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mergers
Selling a Small Business – 5 Tips for Baby Boomers Approaching Retirement
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):
- Liquidation
- Liquidation Over Time
- Keep Your Business in the Family (i.e., Succession Planning)
- Sell Your Business to Managers and/or Employees (i.e., Employee Stock Ownership Planning – ESOP)
- Sell the Business in the Open Market (i.e., Mergers)
- Sell to Another Business (i.e., Acquisitions)
- 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
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:
- Corporate Records and Charter Documents
- Business Plan and Financials
- Intellectual Property
- Security Issuances and Agreements Concerning Securities
- Material Agreements
- Information Regarding Disputes and Potential Litigation
- Information Regarding Employees and Employee Benefits
- 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:
- 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).
- 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
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:
- 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.
- 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?
- 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.
- 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.
- 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.
- 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.
M&A: The New Rules of Mergers & Acquisitions – 5 Tips!
The Point: As part of our Business Advisory Service for Sales/BizDev at Tip of the Spear Ventures, we’ve encountered a number of organizations that are considering selling/merging with another organization. As such, they’re great candidates for our M&A (Mergers & Acquisitions) advisory service. With each passing year where we offer M&A consulting, we find that the best plan is to prepare for the M&A activity, including putting together a team of professionals (In addition to consultants, attorneys, CPAs, etc.) But what if we don’t assemble a top-talent team to assist with Mergers & Acquisitions? In this post, we’ll explore the new rules of mergers and acquisitions, along with providing 5 tips… Enjoy!
5 Tips (Rules?) to Follow in Mergers and Acquisition
Often essential for a company’s revenue column, mergers and acquisitions must be done in the right way to ensure that post-M&A creation is as profitable as pre-M&A activity. Why conduct the M&A after all if there would not be significant gains to be had? What follows are 5 tips (or rules) that should be contingency-planned in order to create successful mergers and acquisitions outcomes:
Rule #1: Establish a Dedicated Transaction Team
The timeline for completing a merger or acquisition is often very tight. The firms that will be used, the market specializes in transactions between listed companies and Legal services to reduce costs and since more and more transactions are cross-border, it is a good idea for a head of legal to build relationships with colleagues/consultants around the world.
Rule #2: Pay Special Attention to Regulatory Issues
In the new rules of merger and acquisition, one should pay special attention to regulatory issues. Rarely does a merger stumble because of a regulatory barrier, but if you wait too long before you evaluate that risk, it’s never a good strategy. The experts are unanimous: Legal counsel must ensure that no one in-house is committing a blunder causing a regulatory incident.
Rule #3: Think Team Integration Going In/Coming Out
If it is not necessary to put the cart before the horse and operate as a single entity before having accomplished all the mergers and acquisitions obstacles. It is nevertheless necessary to foresee potential blows from a lack of team integration well in advance of the M&A activity. An Integration Team is therefore responsible for identifying the departments whose operations will be merged and which departments will not be merged.
Rule #4: Do Not Be Afraid to Say “No”
Mergers and acquisitions transactions are relationships that grow and require companies to redefine themselves. If the transaction risks losing value rather than creating it, it may be better to retreat, pass, or say “No.” The fact is that the teams negotiating the transaction are so focused on the realization of the deal that they sometimes do not have the necessary distance to notice the problems that arise during due diligence. These problems are sometimes manageable by changing some of the terms of the initial agreement, but they are sometimes too important to ignore. If it’s not a good deal, regardless of ego/time involved thus far, you’re probably better off pulling the M&A plug!
Rule #5: Take Lessons from Each Transaction
The more we make, the better we are especially if you take the time to take stock after each M&A transaction. What worked well? What were the problems overcome? What were the problems we were unable to overcome? What did we not anticipate that we should anticipate next time? These “lessons” provide the “equipment” for creating lists of things to check for during the next transaction (In an effort to avoid repeating similar errors).
SUMMARY
In this post, we’ve looked at the new rules of mergers and acquisition along with 5 tips (rules?) Equipping yourself/your M&A Team with detailed information and new phases to be explored should allow for more fruitful future mergers and acquisitions activity.
Sam Palazzolo