Articles & Presentations

Transferring your business internally can be harder than you think

  The Denver Post | BUSINESS

Gary Miller

Posted:   10/19/2014 12:01:00 AM MDT

Gary Miller is founder and chief executive of GEM Strategy Management, Inc.

After growing a commercial electrical contracting company that he bought from his father 38 years earlier, Bob thought he and his wife, Charlene, could transfer the business to their two sons and happily live the remainder of their lives.

But like 70 percent of family businesses trying to transfer on to the next generation, Bob and Charlene’s company did not make it into the hands of their children. Companies being handed to a third generation have even worse odds, with only about 3 percent surviving.

Like Bob and Charlene, most families just assume their business will easily pass from one generation to the next — and continue to thrive — without any planning or forethought.

Unfortunately, this was not going to be the case for Bob and Charlene. Bob had been feeling a little under the weather, and Charlene urged him to go the doctor. The doctor’s report was not good: stage 3 prostate cancer that needed immediate treatment.

Bob had terrible reactions to treatments and was unable to work. Charlene started going to the business to help and both sons tried to pick up the extra workload from their dad, but it was very difficult.

Bob was the only licensed electrical engineer in the company. The sons could not sign off on any of the jobs. They would visit with Bob after hours — when he was feeling up to it — and go over the jobs so he could approve them, but it was becoming more difficult as each week passed.

When the vendors heard Bob was ill, they became concerned and were reluctant to keep extending credit to the business under their normal terms.

The town’s general contractors, who were the company’s largest customers, were also concerned since Bob usually oversaw the crews.

They knew the sons well and felt they were well qualified, but they thought they did not have the same capabilities as their dad.

Bob had never given his sons much responsibility in actually running the company — he thought there was plenty of time for that.

Charlene grew concerned about cash flow and took a second mortgage on the home they had recently built to get some additional working capital to keep the business afloat until Bob recovered.

You may have guessed the rest of this story. Bob passed away within a year. The business closed. Charlene had to sell their home to pay off the mortgages and moved in with family. Their sons went to work for their competitors at a fraction of their previous salaries. Even Bob’s life insurance proceeds were lost since the beneficiary was the company and the money went to satisfy creditors.

This disastrous ending could have been avoided if Bob had properly planned the business transfer. Before it became critical, Bob needed to:

  • Reduce the business dependence on him by empowering and allowing his sons to run the business.
  • Put in place personal and business contingencies, including pushing his sons toward professional licensing, and developing a business line of credit and a durable power of attorney assigned to provide for someone to take care of the day-to-day operations in case of serious illness as Bob experienced.
  • Establish a succession plan and facilitate critical contractor business relationships with his sons.
  • Create a buy/sell agreement satisfactory to all.
  • Hire a seasoned transaction team to develop a comprehensive transition plan, including a law firm for structuring the transition, a tax-advisory firm for minimizing taxes, and a wealth-preservation firm to protect the income and the necessary insurance benefits for Charlene after the sale is complete.

While the implementation of the points above would have made a dramatic difference in the outcome of Bob and Charlene’s company, a complete comprehensive plan could have provided them much more than avoiding this sad outcome.

It could have assured them the business would provide them enough funds to retire in comfort and that their sons would have a business they could one day sell or turn over to their children and fund their own retirement.

Every business situation is different and has its own complexities. Events happen without warning — including divorce, death, loss of a key employee, loss of a major account, loss of a partner, terminal illness — and can dramatically change an assumed outcome.

Bob’s family experienced a catastrophe. Even if you don’t plan on transitioning away from your business for years, having a comprehensive plan in place gives you the peace of mind knowing that your business, your future and your family are secure.

Gary Miller (gmiller@gemstrategymanagement.com)  founder and CEO of GEM Strategy Management Inc., a management consulting firm focusing on strategic business planning, growth capital for expansion, mergers and acquisitions, business transitions, value creation and exit strategies for middle-market company owners. Go to www.gemstrategymanagement.com or call 970.390.4441

 

 

What happens to my people after I sell?

The Denver Post || BUSINESS   Posted 9/21/14 

Gary Miller

by Gary Miller, Founder, and CEO, GEM Strategy Management Inc.

 After spending several decades building a highly profitable, and successful, medium-sized manufacturing business, “Fred”, a middle-aged president sold his company with the understanding that he would stay on as CEO until his retirement, some three years later. At the time the sale took place, both the seller and buyer said it was the best thing for both of them.

But soon after the deal was struck, things began to sour.

I talked to Fred several months after he retired and asked how the post-integration had progressed.

Fred said: “Immediately following the acquisition, a hoard of corporate personnel from the home office descended on us.  Each was a ‘specialist’ in the integration process. Their stated purpose was to integrate and acclimate us to ‘our new parent’s operating methods’.  What they succeeded in doing was driving my people crazy. “

He continued, “We couldn’t make a move without being told that our methods were outdated and ‘we’d have to adjust to the company’s way of doing things’.  When I complained to Corporate about the situation, I was told if I squawked too much, my position would be in jeopardy.  The net result was the company’s morale was destroyed and my key people began leaving.  It wasn’t long before I followed them.”

Fred’s experience is not an uncommon;  and his story ends as many others do – a feeling of helplessness, frustration and sadness – after years of being successfully in charge.

In the many transactions I have been a part of, buyers look at three main areas: Exposure to risk; sustainability of the business and “a fit between the organizations”.

I want to focus on “fit” — particularly the human side of acquisitions – the “cultural fit” as I have witnessed more acquisitions go awry because of this one,  most often overlooked area.  Generally, both parties are oblivious to the blending of two cultures until misunderstandings and resentments start to develop.  Often these troubles grow quickly and become impossible to manage.  They then end in a costly and demoralizing personnel loss which could have been avoided prior to closing if more care and attention had been given during the acquisition process.  While there is no “silver bullet” to successfully blending cultures, steps can be taken by the seller to give him and his team insights as to “life” after closing.

Fred admitted that he made several mistakes during the selling process, and if he had it to do over again, he would do the following:  Hire a professional team with transaction experience including a lead consultant, law firm, tax advisory firm, investment banker and a wealth management firm. Fred was good friends with his accounting firm’s lead partner, law firm partners and his wealth management firm’s partner.  All had little transaction experience.  Fred didn’t hire an investment banker and a consultant to lead the team as Fred decided he could fulfil that role and save money.

Fred said he led the negotiations even though he had never bought or sold a company.  He should have asked some basic questions such as; “What are your plans for my company?”  “What will be my specific responsibilities under the new structure?”  “What are the reporting relationships?”  Fred went on, “I should have consulted management from other companies the prospective buyer had acquired to determine what its track record might be.”

“I should have reviewed the factors and situations which could become post-acquisition points of contention such as compensation of my staff, the acquirer’s objectives, reporting relationships and the degree of autonomy allowed to existing management”.  The following are some considerations a wise seller would have taken into account before selling.

Employment contracts. Negotiating employment contracts may give the seller a good idea of the prospective buyer’s intentions. If the buyer is not serious about retaining management, it is not likely to tie itself to financially binding contracts. Contracts can serve to protect the seller and his top management, not only by assuring a pay-off if the post-acquisition period does not go well, but also by telling — before the sale — whether the buyer is really interested in retaining existing management.

Compensation and Benefits. If you are guaranteed a bonus based on earnings, insist that the details of the bonus package are clearly delineated in the Purchase and Sale Agreement.  Determine if your profit sharing plan will stay or be integrated into the purchaser’s plan.  Make sure the buyer’s plan is of equal value to yours and that it includes all of your employees if your present plan includes all of your employees. If your compensation is higher than your peers, detail how you will be compensated in the purchase price if the acquiring company takes away your company car, reduces your salary, eliminates your deferred compensation, and reduces your vacation and health care benefits. The best way to preclude potentially unhappy scenarios is to insist upon thorough, well-managed negotiations (on your part) in the first place.

Organization Plans and Reporting Relationships. Many of the organization changes made after a company is sold would not have been acceptable to the seller and his management before the deal was closed, if the seller had examined the cultural fit.  The seller has more control over his company’s future if he tries to pin down such matters during the negotiation process. Key questions to ask are: How autonomous is existing management? Do I report to the Corporate CEO directly or through channels? Does affiliation with the parent company serve to bog down, or to expedite work flow? Does management have to devote more time than is warranted to corporate meetings and reporting requirements?

The Need for Understanding. When acquisitions go sour, bitterness arises because the seller “doesn’t understand “the corporate culture of the buyer.  No matter how well a seller feels his management style meshes with the culture of the buyer, no matter how many assurances the seller gives that you will remain in control, you should understand the sale will bring a change and may bring unexpected consequences. Without a doubt, well-managed negotiations are the key to dealing successfully with questions of “What happens to my people after I sell?”

A seller must be aware that over the years of developing and growing a successful company, he has largely considered it his “baby”.  He has taken a parental interest in his key management.  He should be very careful before he gives it over to a new parent.

Gary Miller (gmiller@gemstrategymanagement.com) founder and CEO of GEM Strategy Management Inc., a management consulting firm focusing on strategic business planning, growth capital for expansion, mergers and acquisitions, value creation and exit strategies for middle-market company owners. www.gemstrategymanagement.com  970.390.4441

 

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Getting the Capital You Need: Key Questions and Answers

The Kansas City Star | BUSINESS

09/16/2014 6:15 PM  09/17/2014 2:38 PM

Gary Miller


Gary Miller is founder and CEO of GEM Strategy Management Inc.

Lacking sufficient capital to grow is the main constraint for most small and middle market companies. To reach the next level of success, capital is the fuel that drives the company’s growth engine. Without it, reaching that next level is almost impossible.

Many entrepreneurs are skilled at starting and building small, successful companies. But growing a small company into a big one is very different, and in many ways a more difficult task, which is why raising growth capital is so important. Entrepreneurs and business owners often stumble in obtaining growth capital because they are inexperienced and unprepared.

Here are the key questions, and some answers.

What do I do first?

1. Prepare your company to raise capital. Hire an experienced management consulting firm to help you prepare your company and to help you raise the capital. Raising capital means seeking investors whether it is debt equity through a bank loan or investor equity through an investment firm.

To prepare for either choice, clean up your books and records, prepare for due diligence, update your strategic business plan, detail how much capital is needed including its purpose and uses, and plan the optimal deal structure. Lean on your consultant for help with all this.

2. Develop growth and expansion plans. Prepare detailed financial Pro Formas showing monthly income and expenses. Institutional investors look to invest in companies that have a clear differentiation, scalability, execution capabilities, and a great management team. Your growth plans must be creative and strategic.

Consider forming a joint venture, strategic partnerships or strategic alliances with your customers, vendors or competitors.

3. Hire a valuation company to render a “market valuation” opinion. Don’t expect the sort of sky-high valuation entrepreneurial companies enjoyed in the past. Investors have returned to ground level and realize that many of their investments will not qualify for an initial public offering 12 to 24 months later. Therefore, be prepared to give up more ownership for smaller amounts of capital and possibly even more control if you need to raise equity capital.

4. Prepare a “leave behind” presentation. Prepare marketing materials such as an executive summary, management presentation and due diligence materials.

Your knowledge, confidence, experience, commitment and enthusiasm are critical to your success. Practice the presentation. Know your numbers!

Where do I find growth capital?

First, decide whether you are willing to give up some equity and some control of your business.

If not, then your options may be limited. The path you will then follow is to seek debt financing or debt equity through a variety of sources:

(1) Small Business Administration loan programs have significantly expanded over the last decade ranging from loan program guarantees to women’s business centers; (2) asset based lenders; (3) factoring companies; (4) mezzanine financing companies (a hybrid of debt and equity); (5) self-funding (second mortgage on your home; tapping retirement accounts); (6) friends and family; (7) banks (revolving lines of credit and structured financing); (8) Small Business Investment Companies; (9) business incubators; (10) peer to peer lending and investing; (11) OFIs (other financial institutions, such as GE Capital); and insurance companies.

If you are willing to give up some equity and some control of the business, then your options expand substantially and you can follow both paths of debt equity and investor equity. I tell our clients to look at a variety of sources: (1) angel and venture capital investors; (2) high and super high net worth individuals; (3) family offices; (4) private equity firms; (5) investment bankers; (6) merchant bankers; (7) crowd funding; (8) joint ventures, partnerships, alliances; and (9) SBA venture capital programs.

Make no mistake about it. Plenty of growth capital sources are waiting for the right opportunity. However, there is a price to pay and a cost to bear for growth capital. Expected returns vary significantly depending on the source of capital. The cost of capital is considerably higher for privately held companies than for listed public companies. Investors in this space are seeking high returns.

I tell clients, it is best to raise capital when you can, not when you need it. It doesn’t matter who the capital sources are, if you’re desperate for funds, they will smell it a mile away. Your chances of success will be reduced greatly if you are playing with a weak hand.

The best institutional investors act as partners. They bring in other investors, open doors for business development, help in recruiting, act like coaches, are objective in their advice as your company grows, and guide you through the inevitable difficult times.

Choose your source wisely. Match your choice to your goals. Be aggressive, creative and persistent and develop the ability to convince others to buy into your vision and share your dream on a foundation of substance, trust and integrity. Remember, growth is the greatest driver of enterprise value.

Gary Miller is founder and CEO of GEM Strategy Management Inc., an M&A  management consulting firm. Gary’s firm focuses on middle market business owners on M&A planning, exit planning, valuations, buy-side, sell-side, capital formation and M&A integration.  To reach him, call 970.390.4441  or send email to gmiller@www.gemstrategymanagement.com.

Key Man Insurance Could Be the "Key" to Save Your Business

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by Todd Gurley, Senior Management Consultant

Owners of closely-held businesses push their people (and themselves) hard every day to achieve important goals.  Owners are singularly focused on making their businesses a success.  As they grow their businesses, they often do not think of the “unthinkable” — “What happens to the business (and me) if I lost one or more of my key employees due to an unexpected death”?

This story is not about the positive exit strategy, such as selling your business and retiring comfortably.  This is about the unthinkable: the loss of a key person or persons in your business that creates “exit implications” not contemplated in your long term plan.  So, if that key person unexpectedly dies the company’s future may hinge on that unthinkable moment.

The harsh reality is “key people” are lost every day due to death or a fatal diseases; and after the loss of a key person, more than 80% of small to medium size businesses are out of business in less than three years.  Every closely-held small or medium size business has at least one key person it can’t afford to lose.  Maybe it’s the founder, CEO or CFO.

Or, maybe it’s the top sales person who has bonded with your largest customers representing over 60% of your revenues.  Ponder that scenario for a moment.

Most owners can’t even stand it when key people go on vacation, much less the thought of them never coming back.

Of the 20% of companies who survive the loss of a key person, most have of those companies have some type of insurance on the lives of their key people.

Remember, key people are replaceable, but the company needs time and money to make it happen.  There are four things a company must consider in this process:

1. Who to insure;

2. What type of insurance;

3. How much insurance;  and

4. What company to purchase from.

The “who” is straightforward?  If the loss of a person would have a significantly negative impact on operations, customers or financials then they should be insured.

The “what” gets a little more involved.  There are two broad types of insurance—term and permanent—that will cover the vast majority of situations.  Below is a brief explanation of each and some options to consider:

Term insurance for a fixed period of time.  It’s the cheapest and easiest to get.  Consider it as renting insurance.  It’s pure insurance for a fixed period of time with no build-up of cash value.  A policy for $500,000 will pay the company $500,000 at the insured’s death with generally no tax implications (always consult your tax advisor first).

Permanent insurance for “death” purposes.  Your options (and the complexity) increase significantly with permanent insurance.  Consider permanent insurance as just that: you own the policy for life regardless of what health conditions may arise in later years.  These policies offer both insurance and an investment component, generally called “cash value.”  Unlike term, part of the premium pays for the insurance component of the policy and part pays for the investment component of the policy.  The cost of permanent insurance is significantly higher than term insurance, but its purpose is to ensure you for life rather than a fixed period.  Depending on the kind of permanent policy, the cash value can be invested in different ways.

Permanent insurance for “employee retention” purposes. Insurance for employee retention purposes are important for four reasons.

  1. The policy protects the business if the employee dies.
  2.  The build-up of cash value can be used, for example, as a long-term employee retention incentive for the employee to stay with the company.  If the employee meets certain requirements the company can transfer the policy to the employee along with its cash value. While there are tax implications for the employee with this transfer, there are strategies to minimize its impact.
  3.  When you sell your business, buyers want to retain a stable management team.  Using permanent insurance for a part of your employee retention program adds value creation to the business giving you an opportunity to sell your business at a higher price than you normally could if you did not have an employee retention program.
  4. The company can protect itself with this type of policy in case the employee leaves early by recouping some if not all of the premiums it paid from the cash value.

The “how much” is a balancing act among what you believe to be the true cost to replace the person (s), the number of key people to be insured, keeping the business stable during a transition and how much the company can afford.  Some owners want insurance coverage from 10 to 15 times salary for each employee covered. This “peace of mind” relieves one more pressure point on the owner.

Not to be ignored in this process is the person who is helping you make this decision.  The majority of agents who sell life insurance are not adequately trained or qualified to help businesses make these complex decisions.  You need an advisor who understands your business — it strengths and weaknesses of not only your people but of the business itself.

When you purchase, buy from the highest rated carriers.  Before you buy from any carrier, press your advisor to provide background on each carrier from rating services like A.M. Best, Standard and Poor’s and Moody’s.

Let’s end with a question:  When is the cheapest time to buy life insurance?

Answer: Today.

Do it for the health of the business that you have worked so hard to build.

Mr. Gurley is a senior management consultant for GEM Strategy Management, Inc. with a broad range of leadership skills and experience from start-ups to Fortune 10 companies.  Mr. Gurley’s subject matter expertise includes helping clients develop and execute growth and expansion strategies; strategy implementation; operations management; strategic planning and execution. He is co-founder of Redbird Advisors, a national marketing and consulting firm providing value-added insurance services to independent insurance firms. Redbird Advisors, provides marketing program support, training/education, sales and management mentoring and develops business expansion strategies. 970.390.4441

 

Grow Faster with A Well Planned Acquisition Program Part I

Gary Miller

 

By Gary Miller, CEO, GEM Strategy Management, Inc.

 

Many companies are facing slow growth due to a tepid economic recovery, more federal and state regulations, the Affordable Care Act (ACA), and a lack of confidence in the economy.  Faced with these conditions, small and middle market companies are developing acquisition programs as a part of their strategic business plans to accelerate corporate growth.

With banks wanting to lend, low interest rates, plenty of “dry powder” (money to invest), a tsunami of companies for sale — making it a buyer’s market, companies are charting a path to the next era of opportunity and wealth. However, growing significantly in a flat-growth or a tepid environment requires a bold combination of careful planning, savvy thinking and well executed tactics.

This article provides an in-depth look at step one only, of a six step acquisition process, entitled “Plan an Acquisition Program” (see The Denver Post, “Grow Faster with a Well-Planned Acquisition Program” for all six steps published 6/22/2014).

Careful planning includes, determining the acquisition program goals, selecting the acquisition strategy and rationale, determining acquisition criteria and matching them against available financial resources.  After careful examination of alternative methods of corporate growth —  new product development, licensing arrangements, and joint ventures’ —  it must be determined, whether acquiring another company is the most effective path to meet corporate growth objectives.

An acquisition program should ameliorate strengths and/or eliminate weaknesses.  Before embarking upon a program the company must spend time in serious self-examination to determine its own strengths and weaknesses and their capacity for supporting, financing and integrating a newly acquired company. Often, companies developing an acquisition program hire a consulting firm with M & A experience to assist them in this self-examination effort.

Establish Acquisition Goals

Goals can include addressing these issues.

    • To fill a product/service line gap
    • To expand geographically while taking out a competitor
    • To upgrade infrastructure
    • To increase distribution channels
    • To improve the acquirers balance sheet
    • To acquire management talent and their customer base

Establish Acquisition Strategy and CriteriaAmong others, an important strategic issue is the form of payment. The ramifications of using cash or stock must be examined against the possible benefits of using other forms of payment, such as notes, earn-outs, stock options, bonus clauses, and non-compete contracts. Flexibility in structuring the transaction will enhance the buyer’s negotiating position.

Criteria supporting the strategy should include the following:

  • Companies of interest
  • Minimum size
  • Profitability trends
  • Competition
  • Labor/capital intensiveness
  • Management team depth and quality
  • Debt capacity
  • Product/Service offerings and quality
  • Cultural fit
  •  Brand and reputation
  •  Synergy of combined operations
  •  Payback time period
  •  Stability/Risk
  •  Regulatory environment
  •  Margins
  •  Market position (i.e. # 1, 2, 3, other)
  •  growth rate potential
  •  Financial requirements (balance sheet, cash flow, earnings history, ROI)

Summary Careful planning can significantly lower risk of failure. The path to rapid growth is littered with acquisition “road kill”.  Most acquisition failures can be traced back to poor planning. However, that same research indicates that those companies that complete more deals than companies who do not, generate higher returns on investment, greater enterprise value, deliver stronger financial performance and create significantly more shareholder wealth.

However, the most important goal is any acquisition program is to add enterprise value and increase shareholder wealth.

 

5 Smart Ways to Boost Your Bottom Line

Bob Vanourek

Bob Vanourek

For many small and middle market companies, times are tough.  The “new normal”  way of doing business requires smart thinking to protect, and enhance your profitability. Here are five smart ways to boost your bottom line:

1. Stop Doing Some Things. In tough times, a more radical focus is essential. So many activities creep into what you and your people do every day that you don’t even realize they are now unessential. Cut that waste-of-time meeting. Cease doing business with that never-satisfied customer. Flow chart some of your business processes such as your billing steps. (Just Google “flow chart a process.”) You are likely to find redundant, non-value-added work that you can eliminate.

2. Vent Your Key Staff  You can’t get financial stability in your business until you have psychological stability. Right now some of your staff, probably your best employees, are thinking about where they might go to work next, or what to do if the axe falls on them. Therefore, they are frozen in their work, their innovation, engagement, and their commitment. Stephen Covey famously said, “People can’t listen until they’ve been listened to.”

Gather your staff for a long meeting. Announce that “we have to get every issue out on the table.” Announce you’lll go around the room for each person to briefly name an issue for you to write down on flip chart pages. No long speeches. No defensive counters. There will be no retribution for anything that is said. It is a safe environment. People can pass if they wish, but you’ll go around the table until the whole group has passed three times in a row.

Be prepared to hear some tough issues, some likely about you. Then have the group proioritize the issues into A’s, B’s, and C’s, or into issues easy to resolve versus longer term challenges. If you’ve done this exercise well, you’ll now know some critical things you must do to enhance your financial performance.

3. Form some Tiger Teams and Unleash Them. You can’t do everything yourself, and you can’t afford to send people off for “training” in these tough times, so you need to spread the challenges around and unleash the leadership latent in some of your staff.

Ask for volunteers to lead some temporary Tiger Teams of other volunteers to attack and solve the A priorities (or easy-to-resolve issues) that were identified. Give them a one-page charter outlining the problem (or opportunity), the specific goal(s), the time frame involved, their authority and budget (if any), who they report to, and how they’ll communicate progress. The volunteers can be people outside the firm too. I was CEO of an organization that reduced 15% (!) of our purchased products costs by forming these teams with trusted vendors.

The best way to develop the leadership capabilities of others in your organization is to give them project assignments and to coach them along the way.

4. Find Some Sanctuary. You can’t think smartly and strategically when you are buried at the office and under great stress. Consistent with “stop doing some things,” you must get away on weekends, find the time to get away into a place to really relax (without your email and smart phone), or to just get 30 minutes a day to not be on high octane adrenaline.

5. Make a Strategic Move.  Your competition may be back on its heels. Coming out of your sanctuary, you may realize that now is the perfect time to acquire a weak competitor,  form a strategic alliance with a strong competitor, or enter a complimentary market with a new value proposition.

Boosting the bottom line by cutting customer services or laying off employees across the board won’t help you these days. So be smart in how you boost your bottom line.

 

Bob Vanourek is as senior consultant for GEM Strategy Management, Inc. Bob was the former CEO of five companies from a start-up to a $1 billion NYSE turnaround. He is co-author of, Triple Crown Leadership: Building Excellent, Ethical, and Enduring Organizations, a 2013 USA Best Book Awards Winner. Email bob@triplecrownleadership.com or info@gemstrategymanagement.com.

 

Grow Faster with a Well Planned Acqisition Program

Gary Miller

 

By Gary Miller, CEO

GEM Strategy Management Inc.

June 28, 2014

Many companies are facing slow growth due to a tepid economic recovery, more federal and state regulations, the Affordable Care Act (ACA), and a lack of confidence in the economy.  Faced with these conditions, small and middle market companies are developing acquisition programs as a part of their strategic business plans to accelerate corporate growth.

With banks wanting to low-interestterest rates, plenty of “dry powder” (money to invest), a tsunami of companies for sale — making it a buyer’s market, companies are charting a path to the next era of opportunity and wealth. However, growing significantly in a flat-growth or a tepid environment requires a bold combination of careful planning, savvy thinking and well executed tactics.

This article provides an in-depth look at the planning stage only of the  six step  acquisition process.

Careful planning includes, determining the acquisition program goals, selecting the acquisition strategy and rationale, determining acquisition criteria and matching them against available financial resources.  After careful examination of alternative methods of corporate growth —  new product development, licensing arrangements, and joint ventures’ —  it must be determined, whether acquiring another company is the most effective path to meet corporate growth objectives.

An acquisition program should ameliorate strengths and/or eliminate weaknesses.  Before embarking upon a program the company must spend time in serious self-examination to determine its own strengths and weaknesses and their capacity for supporting, financing and integrating a newly acquired company. Often, companies developing an acquisition program hire a consulting firm with M & A experience to assist them in this self-examination effort.

Establish Acquisition Goals

Goals can include addressing these issues.

    • To fill a product/service line gap
    • To expand geographically while taking out a competitor
    • To upgrade infrastructure
    • To increase distribution channels
    • To improve the acquirers balance sheet
    • To acquire management talent and their customer base  

However, the most important goal is any acquisition program is to add enterprise value and increase shareholder wealth.

Establish Acquisition Strategy and Criteria

Among others, an important strategic issue is the form of payment. The ramifications of using cash or stock or both must be examined against the possible benefits of using other forms of payment, such as notes, earn-outs, stock options, bonus clauses, and non-compete contracts. Flexibility in structuring the transaction will enhance the buyer’s negotiating position.

Criteria supporting the strategy should include the following:

  • Companies of interest
  • Minimum size
  • Profitability trends
  • Competition
  • Labor/capital intensiveness
  • Management team depth and quality
  • Debt capacity
  • Product/Service offerings and quality
  •  Brand and reputation
  •  Synergy of combined operations
  •  Payback time period
  •  Stability/Risk
  •  Regulatory environment
  •  Margins
  •  Market position (i.e. # 1, 2, 3, other) growth rate potential
  •  Financial requirements (balance sheet, cash flow, earnings history, ROI)
  •   Cultural fit

Summary

Careful planning can significantly lower risk of failure. The path to rapid growth is littered with acquisition “road kill”.  Most acquisition failures can be traced back to poor planning. However, that same research indicates that those companies that complete more deals than companies who do not, generate higher returns on investment, greater enterprise value, deliver stronger financial performance and create significantly more shareholder wealth.

    • Gary Miller  is founder and ceo of GEM Strategy Management, Inc., a management consulting firm focusing on strategic planning and growth strategies, mergers and acquisitions, value creation and exit strategies for business owners of middle market companies. For more information contact gmiller@gemstrategymanagement.com  or  970.390.4441

Want to Grow Your Business? Make an Aquisition Plan

Gary Miller

The Denver Post | BUSINESS

 

 

Posted:   06/22/2014 12:01:00 AM MDT

By Gary Miller GEM Strategy Management

Many companies are facing slow growth due to a tepid economic recovery, more federal and state regulations, the Affordable Care Act and a lack of confidence in the economy. Faced with these conditions, small- and middle-market companies are developing acquisition programs as a part of their strategy to accelerate financial growth.

Banks want to lend and have money to invest; interest rates are low; and there is a tsunami of companies for sale. It’s a buyer’s market, and companies are charting a path to the next era of opportunity and wealth.

However, growing significantly in a flat environment requires a bold combination of careful planning, savvy thinking and well-executed tactics.

There are six basic steps to develop a robust but risk-adverse acquisition program.

Plan an acquisition program: Careful planning includes determining acquisition goals, selecting the acquisition strategy and rationale, determining acquisition criteria and matching them against available financial resources. A company must compare its acquisition program to natural/organic growth alternatives to determine if buying other companies is the most effective path to corporate growth objectives. Select an outside management-consulting firm with transaction experience to help guide this process.

Search, find and approach acquisition candidate: Searching for a target comes from leads generated inside and outside the company. Internally, leads often come from boards of directors, employees, sales staffs, suppliers, data bases and customers. Externally, they come from accountants, attorneys, investment bankers, management consultants and business intermediaries.

Approaching the acquisition candidate may well set the atmosphere throughout the acquisition process. Developing detailed information about the candidate before the “approach” is made is crucial in developing a narrative that details how the target company fits into the buyer’s plans and future directions. Rarely will you get a second chance to make a first good impression.

Conduct robust due diligence: Due diligence is critical to the acquisition process. It centers on helping the buyer recognize what the buyer is buying, understanding how it fits in your overall growth strategy and developing the post-acquisition plan.

Due diligence requires stategic analysis of the company’s market position, competitive position, customer satisfaction, unanticipated strategic issues, valuation, synergies, cultural fit, technology and scenario analysis.

Acquiring companies must analyze the target’s financial statements, accounting methods, quality of earnings, revenue-recognition policies and taxes.

Also, it’s important to assess the target’s contracts, leases, real estate, patents and intellectual property, current or pending litigation, employee agreements, compensation and retention, and other legacy risks.

Structure the proposal: The first step is to value the company. A third-party valuation company, investment banks and public accounting firms are the best sources for this function. The valuation serves as the basis for the amount the buyer is prepared to pay.

Information gleaned from the sellers and interests can then be used to further refine a proposal. The proposal is only intended to provide a basis for negotiations and will probably undergo numerous changes. Bring in a strong legal team to structure the legal documents through the remaining acquisition process.

When the offer is presented to senior management and principals of the target company, expect one of three possible outcomes: acceptance without changes, which rarely happens; acceptance with changes; or outright rejection. Regardless, further negotiations will be needed to get to an agreement in principle.

Prepare transaction documents and close: A number of formalities must be accomplished in order to close the purchase. Acquisition agreements are relatively standard, and the emphasis should be on thoroughness, not complexity. About half of the agreement is expressed by the “representations and warranties.” The “exhibits” to an acquisition agreement are almost as important to the contract as the representations and warranties. At this point, attorneys for the buyer and the seller are negotiating and refining the final documents for closing.

Integrate the acquired company: Integration plans are extremely important and are often the reason an acquisition fails to add value for the buyer if not well conceived.

Blending both companies’ cultures is the most important function of the integration process. I cannot emphasize this point enough.

While integrating accounting systems, manufacturing, infrastructure, computer systems, strategic plans, sales territories, distribution systems, contacts and human-resources systems are all important, nothing is as important as building a unified culture. Post-integration, consultants are often used to help in this process.

Following these six steps can add significant value to the enterprise and more rapidly create shareholder wealth than staying with organic growth plans only. Research indicates that companies that complete more deals than companies that do not generate higher returns on investment and deliver stronger financial performance.

Gary Miller is founder and CEO of GEM Strategy Management Inc., an M&A management consulting firm focusing on strategic planning, growth capital for expansion, value creation and exit strategies capital formation, exit planning for middle-market companies.

To reach Gary  gmiller@gemstrategymanagement.com or 970.390.4441

Small-Business Strategies

Diving deeper

More details on each of the six elements of a successful acquisition strategy will appear in the weeks ahead at denverpost.com/business

 

Preparing to Sell Your Business Requires the Same Due Diligence as Running it

Gary Miller

The Denver Post 

Posted:   05/25/2014 12:01:00 AM MDT

 

 

 

A crisis is looming for business owners wanting to sell their companies.

Currently, 80 percent of business owners of small- and middle-market companies who put their businesses up for sale never close the transaction. The reasons: poor planning and 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 will cause significant competition, and businesses that do not plan well or overvalue 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. To ready a business for sale, there are three critical steps to take to significantly increase the chances of closing a deal.

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 and 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.

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’ marketplace. Strong preparation could mean the difference between a much higher “selling price” than weak preparation. Strong preparation steps include:

• Quantifying the business value through a third-party valuation firm.

• Getting 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.

• Auditing your financial records by an independent accounting firm.

• Strengthening legal and contractual affairs.

• Installing and improving operating systems and processes.

• Telling 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 its process. This could trigger your key employees to search for new careers.

• Creating management and key employee long-term incentive plans to stay with the company.

• Preparing for buyer due diligence. If you were buying your company, what would you drill down on first, second and so on? Conducting your own due diligence similar to a buyer’s due- diligence process allows you to discover any “skeletons” before the buyer does.

Select the right team to help you prepare you to go to market. Assembling a collaborative, multidisciplined team of experts is critical to help prepare you to go to market. Before a buyer shows up, this team can advise on alternative exit strategies, tax issues, alternative deal structures and prepare you for negotiations. 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.

Following these three steps will significantly help you in finding the right buyer, at the right time, paying the right price to close the transaction.

Gary Miller  is founder and chief executive 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. (gmiller@gemstrategymanagement.com) or 970.390.4441

 

Why Do 80% of Business Owners Fail to Sell Their Businesses?

Gary Miller

Why Do 80% of Business Owners Fail to Sell Their Businesses?

by 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 and 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 could mean the difference between a much higher “selling price” than weak preparation. 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. Advising you on alternative exit strategies, tax issues, alternative deal structures, preparing you for negotiations are important before a buyer shows up to make a deal. 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. Following these three steps will significantly help you finding the right buyer, at the right time, paying the right price to close the transaction.

Gary Miller 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. w. gmiller@gemstrategymanagement.com or 970.390.4441

gmiller@gemstrategymanagement.com 

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