Blog | Dr. John Binkley Generational Equity Chairman

The Importance of Seeing Your Business Through a Buyer’s Eyes

April 14, 2021 By John Binkley

When you think about your business, how would you describe it? Your job? Your passion? Your life’s calling?

There is no wrong answer here. But one word that often escapes entrepreneurs when describing their company is “investment”. This is crucial, because those that are able to make this association often find themselves in a much stronger position to maximize the potential of their exit plans.

Why is this?

Because those who see their business as an investment are seeing it from the same perspective as a potential buyer. They are looking at its capacity for future growth. To increase revenue. To secure greater market share.

Seeing your business through the eyes of a buyer puts you in a strong position to understand and correct any concerns that they might have about the prospects of your company, and to pinpoint the key intangible assets that would capture their imagination and encourage them to pay a premium for your company.

But what if you don’t have this perspective?

Then, at least in my experience, you will be in a similar boat as many other entrepreneurs; business owners that are often too preoccupied with the daily operations of their company to take that step back and look at their company from a buyer’s perspective.

Furthermore, I have found that most business owners tend to err in one of two directions when they attempt to look at their company objectively:

They are overly critical of their company’s shortcomings to the point that they obscure the positives.
They are overly optimistic about their business’s prospects and processes to notice any areas needing improvement.

Both of these can be problematic for attempts to maximize the value of your exit strategy, but it is the latter of the two that is more common among entrepreneurs. This perspective not only clouds their minds from making changes that could improve their worth to buyers, but it may also mean they mistake potential red flags as major selling points.

For example, let’s say that your company has four customers that account for 50% of your overall revenue. To a business owner, this might be viewed as a positive for several reasons:

It shows your company has built strong, lasting relationships, a sure sign of its good reputation
It shows your company treats its customers well so they will continue to use your products and services
It shows that your products and services are of great quality

However, a professional buyer will not necessarily look at these the same way. Instead, when they see that 50% of your revenue is tied to four customers, their big questions will probably be:

“What will happen if those four customers disappear when the business enters new ownership? What if the relationships with these key clients are completely tied to the current owner?”

Where an owner sees benefits, a buyer might see risk. Similarly, you might see it as a big bonus that your experience and industry knowledge has guided your company to new heights, and has helped establish you as a leader in your field.

But, unless you are planning to stay with the company post-acquisition in some form of earnout agreement or similar deal, the buyers won’t be acquiring you when they purchase your business. So instead of being impressed by your expertise and how dependent your company is on that to thrive, they will ask questions like:

Do you have a middle management team?
Who is in a position to take over from you upon your departure?
Do key clients/customers know anyone outside of the owner?
Who is more important to the brand – the owner or the business itself?

Owner dependence and customer concentration are two of the biggest red flags for prospective buyers because, fundamentally, their objective is to acquire targets that present the biggest opportunities with the lowest degree of risk.

Giving buyers what they want

So, how can you gain this insight into what professional buyers are seeking in companies like yours? As most entrepreneurs will only exit one business across their lifetime, this is not something you can afford to pick up on the fly…

The best approach is reaching out to an experienced M&A advisory firm like Generational Group. Because of their extensive knowledge of the factors that influence both buyers and sellers over the course of a transaction, their expertise will be incredibly helpful in gaining an insight into the intangible assets of your company, and the areas that buyers may be concerned about.

Plus, firms like Generational provide a truly objective perspective. Now as one of our former clients, Warren Peck of Phoenix Rising Aviation, once rightly claimed:

“No one likes to be told that their baby is ugly.”

The same can be said of most business owners towards their company. But, as I highlighted earlier, this attitude can cause you to miss vital areas of improvement which, if not addressed, can limit any potential offer from a professional buyer.

That is why the independent, honest perspective of a reliable M&A advisor is like a spoonful of medicine – it might not feel great to swallow, but once you do, you’d be surprised at how quickly things start to improve!

As a general rule to get you started, addressing the following key risk areas will help you make great strides in bridging the valuation gap between your expectations and the buyer reality:

Reducing owner dependence
Improving customer diversity
Enhancing profitability
Augmenting sales and marketing teams and processes
Restricting customer and supplier churn
Documenting key internal procedures and policies
Making sure your financials are accurate and in order

The good news is that most of these can be addressed starting today, and by doing so, can make a substantial difference to your exit prospects.

But, an M&A advisor’s job is not only guiding you in areas needing improvement – it’s also to highlight aspects of your business that will help you stand out from the crowd of acquisition targets and capture the imagination of particular buyers.

I’m again referring to your company’s intangible assets. These are components that you might currently take for granted as part of your daily operations. But, to the right buyer, these can be the difference between an exit where money is left on the table, and an optimal exit that fulfills your ambitions for life after your company.

Providing a complete list of intangible assets would require a completely separate article to be written, but they can include:

Recurring revenue streams from multiple customers
Experienced employee base with low turnover
Solid and documented systems and procedures
Stable and large vendor base
Significant market size and growth potential
Dedicated and skilled sales/marketing team
Well-trained and mentored middle management
Regularly updated business plans
Proprietary software developed in-house
Defensible market share
Business location(s)

By working closely with a professional M&A advisory firm, you can build a stronger understanding of these intangible assets and what they could be worth to the right buyer. While the majority of these won’t mean a lot to all buyers, one or two could really grab the attention of one or two buyers and send the value of your business in their eyes skyrocketing.

Once an advisor has identified these unique traits, they can then actively source buyers from their network who they believe will be interested in these, which in turn could significantly enhance your company’s valuation to them. It will also shape what to include in your Offering Memorandum and similar documentation designed to capture the imagination of prospective buyers.

Demonstrating “intentional growth”

Something else that professional buyers will seek from a potential target is a clear strategy for “intentional growth”. Some companies achieve consistent levels of growth without having documented strategies in place, be it due to the quality and popularity of their products/services or enjoying a boom period for their industry.

However, a plan for intentional growth is substantially more appealing to buyers as it demonstrates to them that there is a method behind your development – one that they can then maintain and build upon once they acquire the company to ensure that this growth continues.

Again, questions that savvy business buyers will ask about your prospects for growth will include:

What plans do you have to grow your company in the coming months/years?
How are you implementing these plans?
Do you have both tactical (short-term plans) and strategic (long-term plans)?

If you believe this is something you’re lacking within your own company, the assistance of a team like Generational Consulting Group can make a massive difference. Not only will this help to accelerate the growth of your company, improving its performance both short term and long term, but it will demonstrate to buyers that you have a roadmap for consistent growth.

This will encourage them about your company’s future which, as I established earlier, is what a buyer is purchasing from you.

The value of seeing a buyer’s perspective

In order to achieve your aims of one day exiting your company for maximum value, being able to objectively analyze your business from the perspective of a buyer is a crucial skill to master.

Hopefully this article provides you with an introduction into developing this mindset. But, I cannot stress enough the value of hiring an independent M&A advisory firm to guide you as you grow your business and enhance its buyer readiness.

This impartial analysis of your business will give you a clear indication of the positive and negative factors influencing the attractiveness of your business in the eyes of buyers, and set you on the path to correcting the issues and emphasizing its intangible assets on your journey to exit.

If you would like to learn more, I would encourage you to consider attending a Generational Growth and Exit Planning Conference. Here you will learn game-changing information to support the continued growth of your company, and how to build a truly “buyer-ready” business that maximizes the value of your exit strategy.

You can also discover more valuable advice and guidance on all things M&A and exit planning from Generational’s regularly-updated insights.

How Family Dynamics Can Influence Your Exit Planning

February 10, 2021 By John Binkley

Over the years, my associates at Generational Group and I have engaged with hundreds of family businesses.

Whether that is to explore techniques and strategies to accelerate the growth of their business or, as the title of this article suggests, guiding their journey to exiting their business, we have a long history of dealing with the often-complex dynamics involved in family-run companies.

With that in mind, I wanted to dedicate this article to the role these family dynamics play in the development and execution of exit strategies. While the longevity and consistency of a business passed from generation to generation is something many firms use as a powerful selling point, can the strength of these bonds actually be a detriment to your chances of:

Achieving an exit on optimal terms?
Protecting the legacy of your business long-term?

The warm reassurance of a family business…

As noted, there is something comforting for customers about a company that has seemingly been around forever. Family businesses have that backbone of reliability that really endears them to consumers.

And right now I’d like to emphasize that this article is not designed to devalue the stature of family businesses and their ability to survive and thrive for decades (or even centuries) at a time. There are many advantages to firms operating this way:

There is typically greater longevity in leadership, which brings stability
Having the business’s level of success tied to the prospects of the family means it is in everyone’s best interests to work hard and get behind the cause
There is often a more long-term outlook among owners of these firms
Family members will adopt many roles and responsibilities to support day-to-day operations, enhancing flexibility

However, these undoubted positives do have the potential to obscure the challenges associated with these organizations. The blurring of boundaries between work and home. The risk of bitter, personal conflicts. The dangers of nepotism overriding actions that are in the company’s best interests.

But, most pressing of all for the purpose of this piece, the difficulties of having frank, open dialogue over succession planning.

The inconvenient truths of passing on a company

In my experience, these family-wide discussions about exit planning are some of the biggest hurdles we as dealmakers have to work through. Especially as you add multiple family members into the mix (cousins, nephews, nieces, etc.), this can become very complicated and delicate to navigate.

Unfortunately, many people in this situation avoid having these conversations for the longest time because they are worried about how this will affect their relationships with family members. As soon as the owner(s) start to discuss their life beyond the business and how they intend to exit, these plans can quickly become a source of conflict:

If you want to pass it on to one or multiple family members, who is responsible for what?
Who becomes CEO or primary owner upon your departure?
How much will you expect them to pay for the company, and in what timeframe?

These are just some of the questions that may result in some tense and potentially volatile discussions. That’s why, as dealmakers, our role is as much about family counselling and mediation as it is about knowing the M&A landscape and negotiating!

Because, the fact is that, as much as many owners relish the idea of keeping their company in the family name, particularly if they have already had the business passed down to them, there are several challenges of family business transfers that could emerge from that decision if it has not been approached in an impartial, honest way:

Your family might have interests outside of the business

Firstly, even if family members have worked in your company for a long time, it doesn’t necessarily mean they are passionate about it, its customers or its other employees. Over the years, they will have likely developed other career interests that they would like to explore, rather than be tied down to the family business.

A situation where the successors feel coerced or reluctant about taking the reins is a recipe for disaster. Without your commitment and fervor that enabled the business to get where it is today, how can the business expect to stay on the same trajectory?

Your family might not have the aptitude to take on the company

Alternatively, just because there are family members who want to take the business into the future doesn’t mean they are cut out for that role. They may have taken on several duties within the company over the years, but that doesn’t ensure that they’ve developed the skills and have the characteristics to lead a business in your industry.

This doesn’t mean they’re hopeless or incompetent – they might have exceptional skills in certain roles, and could remain a vital employee for the company’s development. But, the role of an owner carries a ton of responsibility and involves spinning a lot of plates at the same time – not everyone is cut out for it.

In addition, if you were to pass on the business to a family member that is not befitting the role, this could cause disharmony with your most experienced executives, who might have anticipated they would assume a leadership role instead. In one action, your business could find itself headed by the wrong person and with a weaker backbone than before.

Your family might not have the resources to buy you out fairly

Finally, there is the question of payment for your company, and whether that reflects its true valuation. In most situations, it is unlikely that the family member(s) that you choose to pass the company on to will not have the buying power to meet the fair market value of the company. Plus, asking them to match this value can be a major source of conflict.

So you already have to compromise on your life beyond your business by accepting a lower offer, or arranging a payment plan over the course of several years. But, if the business starts to fail under the new ownership, it could mean you never see any of the money you hoped to receive when you agreed to these scheduled payments.

As you can see, the ramifications of an inherited family business can be huge for the legacy of the company, and your own financial future. Yes, having frank, honest discussions with your loved ones about your succession plans can be hard and awkward – but the consequences of side-stepping these conversations can be even more devastating.

Why it’s better to sell to a third party

Based on the situations I’ve outlined above, I’d recommend that you only contemplate selling to a family member if:

They have the business skills and character to run the company
They have the financial ability to actually buy you out
They have the credibility with your current workforce
They have real passion for the business, its customers, and its employees

It’s hard to find family members that fulfill all criteria, which is why I advocate that exiting to a third party is often the more logical and successful approach.

Most buyers, especially in the lower middle market, are acquiring a company because they see value in its brand and its future. In order to maximize both, they will typically look to retain the family name and “family business” mentality, as well as key employees and processes, to maintain continuity.

This attitude will support the legacy and longevity of your business and its reputation in the eyes of your customers.

Furthermore, a third-party buyer or investor will be significantly more willing to present an optimal offer for the business compared to a family member. As they don’t have any personal ties to you and the company, they are more compelled to present an attractive, fair offer than somebody already within your inner circle.

Overall, this means better things for your own financial legacy, and the long-term future of your family members. You and your partners will be relieved of the financial burden of running the company and the risks associated with that, and can instead concentrate on maintaining good familial relations throughout the process and moving forward.

Partial sales – the best of both worlds?

What if some of your family members are really passionate about the company’s future, have the right aptitude for the role, but lack the capital to give you a fair offer? Rather than take a financial hit, a partial business sale might offer a mutually beneficial solution.

These are circumstances where an investor, often a private equity firm, buys out a percentage of their stock with the aim of investing in the growth of the business, while allowing the original owner to still influence this process. This is with the overarching goal of both parties getting a “second bite at the apple” in a future sale, receiving an even better offer for all sides.

This makes a partial sale ideal for many family businesses. Family members that want to stay on and help steer the company’s future can remain in ownership positions alongside the investing firm. Meanwhile, those who wish to back out and pursue their own path can cash out now, and forge their own journey knowing the legacy of the business is in safe hands.

Start having those conversations

I hope that this article has emphasized the importance of having regular, honest talks with your family members over the future of your company, and the unfortunate implications that can come from not sharing these.

Fundamentally, the exit process is one that can already be emotionally and mentally draining for all involved. To maintain your composure throughout, it is important that you have that support network of family members and trusted employees behind you, and not in conflict.

The guidance of experienced M&A professionals can play a big part in maintaining that family harmony. Our team at Generational Group has helped hundreds of business owners not only understand the process of planning and executing an exit strategy for maximum returns, but also counselled them through all the twists and turns to keep them focused on their goals.

By managing family relationships and mediating any areas of conflict, we have helped many deals recover from the brink and maintained harmony, resulting in outcomes that benefit all stakeholders in the family business.

For more in-depth articles on the influence of family dynamics on exit planning, and on the many facets of M&A in general, I’d encourage you to visit Generational’s Insight page for a treasure trove of valuable information.

Generational Group in 2020 – A Year of Diligence

December 7, 2020 By John Binkley

As we approach the end of 2020, it is fair to say this is a year that will live long in our memories.

The last 12 months have presented more than their fair share of challenges and hardships, not least due to the seismic impact of the COVID-19 pandemic. Yet, through this dark cloud were many rays of light in how people responded to the hurdles of 2020 – organizations adapted, innovated and evolved with the times, allowing them to thrive in unprecedented circumstances.

This has been especially true in the world of M&A, and for us at Generational Group. Like many companies, we had to shift to quickly learn how to close deals via Zoom! But despite the disruption, both our team and our industry bounced back and found success, leaving many optimistic about deal making prospects for 2021. In fact, we anticipate that when 2020 closes, our firm will have set another record for deals closing.

For me, this reaction to the rapidly altered landscape is underpinned by a key quality – diligence.

It is one of our core values at Generational Group, emphasizing the persistence, commitment and dedication of our associates to achieve the very best results for our clients in spite of the circumstances. Never has that been more apparent than during 2020.

As has become a tradition in recent years, I’d like to share with you a recap of what’s been happening with Generational Group in the last 12 months, and why I believe our response to this year’s events has placed us with a strong, positive outlook for the future.

Achieving in M&A

We’ve witnessed this first-hand at Generational Group: 3Q 2020 was our strongest quarter ever for number of deals closed, and with our NDA (non-disclosure agreement) requests up 44% this year (so far), we anticipate buyer demand to stay high for many months to come.

Following a temporary lull in activity in the immediate aftermath of the COVID-19 pandemic, the speed and strength of the M&A industry’s comeback was highly encouraging. Indeed, deal making activity in the second-half of 2020 has been at a record pace, and is expected to persist into the new year.

Back in April of this year, we reached a major M&A milestone when we closed our 900th transaction as an organization. And with the pace of activity in the latter half of 2020, we are already knocking on the door of 1,000 completed deals – an amazing landmark in middle market M&A.

This meant a great deal to me, although not for the number itself, but for what the number represents – over 900 business owners who we have helped to secure their financial legacy and make the most of life beyond their business.

The events of 2020 also fill me with confidence that we can and will build on our Refinitiv/Thomson M&A Rankings announced at the beginning of the year, where we were positioned #1 for transactions valued up to $25m, and #2 for transactions worth up to $100m.

With all signs pointing up for our team and the deal making landscape overall as we approach 2021, I look forward to seeing what more we can achieve in the coming months, and how we as a company can continue to go the extra mile for our clients.

Pursuing growth

In a similar vein, the challenges posed by this year’s events have not hindered our ambitions as a company to continue to expand, so we can realize our aspirations and provide the most comprehensive support for our clients.

With this in mind, we added another arm to the Generational Group in 2020 – Generational Consulting Group. Consisting of former CEOs, C-suite executives and seasoned management consultants with experience across all industries, GCG creates proven strategies and tactics to enhance the growth and performance of middle market companies, with the ultimate goal of building value in each business.

This step was fundamental in us being able to deliver a fully rounded experience for our clients – maximizing the capabilities of their businesses on the journey to eventually achieving an optimal exit.

As part of this, we were excited to announce in November that we had acquired Decker Transformation Advisors, with the goal of gaining from their expertise to further enhance the offering of GCG. Prior to joining us, DTA was dedicated to transforming middle market companies by developing data-driven strategic growth plans, building high performing teams, and propelling execution to dramatically increase value.

With the addition of the highly-experienced T.D. Decker on board as the President of GCG going forward, I see incredible potential in this branch of the Generational family tree.

The expansion does not stop there however, as earlier in the year Generational Group also introduced two new offices in Charlotte, NC and Kansas City, MO, led by Jack Sluiter and Andrew Byrd respectively.

Again, this demonstrates our unending ambition to better engage with business owners across the United States by establishing locations in prominent locations across the country.

Supporting success

As an enthusiastic golfer, it’s no surprise that one of my favorite developments from 2020 was Generational Group forging a sponsorship agreement with Harry Higgs, one of the most exciting up-and-coming names on the PGA Tour.

A Dallas resident and graduate of Southern Methodist University, like my son Ryan, Higgs has already attracted a big fan following in just his second year on the Tour.

In 2020 alone, Higgs became one of only 4 PGA Tour rookies to qualify for the BMW Championship, finishing 55th overall in the FedEx Cup standings. His run towards that event was highlighted by a second-place finish in The Bermuda Championship.

Higgs’ 2020-21 season has continued to highlight his potential. Another second-place finish at The Safeway Open was capped off by a walk-off Albatross, something only a handful of golfers can boast.

With many years on tour to look forward to, the whole team at Generational is excited to see what Higgs accomplishes this season and are rooting for him the whole way!

Giving back

One of the most fulfilling aspects of our work at Generational Group is how we can continue to support our community and incredible charities, no matter the obstacles the year throws our way.

In 2020, Generational was proud to be the title sponsor of multiple fundraising golf tournaments. This included a pair of Golf Galas in the final months of the year aimed at raising funds for Here’s Life Africa, and the work they do that impacts the lives of thousands of people in Africa every single year.

In November, we once again sponsored the annual Salute to the Troops tournament, celebrating our brave service men and women, and raising money for three outstanding Veterans foundations: Feherty’s Troops First Foundation, Defenders of Freedom, and Northern Texas PGA Hope.

Finally, adapting to the current landscape, The Dallas Jingle Bell Run returned in a virtual form for 2020. As the existing environment makes it impossible to celebrate the festive season together, this alternative approach still encourages everyone to get fit and raise money for two amazing organizations: Trinity Strand Trail and The Mavs Foundation.

The Jingle Bell Run will be running until December 17, so if you’d like to sign up or donate, visit the website: https://runsignup.com/Race/TX/Dallas/DallasJingleBellRun

Looking forward

I hope you enjoyed this trip down memory lane for myself and the team at Generational Group. 2020 has carried its share of struggles, but it has also inspired many stories of hope, perseverance and accomplishment.

I am immensely proud of what our team at Generational has been able to achieve this year amid a challenging landscape, and I would like to thank the exceptional commitment shown by each and every one of our associates. Without them, the high points of this year would never have been possible.

To conclude, I wish you a wonderful holiday season, with the best of health for you and your loved ones. Together, let’s look forward to more reasons to be optimistic in 2021.

You Must View Your Business as an Investment: Here’s Why…

November 10, 2020 By John Binkley

I wanted to start this post off with a quick question: How many times have you heard someone refer to their business as “their baby”? Perhaps this is even something you do yourself.

Having supported many business owners on their exit journeys, I understand that a company is more than just the walls of a building, the people working for them or the products and services that power them. Businesses are built from countless hours of hard work, tons of sacrifices and an endless series of triumphs and set-backs. The emotions they inspire in their owners, workforces and customers are very real – particularly when the time comes to exit.

Of course, the strength of the emotions will depend on what people get out of their business. For some it’s a hobby. For others it’s a job. Some set out to change the world. Others want to secure their financial future. Many see their company as a reflection of themselves, or view it as a member of their family.

But, fundamentally, it’s important to view your company as an investment. And it’s important that you recognize it this way if you want to achieve an optimal return when you’re ready to exit…

The importance of your company as an investment

Unfortunately, far too many business owners in my experience don’t do the analysis that they need to view their company as an investment, and this can prove very problematic when they feel the time is right to sell.

Let’s say you look at your business as a job. This means you are likely looking at things from payroll to payroll and reacting to changes when necessary. As a result, you probably don’t have the time or inclination to consider strategy or plan for the long-term – which can prevent you from growing beyond this current dimension.

Alternatively, what if you view your business as a hobby? While it’s great to enjoy the work you do, if you don’t see it as any more than a getaway or pastime, you again probably won’t be paying too much attention to the future. You’ll be enjoying the here and now – something that can have negative consequences as the future draws closer and closer.

Finally, let’s consider someone who treats their business as an extension of themselves. They are probably more intently looking towards the future than the previous examples and making their business as strong and successful as possible. But they can’t imagine ever parting with their company one day.

They build their business around them. Everything goes through them, and the business could not function without them. But the fact remains that, one way or another, they will eventually part way with their company. And by making the organization wholly dependent on their presence, the owner has limited their chances of selling for the maximum value, as covered in this Generational Equity article on reducing owner dependency for business exits.

As so much of their time is tied into running and growing their business, they lose sight of the fact that they should be working towards getting a return for all the blood, sweat and tears they pour into this process.

When you buy shares on the stock market, your aim is to witness these grow in value and turn a profit on the other side, right? You should see your business in a similar way – you are guiding its growth in a bid to one day secure an offer that ensures your family’s long-term financial security and enables you to enjoy your next chapter.

Another essential reason you need to start seeing your business as an investment is because that is how buyers look at businesses, which is ultimately why business sellers should think like business buyers. A key factor in why M&A activity has picked up dramatically in the second half of 2020 following the initial shock surrounding COVID-19 is because buyers and investors always look at a company’s long-term future.

This is particularly true of private equity firms and family offices. They have persisted in making acquisitions because the length of times they intend to hold companies is very long. Most PE firms will hold an investment for 5-7 years before selling it on; family offices may intend to hold on to them forever.

Viewing your company as an investment is critical to getting inside the minds of business buyers. By keeping a close eye on your financials and how to positively influence these, by introducing growth strategies and tactics to minimize owner dependence, by having a clear strategy in place for the transition of ownership, you are removing the biggest obstacle in any buyer’s mind before making any investment – RISK.

How to achieve an investor’s mindset

So, now you understand why it’s essential to ditch the “my business is my baby” mentality for one that clarifies it as an investment (and one of the biggest investments you can make), what can you do to reinforce this in how you approach running your company?

Here are four pieces of advice I can offer to help you maintain this mentality and demonstrate to prospective buyers that you are treating your business as the investment they see it as…

1. Take steps to protect and grow the wealth in your business

Consider the following questions for a moment:

What is the current value of my business?
Are there any major risk factors in my company that I haven’t yet addressed?
How does my business perform compared to our competitors?
Am I satisfied with the current performance of my company?
Is my business proceeding towards achieving my goals?

If you are unclear about the answers to these questions, it indicates that you could be doing more to defend and enhance the value of your company.

By addressing these areas, ideally with the help of professional strategic growth advisors, you will be taking strides to protect the wealth that you have accrued in your organization, and accelerating it to make your “investment” even more attractive to potential buyers and secure an optimal offer.

2. Focus on strengthening your management team

As noted earlier, thinking of your business as your baby or an extension of your own identity can be a slippery slope towards making it too dependent on you as the owner.

Not only does this put pressure on you to be everywhere in your company, but it waves a big red flag in front of prospective buyers – if the business’ success is largely due to your efforts, then they won’t be confident of it continuing to succeed when you depart.

Instead, focus on delegating responsibility to others in your management team, sharing responsibility and easing the burden on you. This will give buyers reassurance that your business will continue to thrive beyond your ownership, due to the performance of your team.

3. Foster your intangible assets

Imagine two companies – both working in the same industry, both based in the same city, both with comparable financials and growth projections. However, one is attracting premium offers, while the other is struggling to find a buyer. What is the reason?

The answer lies in their intangible assets, these are the elements that have a big bearing on company value, while not appearing on balance sheets. Part of treating your company as an investment is making sure these are evident to buyers, and how they set you apart from other targets in your industry.

Work closely with a professional M&A firm to determine exactly what intangible assets you hold, and what value they would offer particular buyers. From your systems and operations to your staff and intellectual property, having a strong grasp on these assets and how to make them stand out is essential to securing a premium offer.

4. Cement your exit strategy

Finally, ensure you have a documented exit strategy in place. This represents the goal of your investment, your roadmap for your transition to life after your business.

It is amazing how even to this day many business owners fail to fulfill this crucial step. Starting to plan your exit doesn’t mean you must exit right away. In fact, since the process is a journey, not an event, you are in no rush to close a deal.

A strategy is the difference between a business owner that HAS to sell, putting the power of the deal in the hands of the buyer, and a business owner that PLANs to sell, with a clear idea about what offer they need to provide for their future and how they intend on receiving it.

Getting help on your journey to exit

An important realization on your journey to a successful exit is that your business is, first and foremost, an investment. It may also be your passion, your job, your reason for getting out of bed in the morning – but above all else it is your vehicle towards total financial security, and you should never lose sight of that.

I hope this article has helped reinforce that point and introduced some food for thought on how you can always maintain this “investment-first” mentality.

To support you with this, I would highly recommend speaking to our folks at Generational Equity. Our experienced M&A associates are there at every step on your path to exit, from helping you create a comprehensive exit strategy and enhancing your business value, to guiding you through negotiations and managing emotions through this life-changing process.

Don’t just take my word for it, listen to what our clients say about the importance of exit planning:

If you’d like to know more, contact our M&A professionals today.

Why Now is the Time to Focus on Your Succession Plan

August 10, 2020 By John Binkley

If 2020 has demonstrated one thing above all else, it is that we can never take things for granted.

Life can be unpredictable, and this means circumstances beyond our control – be it a personal matter like a death or divorce, or a worldwide incident like the COVID-19 outbreak – can dictate the future for individuals, families and businesses.

While it is impossible to predict the future, it is possible to prepare for it, which is where effective succession planning can reap rewards for business owners. In turbulent times such as this, the value of having a structured plan for life can help cut away the chaos and offer an advantageous layer of security.

Yet, research conducted by Wilmington Trust in 2017 revealed that 58% of business owners did not have a specified succession plan for their organization.

I hope that recent events have resulted in this percentage declining, but it demonstrates that many are risking the continued legacy of their business and the value of their exit by not preparing for the inevitability that they won’t be in charge forever.

With this in mind, I’d like to use this article to discuss the importance of succession planning, outline the unhelpful assumptions that some make regarding the future of their company, and what a well-thought-out plan should incorporate.

What is succession planning?

At its most fundamental level, succession planning outlines the necessary actions to ensure a business will continue when the owner is no longer involved in the day-to-day operations. But, in addition, it also can play a key role in protecting the equity owners have built into their business, and consequently maximize the return they receive for their years of hard work and investment in the organization.

It is a roadmap for your business beyond your guidance. As the team and I at Generational Equity have noted time and again, owner dependence can be a major red flag for prospective buyers or investors – the closer you are tied to the success of your business, the more concerned buyers will be about its prospects without you at the helm:

Are you primarily responsible for your relationships with clients or suppliers?
Have you dedicated time to building and training your management team?
Do you delegate key decisions?
Are your business processes documented and shared, or locked in your mind?

Among the core components of any successful succession plan are factors such as:

Hiring and developing an effective middle management team
Building decision-making processes that extend beyond the owner
Creating a client relations team
Constructing a long-term strategic plan for the business

These are among the core steps that you can take while still at the reins of your company to best prepare it for when you let go. Not only will this support long-term business continuity, but it will also indicate to potential buyers that your company is sustainable and can still thrive in your absence.

Where do people often go wrong with succession planning?

When I consider the issues that many business owners have surrounding succession planning, one word always comes to mind: assumptions. More precisely, it is owners assuming that one of these two scenarios will take place:

The business will be taken over by their son, their daughter or another family member
The business will be acquired by one of their employees

While I am not suggesting that in certain circumstances these aren’t appropriate or workable, making the assumption without some serious conversations or considerations can have disastrous consequences.

First, let’s consider passing on the business to your offspring. Rather than making the bold assumption that they would like to run the business when you’re ready to depart, have a conversation with them about this idea.

They may have aspirations in another business or industry altogether, and if they don’t have the desire to run your company, or only do so out of obligation rather than choice, this can put the future prospects of the business you’ve spent years developing in jeopardy.

Furthermore, you have to consider objectively if any of your family members have the necessary attributes to run a company. It’s one thing to take on a middle management position in the business to gain experience – actually managing an organization is an entirely different animal.

Not to mention the insult that key employees could feel if you hand the company over to your child, particularly if they had no connection to the business beforehand.

And what about financing the transaction? Most likely you will be required to provide a long term note on the business, requiring your offspring to reach key financial metrics, post-acquisition in order to buy you out over 3-5 years (or more). Do your kids have the ability to meet these financial requirements and do you have the faith that they can?

So, what about the prospect of selling to your employees? On the surface, this appears preferable – if you have trained a strong middle management team that understands your company inside-and-out, assigning one of them as your successor can support a seamless transition within the company.

However, this benefit can be outweighed by the financial burden this imposes on the departing owner. Most key employees won’t have the same buying power as a professional buyer or a private equity firm has available.

This means that you will either be selling your company for less than what it’s worth, which shouldn’t be considered based on the blood, sweat and tears you’ve poured into the company, or you will have to carry paper financing the deal over a 3-5-year period (or longer). This is risky because, if the business falters outside of your management, does this affect the value of your buyout?

Of course this is the same issue you face if you sell the business to family members: Is the capital available to cash you out or will you be on the hook for a long term loan where you have no control over the success of the business?

What should a well-executed succession plan include?

So, what steps should you take to develop a successful succession plan?

Most importantly, determine your personal financial needs going forward. You need to meet with your wealth management team and determine how much you need for the next phase of your life. If you are financially able to provide financing to your family members/key employees for a 3-5 year time frame, then great, closely examine those two options.

However, if you are not, then the best plan is to look for buyers outside of your family and internal team. As tough as that may be to face, we have found that in most situations, a professional external buyer, with the resources to both cash you out AND provide for the ongoing growth of the company (and your legacy) is really a far better option for you and your company, family, and associates.

Start now to secure your financial legacy

Hopefully this has given you a launching pad to think about the importance of succession planning with your business. As 2020 has demonstrated all too clearly, your company is too meaningful and valuable to leave its future up to chance, or at the mercy of circumstances beyond your control.

The key now is to start planning if you haven’t already – the earlier you can begin cementing the facets of your eventual departure and what comes next, whether you plan to exit next year or in the next decade, the more you will benefit in the long-run.

This is why I recommend that business owners who have no exit plans in place, attend a Generational growth and exit planning conference. We have designed these to provide valuable information to business owners about the key components of a successful exit and how to do so in a way that maximizes the return to you.

Until next time, I wish you nothing but the best for the months ahead as we continue to contend with these challenging times.

A New Dawn for Deal Making?

June 5, 2020 By John Binkley

Back in April, I was delighted to learn that our team at Generational Group had closed our 900th transaction in company history. At any time this would be considered a fantastic milestone to pass, and I am of course incredibly grateful to the continued hard work of our associates and the wonderful support of our clients.

For us, every one of these 900 (and counting) transactions represents a business owner that we have helped secure their financial legacy, so that they can reap the rewards of their investment into their company and enjoy life beyond business.

Yet, considering the life-altering circumstances of the last few months, this achievement has a whole different meaning to me. It demonstrated that, even in these times of hardship, where families, communities and businesses have been changed forever, the resilience and commitment of entrepreneurs continues to hold firm.

Of course, the COVID-19 pandemic has changed deal making at least temporarily, which I will explore in this article. But, it is the perseverance of the entrepreneurial spirit, particularly within the middle market, that gives me a great deal of confidence for life beyond this crisis.

Optimism for the Future of Middle Market M&A

In my previous article, I highlighted several reasons why I remain confident in the foundations of our economy and the bullishness of buyers in the face of this unprecedented challenge. And I’m happy to report that a couple of months later, nothing has dampened this feeling. If anything, it’s grown even stronger!

The robustness of our banking system continues to be a source of comfort in these hard times for individuals, families and businesses, with central banks offering reassurance that they will be introducing measures to stimulate economic growth and protect incomes.

But beyond that, I’m encouraged by the attitudes of middle market entrepreneurs and their prospects for M&A activity after this pandemic. A survey of SME owners conducted by Permanent Equity recently revealed some reassuring statistics, including:

32% of owners surveyed said their companies’ revenue had remained stable or even expanded during the pandemic
40% expect their revenue will be back to 2019 levels within 6 months of life returning to some form of normality
76% believe their business will emerge from the COVID-19 crisis stronger than before

These are great signs for the resilience of the middle market, and indicates that these companies are not statically waiting for this all to blow over – they’re adapting to the “new normal” with changes like remote working and investments in technology, which will then benefit them once we have overcome this challenge.

That’s an attitude we’ve also taken at Generational, changing our practices to protect the health and wellbeing of our associates across the country while continuing to meet the needs of our clients in these unique circumstances.

Because, particularly in the lower middle market, transactions are still moving forward. While the press will often focus on the decline in billion-dollar deals due to the uncertainty COVID-19 has caused, the timeline to deliver ROI for smaller deals is significantly longer, meaning there’s less risk associated.

But how has deal making changed in the face of this new landscape? How could this affect a business owner’s approach to planning their exit?

Exit Planning in the COVID-19 Era

When discussing how COVID-19 has adjusted the deal making process, I think it’s vital to start with how we should determine a company’s value.

Regular readers of Generational Equity’s insights will likely be familiar with recasting. That is when a professional M&A firm will examine your financials to account for any one-time expenses that would not impact on its new owners. These can include:

Losses due to fire
Losses due to employee embezzlement
Other business disruptions beyond your control (floods, earthquakes, tsunamis)
Any of your compensation that was above fair market value
Travel and vacations for you and your family that the company expensed

This is a widely-accepted process and helps provide a more accurate picture of your company’s worth for a prospective owner. However, moving forward there will be another important element to include on this list: the loss of revenue or income as a result of COVID-19.

As Northern Trust reiterates in a recent article:

Moving forward, we expect the due diligence process to include questions that help buyers better understand the specific impact of COVID-19 on the business, and its general level of preparedness for a global pandemic.

By accounting for this unprecedented disruption when recasting your company, you can offset any concerns or doubts of buyers, and also increase the likelihood that you will maximize the value of your business sale.

Furthermore, if you are able to adapt your financial forecasts to demonstrate why your business won’t be greatly impacted by COVID-19, this can give you a significant competitive edge among potential buyers. Remember, private equity firms are still sitting on upwards of $2 trillion in dry powder – this still needs to be invested, and means a well-prepared company can still secure a premium on their business.

This recognition of COVID-19’s impact on business operations has led to the expansion of EBITDA to EBITDAC:

Earnings
Before
Interest
Taxes
Depreciation
Amortization
Coronavirus

No, this isn’t a bad joke – it is a reflection of the sizable effect that COVID-19 has left on many businesses across numerous industries.

As well as the transformation COVID-19 has had on determining business valuations, it’s important to consider how deals will be structured. We’ve spoken at length in the past about earn-outs and their prevalence in deal making, but in this new environment, they are likely to become even more sought-after.

Again, Northern Trust emphasizes this point, saying:

We also expect to see buyers paying a greater portion of the purchase price in the form of an “earn-out.” We believe sellers who adjust their mindset, show a willingness to be more flexible on deal terms, and who recognize that the transaction process is going to take longer in this new environment are likely to be at a competitive advantage.

This reinforces the need to be supported during your exit planning by a professional M&A firm, because this will help prevent any earn-out from being too heavily weighted in favor of the buyer: the deal structure also needs to benefit you (the seller).

The advice of an experienced M&A advisor will also give you a clearer picture of what deal structures are more beneficial than others. This could allow you to establish an earn-out structure that is actually more financially advantageous in the long-term than a more cut-and-dry transaction

Fundamentally, we are in challenging times when it comes to deal making and exit planning. Information seems to change every hour, and it is important that, as a seller, you are working with a true professional that has experience in closing deals no matter what the economic cycle and understands how to secure an optimal deal structure.

Maintaining Your Journey to Exit

I hope this has given you a greater understanding of how M&A activity is continuing to take place, and how deal making is evolving in order to meet the challenge.

Even in these difficult circumstances, dealmakers across the U.S. are striving to help push deals over the line, including our diligent associates at Generational, and I believe this should reassure business owners about their prospects of exiting both now and when COVID-19 has passed us by.

Above all else, I hope you take away from this the value of being supported through your exit plans by an experienced firm that has managed clients through all kinds of economic cycles. In trying times such as these, it is that experience and expertise that will keep your exit plans on track and keep you on course to an effective, satisfying exit.

If you want to keep up with the latest trends and news related to the economy and its impact on your approach to exit planning, I’d recommend subscribing to Generational’s regularly updated insights.

Until next time, I’d like to wish you, your family and your business nothing but the best as we continue to manage and overcome this challenge.