Posts Tagged "Exit advisors"
Business Response to the Coronavirus Crisis – Manage & Secure Cash
By: Patrick Ungashick
To help our clients and other business owners and leaders respond to the unprecedented leadership disruptions caused by the coronavirus (COVID-19) outbreak, the team at NAVIX offers the following crisis management information series.
Responding to Coronavirus: Manage & Secure Cash
In response to the economic uncertainty created by the coronavirus outbreak, we suggest you take steps necessary to ensure that your company does not run into a cash crunch. In times of crisis, cash is a company’s lifeblood. Consider these steps to assess your company’s financial position:
- Identify the company’s immediate cash needs and demands.
- Calculate the cash needed to cover the business’s core operations for at least the next 45 days.
- Run and update each week a cash flow forecast to monitor the company’s short-term cash position carefully.
If your company’s cash position is sufficiently fragile or uncertain that you risk a shortfall, consider the following actions:
- Make a maximum effort to collect on accounts receivable—now is not the time to let others hold onto your company’s cash.
- Draw on your line of credit (if available) to establish at least a 45-day liquidity cushion. Depending on the risks to your revenue presented by this outbreak, an even larger cushion may be prudent.
- If you do not have a line of credit or have already fully drawn it down, consider making a list of cash outlays which can be cut or deferred in the near term if cash becomes tight.
At times like these, cash is king. If you are already a NAVIX client, your advisor stands ready to help you model your cash flow needs and discuss your company’s financial alternatives during this crisis. If you are not a NAVIX client, work with your advisors or contact us about our services.
The NAVIX team has helped hundreds of business owners prepare for exit. We have also helped countless owners and leaders deal with recessions, liquidity crises, and economic upheaval. Our experience and perspective enable us to guide our clients through difficult times, such as these.
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.
The One Exit Tactic You’ve Probably Never Heard Of
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
How to Avoid Getting Burned by Earn-Outs When Selling Your Company
By: Patrick Ungashick
The term “earn-out” usually sends a shiver down the spine of business owners. And for a good reason. Business owners seeking to sell their business at exit overwhelmingly prefer all-cash deals. Owners know that any portion of the purchase price held back at closing is at risk—you might never see those dollars. Despite owners’ overwhelming preference, most deals are not 100% cash transactions, but instead, include any number of mechanisms that pay additional dollars to the seller after closing only upon achieving certain results. One of the most common mechanisms is an earn-out. Here’s why owners seek to avoid earn-outs, and how to avoid getting burned by them if part of your deal.
Selling Your Company
First, a quick explanation of earn-outs. An earn-out is a provision defining how a selling owner may receive additional payments after closing, contingent upon specific results such as stipulated financial performance or milestones. Earn-outs are used to bridge valuation gaps between the seller and buyer. In essence, with an earn-out, the buyer is saying to the seller, “We will pay you more for your company later if you actually go out and achieve [blank]…”
Here’s an example. You believe your company is worth $15 million, in part because you trust the company will continue to grow 25% per year like it has the last few years. Your buyer is not convinced that the growth rate is sustainable and is only willing to pay $10 million at closing. To bridge the gap, your buyer agrees to an earn-out that may pay you up to an additional $5 million after closing if the company sustains the 25% (or better) growth rate over the next several years.
Earn-outs can be useful in bridging value gaps, and some deals might never be closed without incorporating an earn-out into the agreement. However, an earn-out often trades one problem (i.e. the buyer and seller do not agree on the price) for another set of problems:
- You and your buyer have to agree on the specific performance or milestones needed to receive earn-out payments. For obvious reasons, buyers prefer to tie earn-outs to the bottom line. Sellers, however, beware. After you have sold the company (or a portion of it), you probably are in control of very few factors that determine the bottom line. Sellers should seek to tie the earn-out to top-line results, as they are easiest to measure and hardest to manipulate.
- If you have an earn-out tied to financial metrics somewhere below the top line, you and the buyer must agree on key definitions and how those metrics will be calculated. It’s not enough to tie an earn-out to “net profits” without defining what goes into net profits, and what does not. The issue is more complicated than just agreeing on the meaning of certain words and phrases. After purchasing your company, the buyer may allocate some of its overhead and liabilities onto your company’s financial results. This could be a nasty surprise if you and the buyer did not precisely define net profits during the sale negotiation.
- Regardless of which metrics the earn-out is tied to, as the selling owner, you are still at risk if the buyer mismanages (unintentionally or intentionally) the company’s operations after the sale, undermining or outright killing any chance of hitting the earn-out targets. For example, assume you have an earn-out tied to top-line results. Using top-line revenue seems simple and clear. But the new owner can take any number of actions that make it hard or impossible to achieve the top line milestones: What if newly hired leaders are not competent? What if the new owner raises prices, ultimately decreasing sales or even losing customers? What if the new owner raids the company and redeploys some of your best salespeople to another department? What if the new owner changes the company name and, in doing so, disrupts marketing and lead generation? You, the selling owner, bear the risk of any decisions or actions that negatively impact company performance to the point that you do not hit your earn-out targets.
- You and your buyer have to agree on additional important terms and definitions, such as: How long will the earn-out last? Is there a cap on the potential payments? Can the missed earn-out installments be recovered if the company later catches up? Can the buyer offset indemnification claims against earn-out payments? These are only some of the critical issues that must be addressed and negotiated.
Maximizing Cash at Sale
Owners seeking to one day sell the company at exit must build a company that is so attractive to potential buyers that they will offer all-cash terms. Earn-outs at their core are a mechanism for buyers to limit risk: risk that the company will not perform as desired after sale; risk that existing customers will leave or decrease their volume; risk that top employees will flee, etc. Building a business that sells for all-cash terms involves more than just growing revenues and profits. To avoid earn-outs altogether, you must hire and align a quality leadership team, eliminate your involvement in routine sales and operations, achieve a strong track record of growth, reduce customer concentration, and have effective financial systems and processes. Building a business that is robust in these areas reduces buyers’ risk to the point that buyers do not see any need for an earn-out.
The second step to avoid getting burned by an earn-out is to hire and work with an experienced exit advisory team. Your accountant, lawyer, investment banker, and exit planner must have extensive experience with situations like yours and be qualified to give you sound advice. Your investment banker and lawyer, in particular, will be your A-team in negotiating the deal terms, especially any earn-out, and protecting your interests. Do not use general purpose advisors when selling your company. You carry the risk that any fees that you might save will be paid back multiple times over in future costs and losses.
At NAVIX, our clients are prepared to potentially sell their business for all-cash deals and have advisory teams qualified to help avoid the fallout caused by an ill-negotiated earn-out.
To learn more about how to prepare your company to sell for 100% cash, contact Tim to schedule a complimentary, confidential consultation 772-221-4499
17 Signs You Might Need a ‘Partnerectomy’
By: Patrick Ungashick
Webster’s Dictionary defines a “partnerectomy” as “the procedure to remove a diseased or failing business co-owner.” Well, OK, that’s not true — it is a word that we made up. But sometimes partnerships need to come to an end. Here are the symptoms to watch for to determine if you have a business partner who needs to go.
Business Partnerships
According to our proprietary research, about seven out of 10 U.S. companies have more than one owner. These partnerships feature two or more leaders coming together with the shared goal of growing the company. Their combined effort and often complementary skills fuel the company’s growth and success. That’s the positive version of the story — and it is often true, especially in the beginning. However, sometimes business partners realize they may not be exactly on the same page on multiple issues. Sometimes it’s possible to reconcile their differences and resume a productive relationship. Other times, the necessary and perhaps the only course of action is to remove the partner in question. In other words, the company needs a partnerectomy.
Some partnerectomies are more difficult than others. Some are painful, angry, risky, expensive, and cause lasting scar tissue. Others are more controlled, safer, less emotional, and leave the organization much stronger than it was before the procedure. Either way, before resorting to this invasive and irrevocable course of action, business co-owners should exhaust every effort and resource to find another resolution to their core differences.
Reasons to Buy Out Your Business Partner
Here are the symptoms that indicate your organization may need a partnerectomy, any of which suggests that it’s time to take action. You may need a partnerectomy if:
1.You and your partner(s) disagree about where to take the company and how to get there.
2.One or more partner(s) want to take all of the company profits home while one or more partner(s) want to reinvest all of the profits back into the company for growth.
3.You believe that there are important topics that you cannot discuss with your partner(s) for fear of damaging the relationship.
4.Deep down, you are not sure that you can trust your business partner(s).
5.Deep down, if you could turn back the clock you would not enter into a partnership with that person(s) again.
6.Deep down, you believe that if that partner(s) were to leave the company, then employees, customers, suppliers, or other third parties would be relieved.
7.You and your partner(s) have very different timelines for when each wants to exit from the company.
8.You and your partner(s) have very different opinions about your company’s value.
9.You and your partner(s) have not signed a buy-sell agreement.
10.Your employees clearly prefer or are aligned with one partner or another, such that divisive factions exist in your organization.
11.Members of your leadership team are unclear what a particular partner actually does inside the company.
12.You believe that if that partner(s) departed from the company tomorrow, the company would not experience any setback or difficulties.
13.You find yourself frequently having to do any of the following for another partner(s): “cover for” him or her, do “damage control,” or “take precautionary steps” to ensure that the other partner does not cause the company problems, intentionally or not.
14.Your partner(s) has ongoing personal habits or issues that create a serious risk for the business.
15.You and your partner(s) do not have current, written, mutually agreed-upon job descriptions.
16.You and your partner(s) are working at different commitment and energy levels but take home the same pay.
17.You and your partner(s) are doing different jobs inside the company but take home the same pay.
It is worth noting that some of these symptoms set off obvious and immediate alarm bells, whereas others seem trivial or harmless. Yet, as the word symptom implies, each of these items may be a surface manifestation of a deeper root issue that, if left unaddressed, can lead to real catastrophe. If you are experiencing any of these symptoms, just like any true medical issue it is advisable to discuss your situation with a knowledgeable advisor, and if necessary, do “more tests.” Contact us to confidentially discuss your situation.
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
The Five Conversations You Must Have to Prepare for Exit
By: Patrick Ungashick
Five conversations can put you on the path to a happy and successful exit. These conversations need to be open and honest, revealing your desire to exit the business eventually. They need to be handled intentionally and carefully, with preparation and practice, because there is a real danger you may do more harm than good. Ideally, the conversations need to happen well before you exit (we suggest about five years,) when you still have time to take the right advice coming out of these conversations and put it to use. Waiting until just before you exit to have these conversations negates the opportunity for positive action arising out of them, and risks alienating people who care about you and the business, and feel disrespected for not being included much earlier.
The five conversations are with the following relationships:
1.Yourself
2.Your spouse or partner
3.Your business co-owners (if applicable)
4.Your business co-leaders
5.Your advisors
These five relationships are critical for your exit success. How you approach these relationships—through the conversations you have with them—will go a long way to determine if you exit happily or not. As long as you have not disclosed your exit aspirations with these key relationships, you cannot be entirely honest with them for fear of creating potential problems for you and your company. Your ability to lead the business and work effectively with these relationships will be compromised. You will find yourself making critical exit-related decisions that impact the business, partners, employees, customers, key suppliers or advisors, and your family, keeping them in the dark about your intentions, and where you are trying to lead things. Misalignment, tension, friction, and frustration are nearly certain to ensue.
The longer you wait to have these conversations, the greater potential your exit success will be undermined, or you may even cause harm to your relationships with your business partners, employees, customers, and family members. The business may suffer. Millions of dollars may be lost. Consider the following real examples we have encountered, all of which occurred because of business owners who never had a productive exit conversation with these relationships:
- The two business partners who, after 14 years of working together in friendship, found themselves unable to be in the same room out of anger and hurt, because they could not learn how to effectively talk about their future exit.
- The business owner’s wife, sitting in a conference room in our offices, crying out of fear. After thirty years of owning their business, nearly all their wealth was still tied up in the company, and her husband was unwilling or unable to tell her when they would end their financial dependency on the business.
- The three siblings who co-owned a second-generation family business, who prematurely sold the firm because they never learned how to have the exit conversation with each other.
- The two key employees who left the company they cared about as much as the owner, feeling unappreciated and disrespected because they suspected the owner would sell the business one day, but had never confided in them nor approached them about potentially buying it.
- The business owner who did not feel comfortable sharing his future exit intentions with his accountant, and without that information, the accountant failed to recommend a corporate structure that would have reduced taxes at exit by more than five million dollars.
- The business owner who sold his business when a surprise buyer showed up and wrote a large check, even though the owner never had this conversation with himself about his exit goals and values. Only to watch the buyer subsequently treat his former employees and customers poorly to the point that for the rest of the owner’s life, he felt like he had failed those people.
Conversations with the five relationships will not guarantee you a happy and successful exit. However, if you fail to have the conversations with these five relationships, your exit likely will be more stressful, riskier, and costlier than if you have the conversations. To plan these communications takes a modest amount of time. In return, you may create thousands to millions of dollars in increased net business value, years of continued good relationships, and uncountable benefits in reduced stress and avoided problems. On a dollar-for-hour basis, these conversations may be the most valuable time you spend during your entire career as a business owner.
To get started, review this helpful information about the 14 most common exit planning questions. Then, contact us to discuss your specific situation.
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
Tim Kinane
Tim is a Consultant to Business, Government and Not-for-Profits Organizations specializing in innovative and challenging ways for organizations to survive, to thrive and to build their teams.
