About this Webinar

June 22, 2021, 2:00 pm Eastern

Abstract:

In today’s hot market, many business owners are being approached by potential buyers about acquiring their company. If that’s you, then reserve your spot for this educational webinar to learn how to:

• Recognize if that potential buyer is serious, or if you should stay away
• Evaluate the situation quickly, effectively and in the safest way (especially if the inquiry comes from a competitor)
• Respond if the potential buyer is the real deal
• Sell your company without the cost and risks of a full sale process

Register Now for this Complimentary Webinar 

Contact Tim 772-221-4499, to discuss strategies for your business.

Between COVID-19, a recession, and the aging of the US Baby Boomers, the number of business owners seeking to sell their company at exit will only increase in the future.

While every company is unique, there are ten universal signs that indicate if your company is ready (or not) to sell and maximize value. Our newest White Paper, Top 10 Signs You Are Not Ready to Sell Your Company, presents these ten signs, and just as importantly provides guidance and resources on how to prepare for a successful sale.

Click here to download this complimentary resource from NAVIX.

Contact Tim 772-221-4499, to discuss strategies for your business.

I was a guest speaker on the inaugural Small Talk online series for the Business Development Board on Martin county.  The interview is from late April and the key points remain valid as businesses transition back to a healthier economy.

The topic was How to Maximize Your Loan Funds.  Along with reviewing how to best use SBA PPP funds, we discussed what to consider moving forward.

Key take away points:

SBA PPP Funds:

Keep communication open with banker and CPA.

• Be proactive
• Review options
• Ask questions
• Document expenditures
• Consider immediate and longer-term cash needs
• Multiple cash flows

Keep communication open with vendors:

• Terms
• Vendors are partners- you want them to be there to get you back on track

Businesses are resilient.

Generally, businesses need to find a way to react quickly to an issue or problem.

• How much money is needed
• What is the best way to spend money now
• How to make the next immediate decision

That is great during the time of crisis, but it is important to think future down the line.

Employees

They are the one who helped to build your business to where it is now, they will be vital  to re-build your business.

Keep in contact- keep communication open.

Opportunities in times like these

Resilience of people in general, Americans and Small Business

Small Business is the engine that runs this country- Small Business is what will bring the economy back.

• Step back from the problem
• Explore all new opportunities as you move forward
• Challenge employees and help them find opportunities

Contact Tim 772-221-4499, to discuss strategies for your business.

By: Patrick Ungashick

Much of the conventional wisdom suggests you should start serious planning no earlier than five years before you are ready to exit. This misperception is so common; we call it the Five Years’ Fallacy. This approach gets owners in more trouble than perhaps any other mistake.

There are four major flaws with this approach:

1. Many exit planning tactics require at least five years or more to implement fully or to see the full benefits of implementing that tactic. Therefore, if a business owner is less than five years away from exit, some exit tactics become unavailable, or their positive effects may be diluted. Consider the following examples:

• Selecting the ideal business entity is an important consideration, especially in the event of a sale, because the type of business entity may greatly impact taxes. For example, owners of C corporations, in some cases, may reduce taxes upon a sale by converting to S corporation status prior to sale. However, the tax savings are reduced if the company is subsequently sold within a five-year holding period after conversion. In another example, the reverse may be true—owners of S corporations seeking to implement an ESOP as an exit strategy may secure tax-free proceeds from the sale if they convert to a regular C corporation. Matching up your exit plan with the appropriate business entity may require years to implement.

• Business owners seeking to pass a business down to the next family generation often desire to make tax-free gifts of business interests to the successor generation. Congress limits the value of gifts that can be made without triggering gift or estate taxes, including annual gift limits. As a result, passing down a large family business can take many years to accomplish. Too little time inhibits the effectiveness of gifts and other family-business transfer strategies.
• If you intend to sell to a third-party buyer, your business’s brand and intellectual property may be an important factor in driving value. US law sets timelines required to register, file, and protect your intellectual property. If you wait until five years or less to develop an intellectual property strategy, you may have forfeited many of the opportunities available to create brand value.
• Owners seeking to sell their business to one or more employees need to hire, train, and groom a key employee or entire team prepared to run your business after your departure. Developing successor leadership may take many years.
• Many exit tactics benefit from the “miracle of compound growth” on invested assets. For example, funding an income tax-deductible retirement plan creates potential future income outside the business. If you have only a few years to implement this tactic, your results likely will be significantly diminished.

2. Waiting until the last five years to prepare for exit, reduces your control over many factors that influence the business’s sale price.

Road market conditions, interest rates, capital markets, your industry’s health, and other external forces influence the availability of cash, the cost of capital, and the demand for businesses in your industry or market. Many economists note that these cycles can take as long as ten years to complete. If you are restricted to exiting within a specific time frame such as five years, you may choose a time when your business’s price is lower due to external conditions. Your investment advisor probably has been telling you, “Don’t try to time the market,” when investing in publicly traded stocks, bonds, and mutual funds. But when it comes to selling your business, you must carefully consider market conditions. Leaving only a few years’ preparations to sell may limit the ability to achieve the most favorable external climate.

3. Limiting your exit planning preparations to the last five years is you simply cannot predict the future.

A prospective buyer with a large checkbook may walk through your front door tomorrow. Your industry may go through an unexpected consolidation (often called a “rollup”,) which heats up your potential market price but only for a window of time. You may become seriously disabled and unable to work. You may die. Who guarantees how much time you have? Life happens.

4. The fourth and final reason why you cannot wait to start serious exit planning is that if you have not clearly defined where you want to end up, then you do not know if the decisions you are making today will get you there.

In Stephen Covey’s best-selling book, The 7 Habits of Highly Effective People, the second habit is to “Begin with the End in Mind.” His lesson applies here. To paraphrase Mr. Covey, the successful owner must be able to visualize the desired outcome and concentrate on activities that help achieve success in the end.

Align your business growth plan with your business exit plan. Every day, you are making decisions that in some small or big way will impact your success at exit. Making today’s important business decisions without considering the ultimate impact on your exit, causes great difficulties down the road.

The bottom line is that if you are a business owner telling yourself you want to exit (or have the option to exit) sometime within the next five years, then you are already in the homeward stretch. It’s now time to start serious and effective planning and preparation for your exit. To help, download our popular free ebook: Your Last Five Years: How the Final 60 Months Will Make or Break Your Exit Success. Then, contact us to schedule a free phone consultation to learn how we have helped hundreds of business owners plan for and achieve a happy exit.

If you have a quick question coming out of this article or, if you want to discuss your situation in more detail, we can set up a confidential and complimentary phone consultation at your convenience contact Tim 772-221-4499,

By: Patrick Ungashick

Selling your company to a strategic buyer…Private equity…ESOPs…IPOs…There seems to be a dizzying list of different ways to exit from your company. You have likely heard of most of them, and perhaps you are considering one versus another. Yet there might be one undervalued exit tactic that you have not heard of and need to know about. It is called a “non-control recap” in short vernacular (recap is an abbreviation of recapitalization). Here’s how it works and why it may help achieve your exit goals.

What is a Non-Control Recap?

Simply put, a non-control recap is selling a minority interest (non-controlling) portion of your company to an investor (recapitalization). Historically for mature companies, non-control investors were largely private equity groups (PEGs), but family offices are an emerging player in this market. Non-control recaps are an alternative to a full sale of the company, although a full sale can still be pursued at a later date.

Why Consider a Non-Control Recap?

This exit tactic offers business owners a number of important advantages, particularly in comparison to selling the entire company. If you are your company’s sole owner, you can gain significant liquidity by taking home cash from the partial sale while continuing as a partial owner and leader of the company. You can reduce personal risk, as you diversify your net worth by gaining cash and potentially reducing or eliminating personal guarantees with an additional equity partner involved. Non-control investors prefer a passive role in the company, leaving you in control of day to day operations and decisions. With the right investor, you gain a valuable strategic ally in growing the company. Non-control investors may bring strategic opportunities to the company that were previously not available, such as opening new markets, introductions to prospective clients, or perhaps identifying and assisting with acquisitions for growth. Non-control investors typically require minority representation on your board, bringing experienced leaders to assist the company to its next level of growth. Finally, you can remain the majority owner of the company until a later date, at which point you may choose to sell the entire company at your full and final exit, gaining another round of personal liquidity.

What If You Have Partners?

If you are not the company’s sole owner but have partners, the advantages of a non-control recap include all of the above, plus flexibility to customize the investment to the needs of individual co-owners. The level of liquidity can be tailored such that each co-owner can decide to sell some to all of his or her interest. The ongoing roles can be customized for each owner as well, permitting some to leave at closing and others to continue working in the company. A non-control recap can also be the vehicle for key management to own a portion of the company going forward, as a retention and incentivization strategy and/or as a stepping stone toward a future full sale of the company to the next generation of employee-owners.

Is There a Catch?

Non-control recaps are not for every owner or every company. Investors look for companies that are profitable, offer strong growth potential, and have capable leadership. While a minority investor remains hands-off mainly in the day to day operations, non-control investors will require supermajority rights on issues like selling the entire company or raising additional capital or debt. Another point to consider: the non-control sale may receive a lower valuation multiple than what might be achieved with a full sale, reflecting the investor’s minority position. However, this potential disadvantage is offset with the opportunity to pocket some liquidity now and retain ownership for the full sale at a later date–hopefully at a higher total valuation after having grown the company to the next level.

Non-control recaps may not be the right tool for every business owner, but they offer compelling advantages that should be considered prior to deciding to sell the entire company. To learn more, review our webinar on this topic called “Cashing Out Without Walking Out” or contact us to discuss your individual situation.

Interesting Items

By: Patrick Ungashick

Have you ever attended a presentation where the speaker asked audience members to raise their hands if they believed themselves to be an above-average driver? Typically, about 95% of the people in the room raise their hands. This would be impossible, unless the room was full of Formula One and NASCAR drivers. In a room full of randomly selected adults, 95% cannot be above-average drivers. There is a scientific explanation for what is happening, and it offers critical insight for business owners hoping to exit happily one day in the future. Here’s why.

The scientific principle at work is most commonly called illusory superiority, and most of us suffer from it at one time or another. Illusory superiority is a cognitive bias wherein a person overestimates his or her abilities and qualities relative to others. Several psychological experiments have revealed illusory superiority in action. For instance, in a 1977 study, a whopping 94% of professors rated themselves above average relative to their peers. Other studies have shown people tend to overestimate how charitable they will be, or of course their driving skills. Interestingly, illusory superiority seems to be rooted in North American culture—in many Asian societies; the phenomenon does not exist.

The illusory theory also applies to business owners contemplating exit. Most business owners know that the exit process is typically stressful and difficult and that a significant number of owners fail to exit when they want, how they want, and for the value that they want. But, most owners also seem to feel that they are unlikely to suffer any of the obstacles or setbacks that commonly plague others. In exit planning and our experience, most owners overestimate their readiness to exit and underestimate the challenges they will face. This behavior is illusory theory in action.

Psychologists who study illusory theory offer explanations as to why it occurs, which can help business owners better approach exit. A leading cause for illusory behavior is that “soft skills” like driving, lack rigorous mechanisms to measure and verify one’s competency, allowing us to assume that we are more qualified and prepared than we might actually be. That’s why people over-estimate their driving skills but are unlikely to over-estimate harder skills such as playing golf or piloting a plane, where one’s competence or preparedness are unequivocally revealed.

When getting ready for exit it is easy to assume that you are sufficiently ready and prepared, particularly if you have never exited from a company before. This assumption leads to underestimating the work that needs to be done and the time required to do it—arguably the biggest mistake owners make. Most owners lack tools and mechanisms to objectively evaluate how ready they and their company are to exit, and how likely they will achieve their exit goals. This too is the illusory theory in action.

If you are like most owners, you have too much at risk at exit to assume you are adequately prepared. Consider the following steps and resources to have a better plan:

• Educate yourself on the key questions and issues that most owners face as their near exit. Once you start telling yourself you want to exit sometime within the next five years, you will have work to do and must identify how and where to get started.
• Research what goes into an exit plan. Many owners will say, “Sure I have an exit plan” without knowing all the elements and areas that a sound play must address. This comprehensive article can get you started.
• Work with advisors who have helped owners like you achieve their exit goals. Your exit is too important to leave it to people who are not specialists.

If you have a quick question coming out of this article or, if you want to discuss your situation in more detail, we can set up a confidential and complimentary phone consultation at your convenience contact Tim 772-221-4499.

By: Patrick Ungashick

There once was a man engaged to be married. He had never married before, but he had seen what a happy marriage could do for people, and unfortunately, he also had seen what an unhappy marriage could do to people.

The man hoped his marriage to his future spouse would be happy and successful. So, he committed to working with a minister experienced in preparing people for marriage. The minister helped people know, anticipate, and address the issues and challenges that often come with marriage. The minister got to know the man, assessed the man’s readiness for marriage, and then gave feedback and advice to help the man enter into a happy and long marriage.

The man also wanted to share the wonderful moment of his marriage with the people closest to him and his future spouse. So, he committed to working with a wedding coordinator. The wedding coordinator designed a wedding event that would share the couple’s joy and happiness with all of the people whom they cared about, and would run smoothly without stress or unwelcome surprises.

Eventually, the man married. He and his spouse had a wonderful wedding, thanks at least in part to the wedding coordinator. And they lived happily married ever after, thanks at least in part to the minister.

This simple parable can help explain the difference between an exit planner and an investment banker, which is a common question we hear from owners who intend to sell their company. It’s an understandable question, for in many ways an exit planner helps prepare the company for sale, a sale that the investment banker is charged with making happen. But there are key differences between exit planning and investment banking, which is why it is important to think about these two roles separately. In some cases, it can make sense to work with the same firm or team to fulfill both roles, but in other cases, it’s beneficial to work with separate teams.

The man (or woman) seeking to marry is like a business owner seeking to exit, in this case, by selling his company one day. Just as the man has never married before, but he has seen good and bad marriages, the business owner has never exited before, but is aware that some exits are happy, but many are not. Exit, like marriage, changes one’s life in many ways. Being unprepared for exit can lead to significant struggles, just as being unready for marriage.

The minister (or priest, rabbi, counselor, etc.) is like an exit planner. Just as the minister is concerned with the individual’s overall best interests and happiness, so too is the exit planner. The exit planner’s mandate is to help the owner achieve his or her overall exit goals, which often includes: reaching personal financial freedom, leaving the company in good hands, exiting on his/her own terms, and having a sound plan for what to do next in life after exit. To be effective, the exit planner must get to know the owner and the company, and then advise the owner on the best plan and course of action, which may include—depending on the owner’s goals—selling the company. However, at all times, the exit planner must remain objective and committed to achieving what is best for the business owner.

The wedding coordinator is like an investment broker (or business broker, M&A advisor, etc.). Just as the wedding coordinator is focused on a singular event and outcome—the wedding day, the investment banker is focused on a singular event and outcome—the sale of the business. To be effective, the investment banker must be dedicated to the difficult and sometimes fragile process of selling the company. Selling a company is never guaranteed, not to mention selling for an attractive price and favorable terms. Just as the wedding coordinator seeks to make sure everything goes off smoothly with no critical detail unaddressed, so too the investment banker must carefully choreograph the process to minimize factors or risks that can hinder or even block the company sale.

When working for the business owner who wants to sell his or her company, a close and synergistic working relationship typically exists between the exit planner and the investment banker. The exit planner, typically engaged three to five years prior to exit, can help the business owner identify and implement tactics that will increase company value at sale and reduce risk. This tees up the company for the investment banker, who typically comes into the picture about a year before the final sale.

However, note that the two professionals, while serving the same client, do not share the same focus. The exit planner, like the minister, is focused on the business owner’s overall goals and best interests. The investment banker, like the wedding coordinator, is focused on the sale process and closing. Ideally, these two elements remain in alignment, meaning that selling the company (what the investment banker wants) is in the best interests of the business owner (what the exit planner wants). However, things can happen that bring into question whether selling the company is in the owner’s best interests at that time. Common examples include:

• The offer(s) to purchase the company is for a lesser amount that the owner needs or wants
• The offer(s) to purchase the company include terms and/or conditions the owner finds unfavorable
• The offer(s) to purchase the company come from a potential buyer(s) that the owner feels is not a good culture fit
• The business owner comes to realize that he or she is not personally ready to sell the company at that time, often because the owner is unsure about what he or she would do without the business
• The business owner grows unsure about selling the company to an outside buyer and instead seeks either an inside sale or passing the company to the next family generation

Should any of these occur, the investment banker and exit planner may find themselves working toward different outcomes. This benefits nobody, especially the owner. Experienced exit planning and investment banking advisors know these issues and seek to minimize the likelihood that these situations occur. In all cases, business owners and their advisors need to remain clear through the entire process what role every advisor is playing.

If you have a quick question coming out of this article or, if you want to discuss your situation in more detail, we can set up a confidential and complimentary phone consultation at your convenience contact Tim 772-221-4499.

By: Patrick Ungashick

Business Valuations & Exit Planning: A Business Owner’s Guide

This is part four of a four-part series on business valuations, written for business owners who need to understand how business valuations are used in the process of preparing for your business exit. As this series deals with tax and legal subject matters, readers are advised to consult their tax and legal advisors. This material is for educational use only. 

How to Select a Business Valuation Professional

There is no such thing as a completely objective business valuation. Every business valuation involves some degree of judgment, which means subjectivity. A human being who values a company has countless decisions and judgment calls he or she must make during the valuation process: which valuation methods to use, what data to include or exclude, how to factor in non-quantifiable issues such as risks, opportunities, market conditions, and more. Even if you are using a software program to do a valuation, subjectivity is introduced by the judgment calls made by the person(s) who programmed the application, and again by the person entering the data. Therefore, if you need a business valuation a critically important question becomes who do you use to do the work?

There is an additional reason to carefully consider who should perform your business valuation. Getting a business valuation is like buying an insurance policy—that valuation may be called up to help protect you against claims against your interests from unfriendly parties, such as a disgruntled business partner, a divorcing spouse’s lawyers, or perhaps even the IRS. Not all business valuations are created equal. The quality of the valuation, and the party who performed it determines how durable that “insurance policy” will be if called upon.

Unfortunately, it’s never been more challenging to determine who you should use to get a business valuation. There are no formal college or university degrees in business valuations, and no state or federal licenses exist. Consequently, many professional advisors will say “Sure, we do business valuations” if asked. An online search turns up countless websites, programs, and calculators that offer low-cost or even free valuations. While free online valuation calculators may be fun to play with, they cannot provide the level of accuracy and assurance that comes with a valuation done by a qualified expert. So, when investigating who to turn to, consider the following:

Professional Experience

While no formal education or licensing requirements exist for business valuations, several organizations offer professional certifications in this field. Look to work with valuation professionals who have at least one of these credentials (listed in alphabetical order):

• Accredited in Business Valuation (ABV). This designation is only to certified public accountants (CPAs) who have passed an exam and have met several thresholds of minimum valuation experience.
• Accredited Senior Appraiser (ASA). To earn the ASA, an applicant must meet specific educational requirements, pass a comprehensive exam, submit their work product to a peer review process, and possess five years of full-time business valuation experience.
• Certified Business Appraiser (CBA). Applicants must meet certain educational requirements, pass a comprehensive exam, and achieve either 10,000 hours of business valuation experience or complete 90 hours of advanced course work. As with the ASA, applicants must also undergo a thorough peer review process.
• Certified Valuation Analyst (CVA). Like the ABV, this credential is only available to CPAs. Applicants must pass a comprehensive exam and complete required course work.

As of the time writing this article, only about 5,000 professionals in the US hold at least one of these credentials. The good news is once you know what to look for, it is not difficult to find them.

How to Find Your Valuation Professional

Should you need a formal business valuation, consider the following steps:

• Ask your existing trusted advisors to refer you to valuation professionals that they know, and hopefully have worked with in prior situations. As a backup method, research online valuation professionals in your area and/or who have experience in your industry.
• Meet or speak with several candidate professionals, share your situation, and ask them how they would approach your needs.
• After initial discussions, ask for a written proposal including a fee schedule and project timeline. Be sure you understand the information and work required of you during the valuation process.
• Once you have selected the valuation professional whom you prefer to work with, have your lawyer review their service contract or agreement. It should contain clear and favorable language about how this professional will respond if called upon to defend their valuation in court, arbitration, or in front of a regulatory agency.

Be sure to review the previous articles in this series (if you have not already) to learn when you might need a valuation, how the valuation process works, and to understand the more common valuation methods. Valuations play an essential role in many business owner’s exit planning process—it pays to know the basics of how they work.

Your Next Steps

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If you have a quick question coming out of this article or, if you want to discuss your situation in more detail, we can set up a confidential and complimentary phone consultation at your convenience contact Tim 772-221-4499.