M&A

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.

COVID-19 & Focusing on the Future for Middle Market M&A

April 17, 2020 By John Binkley

In a matter of weeks, COVID-19 has changed the world as we know it in unprecedented ways. From restrictions on travel and mobility, to employees globally working remotely to bypass the pandemic, life feels like it has been flipped upside-down.

The M&A industry has not been immune to this impact. COVID-19 has been at the heart of current economic uncertainty, and subsequently this has caused deal making activity to slow in the short-term. Fortunately, at Generational Group we have continued to safely press ahead with transactions even at this tumultuous time.

As a recent roundtable meeting hosted by Axial highlighted, many deals at the Letter of Intent (LOI) stage are either pushing forward with urgency, or left on ice for the time being. While right now it is impossible to predict how long these existing conditions will remain, I am optimistic that it is a challenge we as an industry will overcome, and return to a state of ‘business as usual’ in due course.

Here, I explore my reasons for staying positive in the face of this crisis, and why I expect the M&A landscape to return to its once-thriving state when we can put these circumstances behind us.

Our economic foundations remain strong

Firstly, while COVID-19 has unfortunately resulted in numerous businesses shuttering short-term and a steep rise in unemployment, the underlying fundamentals of our economy remain strong in the face of this extraordinary challenge.

This is different from the banking/financial crisis we endured in 2008. Corporate balance sheets remain strong, interest rates are staying low and there is capital available to support business growth and acquisitions. But perhaps most importantly of all, our banking system is stable and its reserves are well above Federal guidelines.

As a result, we can be confident that our economy will hold firm against this temporary pressure, and will over time return to a positive landscape for M&A acquisitions.

In addition, the launch of the $2 trillion CARES Act stimulus package has bolstered the prospects for businesses looking to retain and take care of their employees. By providing quick funds and relief for SMEs during this time of uncertainty, this will be critical in keeping companies operational and supporting their preparations for the recovery period.

Private equity is still sitting on a mountain of dry powder

As noted, there is undoubted turbulence in the M&A market right now, and this should be expected for a little while. However, we are still seeing substantial buyer interest in spite of these challenges, which is reinforced by the capital available to these groups.

Private equity firms are a prime example of a buyer group prepared for when the market stabilizes. As Bloomberg reports, they are sitting on a $2 trillion war-chest of dry powder, all of which can exclusively be devoted to M&A acquisitions and investments. This puts them in a strong position to actively pursue opportunities as we start to recover.

Furthermore, Bloomberg’s article also notes how companies in a variety of industries will likely prove extremely attractive prospects for business buyers on the other side of the COVID-19 crisis, due to these being largely unaffected from an economic growth standpoint.

Buyers are bullish about future acquisitions

Meanwhile, Pitchbook revealed that a recent survey conducted by Ernst & Young suggested that around 56% of executives actively plan to pursue acquisitions in the next 12 months, which, remarkably, is an increase from October’s figure of 52%.

This is excellent news for business owners considering their exit plans in this uncertain state of affairs, as this demonstrates that when the world starts returning to normal, we can expect a major uptick in deal activity. Companies who have managed these circumstances and dedicated time to planning their exit strategy stand to benefit the most from this.

Plus, this is especially true for lower middle market businesses, because as Pitchbook states:

“For now, many dealmakers are forgoing transformational mega-deals in favor of smaller, discounted acquisitions.”

While the short-term vision for M&A remains a difficult prospect as buyers and sellers seek out firmer footing, these findings fill me with confidence that there will be a flurry of activity and opportunities when there is greater clarity about this entire situation.

Use this time to perfect your exit strategy

Hopefully, this has helped you join me in believing that COVID-19 will present short-term challenges for M&A activity, but will not completely compromise the optimism both buyers and sellers entered 2020 with.

While I recognize this can be difficult to visualize considering the present environment, there are reasons to be upbeat about the future of the industry – and with it, your prospects of achieving an optimal exit.

Right now, my advice to business owners is to dedicate time to exit planning, especially if this is something you’ve not commenced with already. This anticipated slowdown of deal activity in the short-term gives you the opportunity to consider your next steps and build a buyer-ready business to coincide with when the world starts its recovery.

Remember, it will take 90-120 days to complete the critical first step in your exit journey – an initial business evaluation. Starting early with your exit strategy puts you in a strong position to effectively market to buyers preparing for normalcy to resume, and will help you secure an offer that accurately reflects the value of your company.

Our team at Generational Group can support you throughout this journey, even during these challenging times. Our associates continue to operate at their typically high standards, working remotely to ensure their safety while we continue to communicate with clients digitally. These include virtual versions of our informative exit planning meetings, where our experienced advisors break down the steps to maximizing the sale of a company.

I’d urge anyone to get in touch with our team to get a head start on their exit plans while activity is on a temporary slowdown – I’ve never met someone who regretted beginning this process earlier than they needed to.
Also, for more up-to-date information on how COVID-19 is affecting the M&A landscape – and what this means for prospective sellers – make sure you’re subscribed to Generational’s insights. With news fluctuating all the time on this topic, staying informed has never been more crucial.