M&A

Intentional Growth: The Foundation of Optimal Exits

June 23, 2021 By Dr John Binkley - Generational Equity

Having worked in M&A for a long time, it is easy for people to have a fairly one-dimensional view of the industry. That our sole responsibility is to guide business owners to successful, fulfilling exits to optimal buyers.

Please don’t get me wrong – that is certainly a big part of the work we do at Generational Group. In fact, we recently surpassed a significant milestone by transferring over $6 billion in wealth to our clients over the years. But, this is just the culmination of a long, important journey.

Because M&A is not an event; it is a process. Yes, negotiating and closing the deal is the critical final step. But, in order to ensure that our clients maximize the potential of their exit, and don’t leave money on the table when they seal the deal, a lot of work needs to take place in the build-up to this moment.

That’s why I’m devoting this article to the service provided by our team at Generational Consulting Group (GCG) – helping our clients develop strategies to accelerate and structure the growth of their companies.

The Importance of Intentional Growth

Now, I haven’t met a business owner that doesn’t want to grow the revenue and earnings of their company. But, wanting to achieve this and having a clear, thought-out plan to secure intentional growth are two very different things.

While many entrepreneurs are true experts in their industry and understand it inside out, they will often run into challenges that cause them to plateau and fail to reach the next level. These reasons will vary from company to company, but most will encounter these hurdles and will need a strategy in place to overcome them.

This is crucial not only in making your company as profitable, efficient and successful as possible – something most entrepreneurs aspire to – but in the long-term this will play a definitive role in how fruitful your exit will be.

At Generational Group we often talk about the importance of building a buyer ready business. A business that demonstrates real potential to prospective buyers and reassures them over any areas of risk that they identify. An intentional growth strategy is key to achieving this status, and ensuring that your company’s value is at its peak when you decide to execute your exit strategy.

By introducing a documented plan of action that guides you towards both incremental and breakthrough growth, you improve your prospects of securing a premium offer for your company. Why is this?

It enhances your company’s revenue and earnings significantly, which fundamentally means it is worth more on the market than it was prior to implementing the strategy
It assures potential buyers that you have a strategy geared towards growth, which they can adopt and refine to make their investment worthwhile
It gives you objectives and structure to your growth, so you can plan your exit in accordance with your financial ambitions

Essentially, intentional growth plans give you a definitive guide to push past the status quo and truly unlock your company’s potential – which will then improve your chances of an optimal exit that secures the legacy for you and your loved ones.

Pursuing Intentional Growth

When working with clients, our team at GCG apply two proven approaches, selected based on where the company in question is in their current growth cycle:

Strategic Growth Plans
Tactical Acceleration Plans

A Strategic Growth Plan is a 3 to 5-year strategy that focuses on long-term improvements. It gives you a consistent vision of where you want your company to be several years down the line, and outlines the steps that you will take to get there.

In developing a plan, our professionals analyze a company’s financials, culture, competitive advantage, SWOT, strategic identity, mega trends affecting future demand, performance and profitability of its customers, products and services. This, alongside an assessment of the company’s leadership, offers a complete overview of the current business situation, and what needs to be done to realize its full potential.

Conversely, a Tactical Acceleration Plan is more suited to an underperforming company that is looking for significant short-term improvement. These 3 to 12-month plans identify how profitability, cash flow and performance can be enhanced in a matter of months, helping the company transform a difficult situation into a prosperous one.

Again, our professionals will perform a concise analysis of a company’s financials, culture, leadership, strategy, operations, technology, performance and the profitability of customers, products and services, and use this insight to introduce techniques to achieve quick, meaningful results.

Both approaches are structured around the needs of the specific client, and offer expert guidance in how to boost business value in the pursuit of an optimal, fulfilling exit.

What Intentional Growth Could Mean for Your Business

This all sounds excellent on paper, but what does planning for intentional growth – and working with GCG – mean in reality? Well, I’ve compiled a collection of client reviews so you can see exactly what these strategies have meant to them and their companies:

Meridian Medical Service – A Structured Vision

In her role, Else Cole is always thinking about the future. But, GCG helped her put these ideas and visions into set boundaries, which will help bring these plans to fruition.

Over the course of several days, our team developed an actionable strategic growth plan that will achieve its destination in 3-and-a-half years.

Discover the full story.

Frick’s Quality Meats – More Assurance, Less Risk

Even though Frick’s Quality Meats has roots stretching back to 1896, Dave Frick knew there was potential to make the future even brighter than its past.

With a structured, coherent plan in place, Dave is now looking forward to accelerating company growth with more confidence, less risk and better buy-in.

Discover the full story.

My Local Plumber – Getting Off The Hamster Wheel

Tired of going round in circles, Denise Rodriguez turned to GCG to help capitalize on the incredible growth potential of her company.

In just a matter of months, the strategies proposed have made an immense difference to the speed, efficiency, productivity and promptness of the business.

Discover the full story.

VX Aerospace – Filling in the Gaps

VX Aerospace was a classic example of a business with excellent service that was struggling to sustain growth for the long-term.

By working closely with Bob Skillen and his team, GCG identified the weaknesses limiting their potential as a company, and came up with ways to correct these to spur consistent growth.

Discover the full story.

Over Under Clothing – Working Together to Grow

Finally, making intentional growth happen within a company requires everyone to actually enact the strategies and techniques that will make it a reality.

So, when Bryan Horn reached out to GCG, they conducted team-building exercises and really gained a strong understanding of his team’s capabilities and ambitions, ensuring everyone was aligned with their plans to pursue growth.

Discover the full story.

Make Intentional Growth a Priority

I hope you’ve enjoyed this introduction to intentional growth, and taken something away from the stories of business owners who are enjoying the benefits of these focused strategies.

Without a clearly defined roadmap towards growth, it can be a real struggle to maintain momentum in your business and avoid an inevitable plateau, regardless of how impressive your services and products are.

Introducing a tailored strategy that structures and navigates this growth over the course of months or years means that you can consistently build the value of your business – which will then be reflected in the offer you eventually receive when the time is right to exit.

It is never too early to form a framework for your company’s growth. Get in touch with the experts at Generational Consulting Group to discover what difference they can make to your company’s trajectory, and the financial legacy you leave behind.

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

April 14, 2021 By Dr John Binkley - Generational Equity

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 Dr John Binkley - Generational Equity

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.