Posts made in January 2015

Four-point framework sets strategy for smoother business acquisition

Business

The Denver Post | BUSINESS

Gary Miller

 

By Gary Miller GEM Strategy Management

Posted: 01/18/2015 12:01:00 AM MST

Last month I explained why so many mergers and acquisitions fail after the deal is closed. This month, we’ll discuss how an acquiring company can create a framework for smoothing the integration of a business.

The framework is built on four distinct elements: before-sale prep, action after the letter of intent is signed, intermediate profit-improvement programs and strategic positioning.

  • Prepare before the purchase closes. You’ve identified an acquisition candidate, and a letter of intent is drawn up. This is when you need to select an integration executive to form and lead the acquisition team.

This is also a good time to develop an “opportunity statement,” which will serve as the foundation for communicating between the executive ranks of the acquiring company and the business that is being purchased. It helps define why the acquisition is valuable.

It also is important to determine what is critical to assure the acquired company’s success over the next few years. This includes identifying key managers, technologies and customers — all important assets to maintain after the deal is done.

Define industry norms, including executive compensation, labor contracts, marketing and sales practices, margins and industry practices. Develop a detailed communications plan for all stakeholders — employees, customers, distributors, suppliers and bankers — that will be used after the letter of intent is signed.

Decide who will visit the company that is to be acquired, and set a deadline for completing a due-diligence review.

  • Actions for immediate ownership. The steps that have to be completed in this phase are few, but critical.

The first is an examination of the acquisition in detail — particularly financial assets, operating practices, key employees and customers. Questions that must be answered during this stage include: What are the key sources of profits? Why do the acquired company’s customers prefer them over competitors? Are there looming cash or capital needs not previously anticipated?

The second — and most important — step is to keep personnel. Management needs to feel it is part of the acquisition process and that the purchasing company will be open and honest with them. It may require dinners and individual meetings, circulating memos and documents about the acquisitions to senior and middle managers and continuous communication with front-line staff.

  • Intermediate profit improvement programs. Extensive evaluations are made so realistic profit improvement programs can be developed.

First, the integration executive’s team must determine if the management of the acquired company knows how to manage its profitability. What is the impact of substantially increased volume? Can quality requirements be maintained? Do bottlenecks exist? Can effective cash management make a difference? Do the internal controls and management information systems reflect an accurate picture of cost and revenue changes? These assessments become the basis of the decision about how much freedom the acquired management will have or should the management be replaced.

The second step is to establish the priority for profit-improvement. A list of possible programs can be generated either by the acquired’s or the purchaser’s management. With in-depth evaluations of the alternatives and priorities, a realistic implementation strategy can be designed.

  • Strategic positioning, execution and implementation. The last phase of the integration process begins when the purchaser shares its preliminary assessment and jointly developed integration plans with the senior executives of the acquired company.

The assessment and plan identify the long-term needs of the business so these resources can be built or acquired. They may include training, hiring, new technology and capital expenditures, and may contemplate new products and services or rebranding, adjusting distribution systems and pricing, to name a few.

Getting buy-in from the acquired company’s senior management is, again, critical, and it requires making sure that they are a significant part of the integration process. Once the plan is agreed to by both companies, execution becomes a joint effort and responsibility.

The framework for integration will not prevent all disasters. But by following the steps, the chances of success should be increased significantly. Although the task is demanding, it will be rewarding.

Gary Miller is founder and CEO of GEM Strategy Management Inc., an M&A management consulting firm focusing on strategic planning, raising growth capital, value creation, exit strategies, preparing companies for sale and post-integration processes for middle-market companies. gmiller@gemstrategymanagement.com www.gemstrategymanagement.com 970.390.4441

 

Selling your business could be tough; here are some tips

 

The Kansas City Star

Business Columns & Blogs

By GARY MILLER ,  Special to The Star

01/12/2015 10:25 PM

A time always comes when business owners ask themselves, “Should I begin thinking about selling my business?” Your success depends on your strategic exit plan, deal team selection and timing. And business owners today face four big threats now through 2029 that no other generation has had to face.

First, a demographic tsunami of baby boomer businesses is coming on the market from now till 2029. A bit of background will give you some insight into its impact. The U.S. Census Bureau defines baby boomers as those born between January 1946 and December 1964. There are approximately 78 million of them; around 10,000 are retiring every day. Assuming they retire at 65, they will retire at a rate of 4.1 million a year through 2029.

Small businesses (500 employees or less) number 28.2 million as of 2013. Baby boomers own about 43 percent of those businesses (12.1 million). About 60 percent of the 12.1 million businesses will be put up for sale through 2029 (7.26 million). That averages 403,333 businesses on the market each year. Businesses put up for sale between 2008 and 2013 averaged 123,000 per year. One can readily see the tsunami impact going forward — 403,333 vs. 123,000.

Second, it is a buyer’s market over the next 16 years. Transaction volume is steadily increasing (five quarters in a row since 2013), and transaction prices are increasing in recent years (2010 – 2013). However, sales price multiples indicate that it remains a buyer’s market. Though sellers are getting much higher prices than they did just a few years ago, buyers are getting better value for their business-buying dollar. This is shown by multiples that remain at historic lows. The average multiple of revenue for sold businesses in the first quarter of 2014 slipped 1.2 percent year-over-year to 0.59 percent, and the average multiple of cash flow fell 0.6 percent to 2.21 percent.

Third, 80 percent of the businesses put up for sale will not close. Two reasons explain this high number: (1) poor strategic exit planning and (2) overestimating the value of the business. Though 96% of baby boomers agree that planning an exit strategy is important, 88 percent do not have one. You would expect well-thought-out plans to get the most money out of the business would be in place before going to market since on average 70 percent of the business owner’s net worth is tied up in illiquidable assets. Unfortunately, this isn’t the case; most owners skip the strategic exit planning and preparation phase because they are too busy managing and expanding their businesses. They jump ahead into the sales process ignoring personal financial goals, management or family dynamics, market timing, value enhancements, wealth and tax planning.

Fourth, owners do not know where to turn. Owners’ trusted advisers have limited understanding of strategic exit planning. When owners do turn to them, these advisers aren’t prepared or equipped to properly counsel their clients. Consequently, they refer the client to the “known” specialized resource in this space, the investment banker. The banker plays an important role in an external exit, but many aren’t equipped or compensated to determine an owner’s long-term financial needs and exit channels, or to implement value enhancements, strategic tax plans and wealth preservation. They are hired to sell the business externally at the highest price they can achieve.

Lessons learned from these threats are (1) begin planning early; (2) prepare your company to go to market; (3) select an interdisciplinary team of experts who can work together; (4) monitor the team with a lead consultant; and (5) execute the plan when the timing is right. Exit planning and execution are a process, not an event.

Gary Miller is founder and CEO of GEM Strategy Management Inc., an M&A  management consulting firm advising middle market companies and their sponsors on strategic business planning, growth and expansion strategies, raising growth capital, preparing them for sale of their companies, acquisitions, exit planning, merger integration. He can be reached at 970.390.4441 and gmiller@gemstrategymanagement.com.

 

Read more here: http://www.kansascity.com/news/business/biz-columns-blogs/article6173037.html#storylink=cpy

Planning vital when selling business

Arizona Republic 01/11/2015, Page A01

by  Gary Miller, CEO  GEM Strategy Management Strategies, Inc.

Gary Miller

A crisis is looming on the horizon for business owners wanting to sell their companies. Currently, 80% of business owners of small and middle market companies who put their businesses up for sale never close the transaction. The reasons: 1) poor planning; and, 2) over valuation.

With the impending Baby Boomer tsunami, more businesses will be for sale than at any other point in history creating a buyer’s market. This buyers’ market will cause significant competition. Businesses that do not plan well or over value their companies will be left out in the cold.

Many strategic and financial buyers with significant funds to invest are more cautious and reluctant to pay premiums for companies than a few years ago. Therefore, as a part of your planning process, owners should take these three steps to significantly increase their chances of selling their businesses.

1. Think like a “buyer.” Most buyers want to purchase a company that has the following characteristics. A proven entrepreneurial management team in place who can continue rapid growth and expansion after the transaction closes. Most buyers do not want to replace current management of the company they are buying. Doing so adds a risk profile that could endanger the viability of the business going forward. A strong, realistic growth plan to continue value creation through market penetration and expansion, defined market niche and/or acquisitions An ability to produce significant returns on invested capital coupled with strong positive cash flows A sustainable competitive advantage.

2. Prepare before you go after a buyer. Attracting a buyer is like preparing for a beauty contest. Companies that “show best” win “first”. It takes six to 18 months to prepare your company for the buyers’ market place. Strong preparation steps are listed below. Quantify the business value through a third party valuation firm Get rid of obsolete inventory. If your financial records show a higher value than market value, take the write off now so that it doesn’t become an issue for the buyer. Audit your financial records by an independent accounting firm. Strengthen legal and contractual affairs Install and improve operating systems and processes Tell your management team that you plan to sell the company. Be truthful. Include them in the preparation process. To not do so could scare your key employees (the very ones you need to keep) when a buyer’s due diligence team shows up to begin their due diligence process. This could trigger your key employees to search for new careers. Create management and key employee long term incentive plans to stay with the company Prepare for buyer due diligence. If you were buying your company, what would you drill down on first, second and so on? Conducting your own a due diligence similar to a buyer’s due diligence process allows you to discover any “skeletons” before the buyer does. It allows you to correct them or to put the best possible explanation forward to the potential buyer.

3. Select the right team to help prepare you to go to market. Assemble a collaborative multi-disciplined team of experts is critical to help prepare you to go to market.

Five key team members are important to your success. A management consulting firm with strong business strategy expertise and transaction experience to lead the team. A law firm with significant transaction experience led by an attorney who is a CPA An investment banking firm with deep transaction experience in your industry An accounting firm with major transaction experience to guide you through the tax issues A wealth management firm to help you plan wealth preservation from the transaction.

Gary Miller gmiller@gemstrategymanagement.com is founder and ceo of GEM Strategy Management, Inc., a management consulting firm focusing on strategic planning, growth capital for expansion, value creation and exit strategies for middle market companies Contact him at gmiller@gemstrategymanagement.com

 

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