About Gary Miller

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

Headshots_Gurley_2006_001

 

 

 

 

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 

The content of this post is the intellectual property of GEM Strategy Management, Inc. and cannot be copied, reproduced in any form or used without the express written consent of GEM Strategy Management, Inc.

 

 

 

So You're Thinking About Selling Your Business

Gary Miller

So You’re Thinking About Selling Your Business
By Gary Miller CEO
GEM Strategy Management, Inc.
5-13-2014
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, team selection and timing. And, business owners today face four major 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 – 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 78,000,000 of them; around 10,000 are retiring every day. Assuming they retire at 65, they will retire at a rate of about 4,105,000 a year through 2029.

Small businesses, (500 employees or less) number 28.2 million as of 2013 (latest data).  Baby Boomers own about 43% of those businesses (12.1 million). Approximately 60% of the 12.1 million businesses will be put up for sale through 2029 (7.26 million). This 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 (5 quarters in a row since 2013) and transaction prices are increasing over past years (2010 – 2013). However, sales price multiples reveal that it remains a buyer’s market.  While 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 Q1 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% of the businesses put up for sale will not close.  Two reasons explain this high number: (1) poor strategic exit planning and (2) over estimating the value of the business. While 96% of Baby Boomers agree that planning an exit strategy is important, 88% do not have one. You would expect well thought-out plans to maximize the monetization of the business would be in place before going to market since on average 70% of the business owners 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 growing 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 advisors have limited understanding of strategic exit planning. When owners do turn to these advisors they 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. While the banker provides an important role in an external exit, many aren’t equipped nor compensated to determine an owner’s long-term financial needs, exit channels, implementing 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.

To learn more how GEM Strategy Management, Inc. can help you exit successfully, please contact us at info@gemstrategymanagement.com.  or 970.390.4441

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10 Reasons Middle Market Companies Should Grow Their Businesses

Gary Miller

Why Grow Your Company and Build Scale?

 Gary Miller, CEO GEM Strategy Management, Inc.

 I recently was visiting with the CEO with company revenues of approximately $160 million.  After exploring a number of issues he was facing trying to grow his company, we concluded he should grow his company for 10 major reasons. If done correctly, growing his company could provide significant “enterprise value creation” and broadens the range of “exit strategies” for shareholders and investors.  

Here are the 10 reasons to scale your business.

  • Market Power
    • Market power gives greater credibility,
    • Competitive advantage,
    • Preferential treatment,
    • Flexibility,
    • Momentum,
    • Stability,
    • Market coverage,
    • Cost savings, and,
    • Financial strength compared. 
  • Inventory Power
    • Inventory power givesopportunities to increase margins;
    • Investors can “maximize” their “returns” while the firm maximizes its profits.   
  • Recruiting Power
    • Larger organizations have greater access to higher quality talent than do smaller firms, translating into more and higher caliber clients.
    • Size and scale create the perceptions of “success”, growth, professional support, prestige and “career stepping stones”.

 

  • Marketing Power
    • Larger organizations can cover more geography,
    • Can command lower advertising rates do to media volume discounts,
    • Can lower advertising production and promotion costs,
    • Have greater target audience “reach”,
    • Have greater PR and Media relations opportunities,
    • Have increased “brand name” recognition,
    • Can reach investor prospects and current clients more efficiently,
    • First mover advantage can become a “real” option, 
    • Larger scale operations improve corporate image, reputation and “Brand” power,
    •  Investors and financial community take notice creating momentum for new and additional “strategies”.

 

  • Negotiating Power
    • Larger organizations can attract, recruit, and retain higher caliber professionals than smaller organizations.  Employee culture is established,
    • Client turnover is reduced,
    • New client acquisitions costs are lowered, and,
    • “Bottom lines” are higher.

 

  • Cost Reduction Power
    • Larger organizations can scale to the optimum efficiencies,
    • Operating expenses can be reduced,
    • Standardization of  policies, practices and procedures reduce management inefficiencies,
    • Substitution of technology for labor intensive tasks,
    • Purchasing through master contracting and quantity purchasing, and,
    • Forward contracting to lock in costs of materials, labor and suppliers.

 

  • Technology Power
    • Ability to leverage hardware and software technologies to master contracting,
    • Maximize growth, operations, earnings and competitive advantage through technology leverage, and,
    • Opportunity to create intellectual property and capital. 
  • Growth Power
    • Synergize the business to meet client needs through other related enterprises;
    • Provide a holistic approach with a comprehensive portfolio of services that can “touch” clients multiple times throughout the client life cycle,
    • Building repeat business creates strong “bonding” and “loyalty” opportunities.

 

  • Competitive Advantage Power
    • Scale leads to critical mass.
    • And critical mass creates opportunity to leverage critical business applications, components, processes, and practices that accelerate growth, earnings, cost reductions, operations excellence and a solid, safe and secure work environment.
    • This environment creates confidence among investors, shareholders, lenders, and professional staff and ultimately leads to greater building more enterprise value.

 

 

 

  • Earning Power
    • Large scale organizations can earn more for all stakeholders because “scale and critical mass” can produce greater growth, synergies, resources, lower costs and more options than small organizations.  Therefore, margins are increased and earnings are improved while operating expense rates are lower.
    • More earnings produce financial stability, clout, flexibility and the ability to take advantage of investment opportunities.

To learn more how GEM Strategy Management, Inc. can help your company grow and expand, please contact us at gmiller@gemstrategymanagement.com or 970.390.4441