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:

• The Importance of Developing a Planned Exit Strategy
• The Importance of an Exit Strategy
• Selling Your Business – Choosing a Trusted Partner

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

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.