1. Low Valuations: The 7 P's of Business Valuations
There is a military adage called the 7 P's: Proper planning and preparation prevents piss poor performance. And, the impact of the 7 P's on exiting a business can easily translate into $2 - 3mil in lost transaction value for the typical low to mid market business sale.
Business Intermediaries are an excellent source of information regarding the features that strategic and/or financial buyers look for in prospective acquisitions. The most common mistake exiting business owners make that weighs heavily on the valuation that they could have obtained is waiting till the last minute to sell.
Business buyers generally purchase businesses for a living. They will see hundreds of deal books in a year. They will close on many of these transactions. Your business is one of thousands that may be entertained in a business cycle. You must not approach this savvy deal team unprepared. And, preparing a business to entice the right buyers may take more than a couple months. Most business reviews uncover strategies that will take a few years to mature for a buyer to find them credible.
Building a relationship with an intermediary and/or potential transaction deal team can help you uncover and articulate the strategies most likely to result in heightened interest by the broadest cross section of potential buyers. The result of increased interest is upward pricing pressure on your individual transaction to the higher end of the range of multiples that you receive on EBITDA. The range is typically 2 - 3 times EBITDA between businesses presenting desirable characteristics as a result of proper prior planning and those who do not. This can give you a budgeting range for the strategies you are financially able to support during the interim period.
2. Over Taxation: Corporate Forms and Asset vs. Stock Sale.
Most owners imagine initially that they will sell their companies. The fact is that most often, it is assets that are sold and not the entire company. Most buyers understand that a wholesale purchase of an entire entity brings with the transaction potentially undesirable risks and liabilities. As a result, many transactions are structured as a purchase of desirable assets. This can aide in divorcing the value from the risk.
Business owners should pay attention to the common deal structures in their industry and understand the tax implications of the difference between the sale of assets and the sale of stock. Finally, the corporate form most suited to the end state transaction should also be explored.
The corporate form that may have suited early stage development, may no longer suit end stage planning. C Corporations, for example, can be desirable in early stage growth and development. However, as the growth stage matures into exploring transitional opportunities such as a sale to outsider, a pass through entity type (like an S Corp) may provide for more desirable net results for the business owner - including the expenses associated with the analysis and effort to re-form the entity.
3. Low Performing Earnouts: Keep your A Team In Place.
Like the fictional character Hanibal, from the T.V. show The A Team, I love it when a plan comes together. Unfortunately, your critical management team may not be as loyal as Hanibal's T.V. family once you leave the set. Your key employees will be critical to the long term performance of your enterprise. This current economic climate may present you with transactions that expose you to substantial performance risk if the enterprise fails to hit certain metrics post close.
Your management team and hotshot super stars are a flight risk once a transaction has taken place. They may be jealous of the perceived pay day the owner just received. This is especially true considering most star players consider themselves the source of the value the owner just received. In addition, many leaders although never taking the steps required to take on an ownership role, imagined that they might have some day. Now that day is gone. And, this has served as a wake up call for this industry leaders to find a place where they could take an ownership stake. They will leave the first chance they get.
As the enterprise deals with these issues post close - the business owner is in a critical position. In these situations, vesting schedules on carefully planned and implemented executive bonus and stay bonuses can keep all economic incentives aligned.
3 - 5 years prior to a liquidity event, non-qualified plans can be implemented with rolling vesting schedules that will create substantial sums left if a key player leaves too early. Additional specific bonuses can also be implemented IN ADDITION to the deferred compensation that are specific to the transaction. For example, 25% of annual salary on date of close, 25% 12 months later, 50% 24 months later. This will keep all players moving towards a successful integration and hitting of critical benchmarks that have a positive impact on portable value obtained by the exiting owner from earnouts.
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