Tuesday, July 28, 2020

Understanding Your Exit Strategy Options

Options

All business owners will eventually exit their business, and I believe it is important for leaders to prepare well to exit well. 

There are a number of tactics that owners can implement that will help them prepare well for an exit and achieve a sale-ready posture. The beauty of adopting a sale-ready approach is that it has two powerful benefits. First, it will make the eventual exit of your business easier, faster, and more lucrative, whenever and however that exit event may come. Business owners in a sale-ready position have invested the time in laying the groundwork that will enable a thoughtful, smooth transition into a sale or other capital-raising process. It will also enable you to respond quickly if you unexpectedly receive an attractive unsolicited offer from a potential buyer. 

Second, the process of preparing your business for sale will make your business better, today. Business owners with a sale-ready mind-set think more strategically, have better insights into their companies, and make better decisions on where to take their business next. They, therefore, create a two-fold benefit: when the time comes to exit, they have a more valuable business and are better prepared to exit. 

 


“M&A professionals often talk about two types of buyers: strategic and financial, yet there are subcategories of each that are meaningful to understand as you think about what the ideal buyer for your business might look like.” – Jonathan Brabrand


 

A critically important component of sale-readiness is for business owners to fully understand the various options available to them, both in terms of buyer categories and specific companies within each. Depending on the seller’s desired outcome, their options may include domestic and international strategic (corporate) buyers, private equity and other types of financial buyers, or both. It also may include groups that will take a minority stake in your business, in addition to those groups who look to acquire controlling majority positions in companies. 

It is only with a full understanding of the available options that sellers can make informed decisions about which buyers to contact in the first place, and ultimately, with which buyer they choose to transact. Otherwise, they risk looking back on the sale of their business with regret at stones left unturned.

Sometimes my clients equate exiting their business with “selling out” to their primary competitor, and in most situations, this is not a pleasant thought. This aversion to turning their enterprise over to a despised competitor, including the feelings of the disloyalty to employees it would create, leads many business owners to turn their back on the whole M&A process. If you have certain competitors or other companies that you would never want to acquire your business, no worries—you don’t have to include them in the process at all.

The truth of the matter is different; there are many types of buyers from which to choose, each with its own unique characteristics. Let’s take a quick look at the primary buyer classifications to get a better sense of who they are and what they have to offer. 

M&A professionals often talk about two types of buyers: strategic and financial, yet there are subcategories of each that are meaningful to understand as you think about what the ideal buyer for your business might look like.

Strategic Buyers

Corporate acquirers, whether they operate in competitive or complementary lines of business, are termed strategic buyers, because their acquisitions are focused on targets that provide a strategic fit with their overall growth strategy. Strategic buyers always have a “Make versus Buy” decision. Would it be quicker and/or more cost-effective to acquire a given business or to invest in creating the same capabilities from scratch in-house?

Strategic buyers can offer many attractive advantages to a seller. Chief among them is the ability for the selling owner to retire from the business after a short transition period, typically three to six months. In addition, for business owners that desire a full exit through a sale of 100 percent of their ownership, strategic buyers are likely the best alternative.

The benefits to your business of selling to a strategic buyer can also be attractive. Access to the buyer’s larger base of customers, more robust sales team, broader distribution capabilities, or a better sourcing network can all have a significant positive impact on your business’s future. The primary downsides to strategic buyers are the potential loss of the business’s independent identity and the possibility of cost-cutting, such as elimination of back-office functions that can be handled by the buyer’s current staff.

Strategic buyers can be further categorized by the location of their corporate headquarters. International strategic buyers often operate their US divisions independently with a hands-off approach, particularly if they don’t already have substantial operating businesses in the US. Domestic strategic buyers, on the other hand, are more likely to have higher levels of integration with their acquisition targets, yielding more efficient operations and cost savings that drive higher earnings to the bottom line. 

Financial Buyers

Financial buyers are professional investors that acquire private companies with the goal of improving them before selling them several years later to realize a return on their investment. Hundreds of financial buyers are looking for small to medium-sized private businesses to acquire in the US, generally falling into one of three categories: 

  1. Private Equity Groups
  2. Fundless Sponsors
  3. Family Offices

Private Equity Groups

Private equity groups are by far the largest cadre of financial buyers, both in terms of quantity and purchasing power. According to PitchBook, 563 new middle-market PE funds (funds of less than a billion dollars) were raised in the 2016–2018 timeframe, representing an aggregate of $148 billion of capital to invest in private companies.

The private equity model is simple and straightforward. A PE firm (the general partner, or GP) raises a pool of capital from investors (limited partners, or LPs) to then make equity investments in private companies. Private equity LPs often comprise insurance companies, pension funds, and college endowments that allocate a portion of their capital to private equity and other alternative investments, which offer higher returns with higher levels of risk. 

Once a private equity fund raises the targeted amount of capital, the fund is closed to new LPs and the clock begins. PE funds typically have to invest all the committed capital in acquired businesses, called portfolio companies, within the first three to five years and then exit all the investments and fully return the capital to their investors within ten years. GPs earn an annual management fee, often 2 percent, of the total fund amount and then take a meaningful portion, often 20 percent, of the gains the fund generates. To increase the potential return on invested capital, PE firms will acquire businesses using a combination of their fund’s capital and bank debt that will be repaid by the portfolio company over time.

Because PE firms are professional investors and not business operators, they will control the Board of Directors, but rely completely on the existing management teams to run their portfolio companies. As a result, PE firms will motivate their management teams to increase the value of the business through options and the ability to own a minority portion of equity. The quality of management and their desire to remain in leadership positions are so important to most PE firms that they will not pursue acquisitions where management is not strong or wants to retire post-closing.

Fundless Sponsors

Fundless Sponsors are groups that pursue the same investment strategy as PE firms, but have not raised a fund of committed capital. Instead, they maintain a network of potential backers and raise the capital needed to make an acquisition on a deal-by-deal basis. For this reason, fundless sponsors are viewed as having more risk of a deal falling apart before closing than PE firms that control a fund of committed capital. That said, I have worked with a number of very successful fundless sponsors who were great partners to their portfolio companies.

Family Offices

Family offices make investments in private businesses like a private equity group, but their capital comes from one or more high-net-worth individuals or families. As such, they are considered more patient capital since they don’t have time pressure to sell their investments and return capital to LPs. In fact, many family offices take a long-term approach to their portfolio companies or may even plan to hold their businesses indefinitely. Family offices also typically use less bank debt in their acquisitions, which many business owners find more comforting.

PE-Backed Strategic Buyers

Once a private equity firm has made an investment in a stand-alone business, or platform company, they often seek to grow that platform by making smaller, add-on acquisitions. This PE-backed platform company thus becomes a hybrid category of buyer, blending the characteristics of both a strategic and financial buyer. It is common for platform companies to be particularly aggressive in pursuing add-on acquisitions in the first twelve to twenty-four months of PE ownership, when sufficient time exists to reap the rewards of the add-on growth strategy before the PE firm needs to sell the overall platform.

When you have a full understanding of the range of strategic and financial buyers that exist and what each can bring to the table in a potential transaction, you can make the best choice of partner for you and your business. For some sellers, a strategic buyer offers the ideal option for a successful exit. For others with a longer-term horizon and appetite to continue leading their company forward, private equity is the perfect partner.

About the Author

Jonathan Brabrand is a Managing Director at Transact Capital Partners, a boutique M&A advisory firm and long-time corporate sponsor and supporter of the Virginia Council of CEOs. 

Editor’s Note: This article was adopted from Jonathan Brabrand’s new book, The $100 Million Exit: Your Roadmap to the Ultimate Payday. If you would like to connect with Jonathan, you can reach him via email at jonathan@transactcapital.com or connect with him on LinkedIn. 

Posted by Staff at 9:57 am
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Tuesday, July 28, 2020

COVID-19 Update: Treatments, Vaccines, Herd Immunity, Testing +

Covid medical update

We all have questions about COVID and how to keep ourselves, our family, and our colleagues healthy and safe. Today, we find that we are providing custom advice on everything from testing and temperature checks, to what to do if you spike a fever in the middle of the night, to what are the most important things personally right now to be as healthy as possible. We’ve even gone on virtual tours of offices, providing feedback on how to improve the safety of the environment.

It’s a new frontier for healthcare providers, no doubt!

Are you in search some reliable, up-to-date medical information about the COVID-19 virus? Each week, Dr. Steven Bishop, Director of Wellness at PartnerMD, provides a COVID-19 update on Facebook Live, explaining in easy-to-understand terms the latest information related to the virus.

For example, on July 22 Dr. Bishop:

  • discussed promising vaccines from Phizer, one from Moderna, and one from AstraZeneca
  • shared his thoughts on why there is a focus on metabolic health
  • discussed testing in Virginia
  • answered the question, “Does the increase in positives indicate immunity sharing?” and more.

Listen in on that video session here:

DR. BISHOP TO PRESENT TO VACEOs MEMBERS ON AUGUST 6 AT 2:00 PM

Dr. Bishop regularly advises clients and their leadership teams on COVID and how to maximize their resilience against the virus – both as a company and as an individual when it comes to your personal health. He’ll be giving a virtual presentation to the VACEOs community on August 6 at 2:00 PM. Don’t miss this opportunity to ask him direct questions. Here’s a link to register. (VACEOs Members and Sponsors only.)

ABOUT THE AUTHOR
Janet Kiss is a Membership and Corporate Sales Associate at PartnerMD and is available for one-on-one and/or roundtable conversations for VA Council of CEO Members.

Editors Note: PartnerMD is a Sponsor of Virginia Council of CEOs.

Posted by Staff at 9:53 am
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Wednesday, June 24, 2020

How to Navigate and Protect Your Business for a Smooth Transition

As Virginia starts a phased reopening by easing “stay at home restrictions,” businesses need a well-thought-out transition plan. Your plan should take into consideration not only your employees’ and customers’ health and safety, but also fiscal stability, strategic direction, and technology. This multi-layered plan must address regulations, the environment, and internal communications as well as the emotional well-being of your employees. Flexibility is critical, and your business will need to be positioned to respond to a changing landscape as the situation evolves.

When devising your plan, consider these pieces of advice.

 HUMAN RESOURCES

Prepare for the Physical Workplace

  • Give your office a post-pandemic makeover! Normalize the “6 feet rule” in the office and consider providing the baseline of PPE such as masks, gloves, and hand sanitizer.
  • Regularly clean the worksite and follow the CDC guidelines. Consider hiring an industrial cleaning company or ask your existing professional cleaner about their standards.
  • When planning the return to the office, consider:
    1. Flexible schedules to include part-time in the office and teleworking
    2. Create odd/even workdays in the office
    3. Stagger start and end times
    4. Designate days for specific work to be completed

It is important to note that doing everything possible to make the workplace clean demonstrates your commitment to maintaining a safe environment. This will build confidence and reduce the tension employees may have about returning to the workplace while COVID-19 concerns continue.

Focus on Internal Communications

  • Communicate your organization’s policy explaining the protocol. Transparency is key; include the thought process of how and why you devised the policy.
  • Make sure the policy is easily and readily accessible both online and in the workplace.
  • Survey your employees regularly to understand their main concerns and that their voice is valued (i.e. survey monkey, calls, focus groups).
  • Build a desire for workers to return to work and explain why especially if employees are successful at teleworking.
  • Keep employees engaged and mentally healthy. An example could be collaborating with a local gym for virtual yoga classes.

Over communicate the safety protocols as the workforce re-enters the physical workplace. Employees will feel secure knowing management has considered federal guidance and is establishing procedures to develop a culture of safety.

Refer to the state guidelines (PDF). External guidelines can help bridge the gap between varying employee opinions.

FINANCE & ACCOUNTING

Manage Internal Controls

  • Make sure internal controls continue to be practiced especially in the remote working environment.
  • Investigate new ways to accomplish signature and approval responsibilities.
  • Evaluate how receipts have been handled in light of “working-at-home.” Who is proofing cash receipts? How are deposits made and who makes them?
  • Continue to communicate the controls and review of policy requirements.
  • Review by-laws for borrowing/banking transactions requiring board involvement.
  • Ensure all bank reconciliations have been prepared and company credit card receipts have been documented.
  • Make sure all mail has been reviewed and time-sensitive items have been handled.
  • Determine a rotating schedule on personnel to ensure there is at least one person in the accounting department who can be physically present the majority of the week.
  • Take your ledger to the cloud (i.e. QuickBooks Online or remote access).

Establish Fiscal Stability

  • Continue to forecast cash flow and report out with your team weekly.
  • Run various forecasting scenarios to reflect potential best and worst-case scenarios.
  • Rebuild your operating cash reserve. If you recently took shortcuts, document where you mitigated risk. It is easier to remember now than when you are being audited.
  • Monitor PPP forgiveness and everchanging rules for new SBA loans.
  • Develop a strategy to: improve liquidity, build working capital reserves, and access credit facilities. There is no guarantee there will be an additional aggressive stimulus package.

STRATEGY

Document Lessons Learned

  • Do your post mortems. What did you learn that would have been helpful had you put it in place beforehand? Can you do it now and be more prepared if/when we are forced back into lockdown?
  • Record your organization’s strengths and build action steps around weaknesses, threats and opportunities.

Position for Success

  • Evaluate business partnership and merger opportunities to ensure the relevancy and strength of your organization.
  • Consider potential alternative revenue streams. Work with your team and board to identify innovative and creative strategies that are mission-aligned to retain your organization’s relevancy and success.
  • Bring new thought leaders to the table to help reposition your organization in innovative ways.
  • Consider a mini-board retreat to reevalute and modifiy your strategic plan.

 

TECHNOLOGY & OPERATIONS

Understanding Your Technology

  • Survey management and staff to identify issues with technology and processes; record these issues (small or large – either may cause bigger problems).
  • Evaluate your relationships with your vendor partners. Ask yourself:
    • Can they support technology changes?
    • How will we be impacted if they go out of business?
    • Will my business have the rights to continue using software provided by the vendor?
    • Regularly review your information security and technical risks. With malicious activity on the rise, risks need to be addressed by a combination of policies, technology, manual controls, training, and knowledgeable support staff.

      

Plan for Change

  • Be prepared to address new customer and partner expectations.
  • Re-consider new technology that has been put off that may help stabilize operations. Evalute the short and long-term benefits of the technology changes. If choosing to upgrade, be patient when training employees and remember this is a huge change for all involved.
  • Think outside the box when resolving issues or ways to increase efficiencies. Even if you are not ready to make changes now, do the research so you are prepared to react when needed.

 

About the Author: Warren Whitney
Warren Whitney is a results-oriented management consulting firm based in Richmond, Virginia who is dedicated to serving privately held and nonprofit organizations in four areas: Strategy, Finance/Accounting, HR, and IT.

Editors note: Image and content provided by Warren Whitney. This post article was originally posted here. Warren Whitney is a Sponsor of Virginia Council of CEOs.

Posted by Staff at 9:42 am
Wednesday, March 25, 2020

COVID-19 Strategy: Why Talking to Your Banker Now Is Important

You heard it here first: Your fears and concerns are valid, and the anxiety and stress about keeping your business afloat during the COVID-19 pandemic is legitimate and understandable.

If there were easy answers, or answers at all right now, you would most likely be getting them from all different angles. The entire country is in a state of limbo, and not many people thrive on uncertainty especially when it relates to the well-being of employees, businesses, and families.  

How is it possible that there is so much demand for your product or service at the moment, but you are not even able to sell it? Though bankers are not therapists, it is appropriate to tell you that IT IS OK TO FEEL ANXIOUS RIGHT NOW!  

So what is the best approach to deal with your banking partner and anxieties around the health of your company during a time like this? Below are a few points that might help you work through this time with your banker:

#1) Let’s talk!

Very simply, pick up the phone and call your banker (who probably should have proactively already called you by now anyway). The bank wants to hear from you.  

As bankers, we often believe that we know exactly what is going on in the market. And while we are sometimes correct, we may not know exactly what is going on with YOUR market. We want to hear about your struggles, concerns, and outlook. 

And make sure to interview your banker as well. Like you, our worlds are changing very rapidly, and guidance from Federal regulators is pouring in daily. It is important for you to have an honest conversation with your banker about their desire to continue to work through customer cash flow challenges, the bank’s ability to handle a downturn, and if new lending is a possibility.  Though answers might change quickly, continuing to have an honest relationship may help to assuage any fears that both parties are having.  

#2) Plan

With the ever-changing environment in which we are living today, this might be the hardest action item. Determining a plan with so many unanswered questions can feel like trying to hit a moving target, but it is important to do the best you can.

Plans may include such things as understanding how to reduce costs if revenues fall, liquidating assets to maintain cash in an effort to fund operations, or identifying capital sources that will negate incurred losses. 

From a banking standpoint, it could be beneficial to speak with your banker about the opportunity to temporarily move to interest-only monthly payments that relieve debt service obligations in the near-term, deferred payments for a specified period of time, or interest rate relief for an interim timeframe. Many well-capitalized banks are willing and able to work with the customers that are feeling the pains of the COVID-19 outbreak, and Federal regulators are currently encouraging collaboration between banks and businesses to help borrowers adjust to changes. 

#3) Find alternatives

Both small and large business owners are in the process of searching for alternatives to supplement declining revenues related to the pandemic.  From automakers manufacturing necessary ventilators to restaurants moving to takeout menus and even breweries and distilleries producing hand sanitizer, businesses are pivoting to alternative opportunistic revenue streams.

This might be the right time to find an alternative for your business and your workforce to further operations. From a financing standpoint, it could be a good time to visit the Small Business Administration’s website (www.sba.gov) to understand lending options that are not readily available by your bank but can provide temporary, flexible financing relief.   

#4) Let’s talk (again)!  

Keep communicating with your banker. Just because you had an initial call or meeting does not mean that you have to stop there. As the slowdown continues, your banker will be very interested in how you are handling the downturn and, hopefully, how the bank can help. It will also be important for you to hear bank and regulatory updates as they are available.  

There may not seem like easy answers to all of our questions right now, but try to remember that your financial institution is a partner in your company. While we share in your present anxieties and uncertainties, many bankers want to work with business partners to weather the economic storm related to COVID-19.

Like us, understand that your stress is real but that frequent communication with your banker can help to establish the right plan for withstanding the pandemic while setting you up for future viability. Banks and businesses should always remember that we cannot win without each other.  

About the Author
Matt Paciocco is a Senior Vice President, Commercial Banker with Virginia Commonwealth Bank (VCB). Matt is passionate about working in a community bank that enables him to build strong relationships with his business customers and the surrounding communities. Matt has spent the last 15 years specializing in commercial banking and has positioned himself as a leading community banker in Richmond.

Editor’s note: Content provided by Virginia Commonwealth Bank (VCB). VCB is a Sponsor of VA Council of CEOs.

Posted by Staff at 10:51 am
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Wednesday, March 25, 2020

Learning How to Operate in Our New Business World

During the COVID-19 global health crisis, we are forced to adapt to a new way of life. Here’s how to start thinking strategically to best navigate through these uncharted waters.

DEVELOP A MULTI-LAYERED FINANCIAL PLAN. 

You need to understand the financial implications and to act quickly. What happens if business reduction lasts for weeks? Or longer? Consider various “what-if” scenarios. Inquire about your business interruption insurance. Do you have an existing policy with dread disease coverage? Be sure to review the following:

  1. Expenses – by line item and due date
  2. Cash flow – How much cash do you have on hand? How much do you need?
  3. Accounts receivable and collection efforts
  4. Accounts payable — be in communication with your vendors regarding delays

BEWARE OF HACKERS AND CONSIDER CYBER SECURITY INSURANCE.

With companies quickly moving to remote work environments, hackers are aggressively looking to exploit any flaws. Be diligent and don’t click on links from unknown sources. It is not too late to talk to your broker about getting insurance for cyber security or social engineering policies.

REFER TO YOUR COMPANY “EMERGENCY OR DISASTER RECOVERY PLANS”. 

This should include policies regarding:

  1. Remote work.
  2. Who is “essential personnel” to adequately keep the business running.
  3. Paid time off and how it can be handled. Employees can file for unemployment if their office is closed and they are not getting paid time off. They do not have to be in a terminated status to file for unemployment.
  4. Allowing employees to stay home if they are scared, at-risk or uncomfortable at work.

REMOTE WORK IS DIFFERENT FROM OFFICE WORK. 

Employees need to set their own schedules and be able to deal with different distractions (e.g. kids, phone calls, etc.). Don’t underestimate the change and potential impact. Clearly communicate who employees should call with questions or issues, during and after work hours.

THINK CREATIVELY. 

In these uncertain times, you may need to be creative. This will mean different things for different companies. Consider unique ways you can make your business stronger.

BRING THE WORK YOU DO TO THE DIGITAL FRONTIER. 

How can your business adapt to offer services digitally? For example, on-line teaching classes, or offering webinars. The goal is to keep your business top of mind.

CONSIDER CLOUD ACCOUNTING SYSTEMS.

To allow for accounting data to be easily accessible, consider cloud-based accounting systems. In cloud computing, users access software applications remotely though the Internet. Remember to ensure adequate security protection.

KEEP WORKING.

Unless you have been asked not to work at all (e.g., some non-exempt positions), keep working, most likely from home. Utilize smart tools and practice healthy habits. Limit social engagement and leverage technology.

REMEMBER THE BASICS.  

Password protection and current anti-virus systems are critical for remote devices, even if they are owned by the employee and not controlled by the company.

Companies need to consider whether remote users will be able to print or store any confidential information on their laptops or Home PCs. Tools are available that can prevent downloading or printing of any information from personal devices.

EMBRACE SCREEN SHARING, AUDIO/VIDEO CONFERENCING, AND REMOTE ACCESS SOFTWARE.

There are many software options to choose from; some are paid services, but several are free. Here are examples of systems that are commonly used:

  • Zoom
  • Microsoft Teams
  • Skype
  • Google Hangouts
  • TeamViewer
  • Join.me
  • GoToMeeting
  • Web Ex
  • Slack
  • VPN Connections
  • UBER Conference
  • Chrome Remote Desktop
  • Windows Remote Desktop

 

About Warren Whitney
Warren Whitney is a results-oriented management consulting firm based in Richmond, Virginia who is dedicated to serving privately held and nonprofit organizations in four areas: Strategy, Finance/Accounting, HR, and IT.

Editors note: Image and content provided by Warren Whitney. This post article was originally posted here. Warren Whitney is a Sponsor of Virginia Council of CEOs.

Posted by Staff at 10:51 am
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