gap analysis.

If money is made during the initial acquisition moment, the buyer must mobilize funding for quick deployment while the seller balances the need for speed and complexity of the divesting process.

Mergers & Acquisitions Strategy

In order to speed up, we’re going to have to slow down. A strategy to help accomplish that is to view the Mergers & Acquisitions Strategy from the Seller’s perspective. With the Seller’s perspective in mind then, the following is a six (6) stage strategy a Seller could employ to make the transaction a reality:

  1. Business Valuation – What multiple (typically 3-5x) applied against what financial term (Cash flow, Seller Discretionary Earning – SDE, and/or EBITDA)? Additionally, taking into account current COVID-19 financial performance considering revenue, expenses, and liquidity are important business valuation determinants.
  2. Deal Structure – What will the proper deal structure look like? From a financing perspective, will it be made up all/parts institutional/non-institutional financing (Banks, Private Equity – PE, Family Office funding), seller financing, and/or buyer funding? Additionally, will there be a need for the seller to provide a transitional services agreement whereby they agree to stay/run the entity during the transitional period typically of 3-36 months?
  3. Business Listing/Auction – As a seller, you’d like to receive the most money for your years of service to an organization. What is the best route to get the most money then? Typically, we approach organizations not listed for sale prior to them listing their business. With these Sellers, they typically don’t know how much their business is worth. Introducing them to a valuation service can be beneficial in determining the value of their entity as well as a potential source for realistic listing of the company. In some situations, businesses are already listed for sale on sites such as BizBuySell.com. Lastly, in distressed situations a business will go to an auction sale process.
  4. Legality – There typically is involved a series of professional advisors (I wrote about surrounding yourself during the M&A process in a post that you can read by CLICKING HERE). Know that as a seller disposing of assets sometimes there is a need for disclosure of key regulatory approvals that may be required to implement the divestment. Understanding these issues enables a seller to (1) be forthright about any problems associated with the organization’s assts and (2) accelerate the due diligence timeline towards the creation of an acquisition agreement.
  5. Buyer Qualifications – Who is going to be the ideal buyer of the business? Most owners have a variety of Buyers approach for acquisition. However, not all Buyers are created equal, and therefore should not be considered as such. Typically, there is a Buyer profile that can eliminate potential Buyers and provide a strategy for who the owner ideally would like to see carry on their legacy.
  6. Leveraging Technology – If the pandemic has taught us one thing, it’s that virtual meetings can maximize your efficiency if conducted properly. Therefore, leveraging technology (virtual meetings, email with clear communications, etc.) can greatly enhance the offerings value to Buyers.

Slowing Down to Speed Up for M&A Success!

So what is your goal regarding established Acquisition Strategy (You can read Tip of the Spear Ventures Acquisition Strategy by CLICKING HERE). Our goal at TIP is to acquire one (1) business each quarter. That’s a lofty goal, and requires numerous business explorations to be conducted each month. But with such a goal, we know that speeding up isn’t the answer. In fact, we’ve found that if we simply slow down the acquisition process we achieve our objective more quickly.

Speeding up wasn’t the answer for us! With speed came a host of issues, such as increasing complexity, unnecessary energy consumption, and overlooking of key due diligence criteria. We also found that we were quick to “fall in love” only to be heartbroken because we overlooked obvious signs that the business wasn’t a good fit for our portfolio.

By slowing down, we were able to go deeper in our due diligence. As a result, we dealt more effectively with the typical increased levels of complexity, overcame easier the obstacles/challenges that presented themselves along the way, and used far less energy. Not only were we able to go deeper, but speed was attained so that we could go faster towards achieving our goals/objectives.

SUMMARY

In this post, Mergers & Acquisitions: Slowing Down to Speed Up! Part 1, we explored how slowing down to speed up can be achieved in Mergers & Acquisitions. Specifically, we reviewed the effect of COVID-19 on M&A, a six (6) stage Mergers & Acquisitions Strategy, and how slowing down to speed up can result in M&A success.

Sam Palazzolo

PS – In “Mergers & Acquisitions: Slowing Down to Speed Up! Part 2” we’ll discuss Pricing Flexibility and Fairness, The Breakup Clause or MAC, Targeted Due Diligence, and Competitive Analysis. You can read it by CLICKING HERE.

Acquisition Entrepreneurship – Selecting Professional Advisors

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If you’re a leader thinking about making a change in your career, a new MBA looking to launch into leadership, or maybe a seasoned entrepreneur through acquisition you know that the road to identifying an organization to purchase is littered with the corpses of  those that did not conduct thorough enough due diligence. In this series, Acquisition Entrepreneurship, I’ll tackle the topics that will make your journey on that road less risky on the way towards successful acquisition of a new entity. In this post, we’ll explore the Professional Advisors recommended to assist you towards acquisition… Enjoy!

Acquisition Entrepreneurship Selecting Professional Advisors

Selecting Professional Advisors

An Accountant and a Lawyer are two of the most important advisors you’ll want to engage during your due diligence phase in acquisitions. You should look for those accountants and lawyers skilled in working with similarly sized firms as the one you’re exploring (Typically, those that work with smaller firms).

The accountant should have familiarity with smaller firm’s accounting practices, including payroll taxes, sales tax, and noncash expenses such as bad debt reserves or accruals for sales force bonuses earned yet paid. The accountant should have well established protocols to quickly determine if the company has accurately accounted for these expenses.

The lawyer should know which contracts are successfully in play at the acquisition and typical terms and conditions therein. This could be the same lawyer that assisted with creating your Letter of Intent (LOI) as well as prepares the final acquisition documents.

Professional Advisor Fees

While accountant and lawyer fees typically vary, depending on geography and especially with the purchase of an organization that can last several months to a year, you could expect that accounting due diligence will cost somewhere between $20,000 to $50,000. The reason there is such a large range provided is that the cliché “it depends” is in play regarding how much work needs to be done to understand the company’s true financial picture.

Legal due diligence is more tightly focused and includes the cost to prepare purchase agreements and related documents. The fees one can anticipate typically are in the $50,000 to $75,000 range.

One last note on professional advisor fees, specifically contingency. In other words, you may want to see if both accountants and lawyers will work on a contingent basis and therefore get paid at the time of closing so that you won’t have to come out of pocket during the due diligence phase. Keep in mind that some professional advisors will do so, some won’t work on contingency. The bottom line is that you typically get what you pay for so select wisely but don’t eliminate these all too important professional advisors!

Other Professional Advisors to Consider

In addition to accountants and lawyers, there may be other professional advisors that you want to bring in while conducting due diligence. I’ve hired engineers to come and inspect manufacturing equipment, IT consultants to inspect software development, Environment consultants to gage appropriateness of the wet excavation procedures, and Marketing consultants to ensure accuracy in market potential was accounted for. Depending on your entrepreneur through acquisition strategy and the organizations you’re considering, it’s important to bring in the professionals at time of due diligence well before you officially take ownership (Again, it’s better to walk away from the acquisitions table because of issues identified by professional advisors than to sit at it and go hungry for a period of time because you didn’t employ them!)

SUMMARY

Acquisition Entrepreneurship is a great way to explore your entrepreneurial spirit and look to “buy then build” an organization (As opposed to the typically thought of entrepreneurial methodology of a startup). Regardless of the industry you’re looking in and the size of the organization therein, you want to ensure that you have the best team of professional advisors employed to serve you. This will help with risk mitigation regarding your entrepreneur through acquisition strategy.

Sam Palazzolo

PS – I’m typically asked what our Acquisitions Strategy is at Tip of the Spear. As such, we have summarized our Acquisitions Criteria here on our website: https://tipofthespearventures.com/acquisitions/. Please review and let me know if I can be of service.

Is Happiness a Requirement for Success?

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Are you happy? Ask yourself right here/right now are you truly happy? It seems the world right now is not a very happy place. With a health pandemic raging on, long overdue protests taking place, and a world economy on the verge of collapsing the news headlines don’t share a lot to be happy about. It’s an unrealistic expectation for people to be happy all the time, even without the current happenings. So, it got us thinking here at the Tip of the Spear Ventures, is happiness a requirement for success? In this post we’ll explore the benefits of happiness and share two reasons why it’s not good to be happy all the time (Trust me… Research shows it’s not all it’s cracked up to be)… Enjoy!

Is Happiness a Requirement for Success?

Happiness Meet Ditch

Yesterday I had a Zoom meeting with a colleague (I’m sure you did too!) The meeting started off just like every other meeting I’ve ever participated in, but quickly took a hard left-turn straight into the ditch! After we initially exchanged pleasantries (“Good morning (Name)”… “Good morning Sam”) we breached the “How are things going?” moment. This is where the turn came in! My colleague expressed “I’m bitter, burned out, and besieged!” How do you respond to that? Truth be told, I’ve asked that question a thousand times, pre-pandemic/pre-protest and typically get the standard “I’m good, how are you?” response. But not this time! Was my colleague trying me on? Didn’t they really owe me the standard response so that we could get down to business? Why was I facing this derailing moment?

Positive Psychology and the Study of Happiness

Positive psychology is a field born roughly 25 years ago. Positive psychology is often mistaken of perpetuating a myth regarding happiness, inasmuch a good life is all about being happy. There have been a number of good works on the topic of happiness, including Shawn Achor’s “The Happiness Advantage,” Matthieu Ricard’s “Happiness: A Guide to Developing Life’s Most Important Skill,” and The Dalai Lama’s “The Art of Happiness: A Handbook for Living” (Even I’ve written on the topic in a post titled “The Leadership Challenge: Pollyannaish!”) But perhaps this happiness-focus is not exactly what it should be?

According to Martin Seligman, perhaps the most-often cited expert in the field of positive psychology, the study is meant to approach optimal human functioning at large, including the topic of happiness. Furthermore, it turns out that happiness might not be the best state to operate in for success (As a matter of fact, it isn’t!)

Success does not Require Happiness

In order to function optimally in our lives, we do not need to operate in a perpetual state of happiness all the time. So why would we not want to operate in such a state of bliss? Here are two (2) reasons:

Why are You Here? – Meaning and Happiness

The question is as old as time: “Why are you here?” or “What is your purpose?” Defining your meaning is difficult, after all it’s at the top of Maslow’s ‘Hierarchy of Needs’ for a reason. With this in mind, answering those questions is going to take some thought… Some real deep thought! The experiences, actions, and relationships that make your life worth living typically fall into the two camps of “hedonic” and “eudaimonic.” Hedonic life moments are all about pleasure (Seeing beauty, eating chocolate, and/or loving another). Eudaimonic life moments, on the other hand, are all about personal meaning and purpose (Upholding your personal values, finding ethical meaning expressed in what you do, and/or standing up for someone that can no longer stand). Most of the time, what is most meaningful isn’t the most pleasurable and vice versa.

Negativity Makes Life Better!

While happiness might be a preferred state, research shows that negative feelings can in fact be good for us! Anxiety and fear can protect us (think “fight or flight”), guilt can motivate us to make amends, and anger can help us increase focus on a problem at hand. While there’s a difference between feeling an emotion and acting out as a result of it, most are able to experience the negative emotion in life’s ups and downs with a goal of creating a healthy and manageable lifestyle.

SUMMARY

So, happiness as it turns out is not the sole requirement for success. While living a good life isn’t just about being happy, it also entails incorporating authenticity, pleasure, pain, happiness, sadness, love and conflict. If we were only happy all the time, we’d overlook opportunities to provide improvement to ourselves, those we lead, and the communities in which we serve.

Sam Palazzolo