Posts made in October 2017

To maximize the sale of your company, build business value

The Denver Post | BUSINESS

Gary Miller, staff photo

By GARY MILLER | GEM Strategy Management

October 15, 2017, at 12:01 am

It can take two to three years to prepare a business for sale

Imagine sitting at your desk and reading a registered letter from a potential buyer. The letter states that the buyer is retracting its offer to purchase your company as a result of the due-diligence review and analysis the buyer just completed.

This happened to Nathan White, owner of a small uniform manufacturer serving clients throughout the U.S. This was the second time in two years that a potential buyer had withdrawn its offer. Nathan was discouraged.

Nathan called me to see what he could do to sell his company. His story was one I have heard many times before. Nathan’s company suffered from poor exit planning, a checkered record of revenues and profits, a weak strategic business plan, inaccurate books and records, and the loss of two major clients. As a result, the potential buyer believed that the business was overpriced relative to its business value, therefore, the buyer could not justify completing the transaction.

For many owners, the last 10 years have been a difficult period for growth and profitability. Other companies, however, have done extremely well. What is the difference?

Owners do not plan early enough to sell their businesses. Since many owners have never sold a business before, they fail to realize that it takes time and careful planning to optimize the business value in order to maximize the sale price. As a result, they try to sell their businesses before they have maximized the enterprise value of their companies. This situation leads to a lower purchase price from a buyer, or worse, no sale at all.

The process of selling a business has become more complex as buyers today are more cautious and much more rigorous in their due diligence efforts due to the Great Recession.

Regardless of your personal goals, there are some key issues every business owner must address in order to be ready for a business transaction. The business landscape changes every three to five years, and your company’s exit plan needs to keep pace.

The key to increasing business value is to understand how a potential buyer views your business. Here’s what I recommend to my clients: First, obtain an independent professional valuation from an accredited valuation firm. Next, engage an objective business adviser to conduct a business audit and assessment revealing the strengths and weaknesses of the business.

The adviser can help you pinpoint the value drivers and ultimately increase your business’s value and sale price from 10 percent to 35 percent or more. If the assessment reveals that some of your business drivers are weak, prioritize them and begin work immediately to correct or improve them. Once you understand the current value of the business and the value drivers, you can identify tactics to increase its value.

Key business value drivers may include sales growth trends, balanced and growing customer mix, strength of sales backlog, strength of the market niche, strong products and services brand, highly skilled, efficient and loyal workforce, solid vendor relationships, product differentiation, product innovation, strong management team that can transition to the new owner, up-to-date technology and modern work-flow systems and processes, strong management information systems, continuous growth in profitability, barriers to competitive entry, strong company culture and loyal customer base.

At least two years will be required to increase and improve the value drivers of your business. During this time, you will be able to correct minor cosmetic issues to help build incremental value.

Company culture and existing customer relationships are two critical areas that concern most buyers. Here is where you can add business value. If a business is sold, it is important to ensure that employees will embrace the culture of the buyer. Both these buyer concerns can be mitigated if the seller stays on as an employee or consultant for a reasonable period of time.

After two or three years of focusing on value optimization, your business worth should increase in the eyes of potential buyers. Understanding your company’s value and building upon it leads to a larger sale price and maximizes the wealth transfer to the business owner. If the business value process has been carefully carried out, the added value will stand up under the most rigorous buyer due diligence.

Continued owner involvement and the development of a strong management team have become even more important to buyers in today’s merger-and-acquisition environment. As earn-out requirements are commonly integrated into a sale price, performance stipulations tied to profits and revenue are frequently included in the sale contract to obtain the full purchase price.

If you are considering selling your company, act now. You must allow sufficient time to prepare for a transaction to correct any issues and build incremental value in your business. While the market is strong now, strong markets do not last forever. Time is of the essence. Remember, poor exit planning can erode the value of a lifetime of success.

Gary Miller is the CEO of GEM Strategy Management Inc., which advises middle-market private business owners in preparing to raise capital, selling their businesses or buying companies. He can be reached at 970-390-4441 or


Know the risks when you personally guarantee your company’s debt

The Denver Post

By GARY MILLER | GEM Strategy Management

September 17, 2017, at 12:01 am

Rarely can small businesses grow without needing to borrow money sometime during the company’s life. When businesses borrow money from banks, the banks almost always require a personal guarantee from the business owner or shareholders unless the business is profitable and has $25 million or more in revenues.

Most lenders require a personal guarantee as “added assurance” that the owner is committed to the business and to repaying the loan.

A personal guarantee means that if the company fails to pay its debt, you and/or your shareholders are on the hook. Personal guarantees are not limited to bank loans or lines of credit. They also include commercial leases, car loans or leases, equipment leases and other financing arrangements.

Personally guaranteeing a business loan is putting your personal finances on the line. Therefore, your credit score and assets are at risk. Make certain you fully understand what you are getting into before you sign on the dotted line.

Be aware that many business owners incorporate their businesses as C-Corps, S-Corps or limited liability companies, to ensure they have personal liability protection. But when you guarantee your company’s debt to a third party (such as a bank), you lose personal liability protection.

In addition, your personal guarantee could affect your family. Some banks require a spouse’s guarantee in addition to your own, so assets held solely in your spouse’s name are fair game for the lender. Otherwise, you might be tempted to transfer assets to your spouse’s name. In some cases (e.g., for commercial leases), you may be able to negotiate a guarantee without your spouse’s signature.

If you give a guarantee for company debt such as a business credit card, your failure to pay if the company can’t will hurt your personal credit rating. In most cases, small-business owners are required to provide personal information when their companies apply for credit cards. In some cases, if the company fails to make required payments, this action can appear on the owner’s personal credit report. This could make it difficult to borrow in the future, get a job, buy insurance or rent a place to live.

When selling your business, remember your personal guarantee survives the sale. Be sure to obtain a release from the buyer. Try to obtain a release from your lender or transfer the debt to the buyer.  Alternatively, have the company satisfy the outstanding obligation before selling your interest so there’s no longer anything that you still personally guarantee on behalf of the company.

I recommend that my clients negotiate the structure of the personal guarantee as well as the loan terms and covenants with the bank. They include:

  • If your company has more than one shareholder, negotiate a pro rata share of personal guarantees spread among all the shareholders based on their percent of company ownership. This arrangement limits your exposure to the percentage of the company you own. For example, if you own 60 percent of the stock of your company, you only guarantee 60 percent of the debt.  If another shareholder owns 20 percent of the stock, then he or she guarantees 20 percent of the debt. According to the Small Business Administration’s standards, any individual with a 20 percent or greater ownership in a small business should be part of the loan-guarantee process.
  • If the loan guarantee includes the term ‘joint and several’ – which means that each shareholder guaranteeing the loan is on the hook for 100 percent of the debt should any of the borrowers fail to pay his or her share – get rid of it if possible. If other partners can’t pay their pro rata share, the bank may demand that you pay the entire balance even if you aren’t a 100 percent owner of the business.
  • If you are guaranteeing 100 percent of the loan, negotiate a guarantee with a combination of cash and collateral, which can come in the form of property, home equity, and other investments.
  • If the bank requires a personal guarantee, make sure you sign a “Limited” vs. an “Unlimited” personal guarantee. When you sign an unlimited personal guarantee, you are agreeing to allow the lender to recover 100 percent of the loan amount in question, plus any legal fees associated with the loan – such as the lender’s costs for securing a judgment against you.
  • If the bank loan is a term loan, five years, for example, try to limit the term of the personal guarantee – perhaps for two to three years versus the entire term of the loan.

Since banks almost always require personal guarantees, knowing what you’re undertaking is essential. Try to negotiate better arrangements that limit or even eliminate your personal exposure. Before you agree to anything, protect yourself by consulting an attorney. Make certain you fully understand what your guarantee means and what you can do to minimize your risk.

Gary Miller is the CEO of GEM Strategy Management Inc., which advises middle-market private business owners in preparing to raise capital, selling their businesses or buying companies. He can be reached at 970-390-4441 or