Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
An overworked small business owner in the trades, burned out and desperate to sell, gets calls from two potential buyers. He doesn’t seek assistance from any mergers and acquisition experts and he allows the potential buyers to ride along with his employees to learn more about the business.
That was among the worst-case scenarios described by panelists during a workshop at the Minneapolis Club hosted by Rick Brimacomb’s Club E and Upsize magazine. About 4.5 million businesses, representing $10 trillion in business value, will transition in the next decade, Brimacomb says, but only 20 percent to 30 percent will end up being sold.
The panelists shared their thoughts on what business owners can do to take control of their own business transitions and how they can maximize the value of their return in the process.
Most importantly, be proactive, says Dan Moshe, founder of Tech Guru. When people approach him about the availability of his own company, he generally takes the call. He’s not intending to sell right now, but while talking, he’ll ask the potential buyer what would improve the company’s valuation. “I just grill them,” he says.
“The way I’m thinking about this at Tech Guru is we’ve been intentional about every other thing we’ve set out to do with Tech Guru — our marketing, our operations, our customer service — why not be intentional about the end, the exit,” he says. “When I get to the point, I’m going to go pitch the type of companies that I want to sell Tech Guru to when the time is right, when I’m ready to do it. That’s how I’m looking at it.”
During that time, Sunbelt works with them on the more intangible aspects that will impact the price an owner gets, such as making sure a quality management team is in place “so you can go on vacation for two months and hopefully they won’t miss you too much,” she says. “That’s a good thing.”
“We’ll work with sellers to help understand how to get their business structured to help maximize the value and increase the multiple they are going to get,” she adds.
“I tell clients ‘If you can predict, with absolute certainty, two years before you die, become disabled, get divorced or have a dispute with your business partner, then start then. Otherwise maybe you better just start now, just in case,’” he says. Then revisit that plan, Siders adds, at least every two years.
If that number is $5 million, he says, taxes dictate that a sale must actually be closer to $8 million. If engaged early enough, he says, business advisers — accountants, bankers, attorneys and others — can help owners make sure they take the steps to get there.
Part of creating a plan that will maximize a business’ value includes finding the right partners to work with. Potential sellers are, rightfully, spending their time trying to build the company.
“Being tied down to chase after an attorney to do your estate plan is not necessarily a priority for them,” Boland says. “That’s why you have to mentor them. You have to have people around them. … That’s part of that proactive planning. Figure out what you are going to do, how much you need, do you want it to transition to your kids and what kind of a payday do you need at the very end.”
They were not customers. They had seen her name and they approached her because they work with a large bank. Their personal representative changes on a regular basis and they don’t feel a strong relationship there.
The company had performed well for a few years following the recession, but slowed in 2015 and broken even in 2016. Johnston indicated to them that that selling following two subpar years would not be ideal.
“You’re not going to get the value you have built up over the last 20 years,” she says. “Having those conversations with a business banker and not showing your hand too soon to a potential buyer is really important.”
Johnston adds that if business owners don’t feel they have a close relationship with their banker, it might be time for a change.
“There are a lot of amazing ones out there and you should find one,” she adds.
One of the thing the panel of experts frequently hears from potential sellers is concern for the future of their management team and employees. Buyers, panelists say, typically want to acquire companies with strong, well-trained, loyal people. Sellers, they add, should remember that spending money training staff can pay off, not just for loyalty and retention, but also for increasing the value of their business in the long-term.
“You want to have good quality people,” DeMuse says. “Investing in your people is one of the most important things you can do that is going to drive the business going forward. That is what is going to help grow it and make it a more valuable company.”
Siders and Johnston agree, though they caution against letting potential buyers meet with employees before a deal is completed. Siders cited cases in which employees met with potential buyers, then left for other opportunities upon learning the business was for sale.
Adds Johnston: “A lot of the buyers will want to meet the people and have conversations ahead of time — if I am working with the seller I say no way.”
Besides people, Johnston adds, buyers are looking at what industry the business is in, what the potential is for future growth and the prospects for sustainable cash flow.
“The other thing is the management structure,” she adds. “Who is doing what? Do you have processes, handbooks, is it transferable? It’s amazing how, in small companies, roles are loose between people. … As a seller, when you are preparing to sell, it’s important to document all the roles and be really clear with the buyers on that management structure.”
The experts say another important part of planning ahead is the opportunity to clean up financial statements with a focus toward improving cash flow and away from reducing taxes. Business owners, Boland says, are often surprised to find out that running expenses through the company in order to minimize taxes isn’t the best practice, at least when the end goal is selling the business.
Thus, a transaction that might save $100 in taxes might end up costing $300 or more during a sale, she adds.
Johnston says the practice contributes to making it difficult to get bank financing. And those expenses are unlikely to be added back in to the sale price, at least without documentation, she adds.
Adds Siders: “Most business owners try to run their business using tax minimization accounting policies. Then when it comes time to sell they have to come clean. I don’t know about you, but I don’t want to go to confession with the IRS.”
“Think of your financial statements as your brochure for someone to buy your business,” he says.
There also are some relatively inexpensive tech-related enhancements a company can make that could increase the business’ value. The business is usually one of the owner’s largest assets, but often times it’s not always well maintained from a technology perspective, Moshe says.
Many times, companies spend way too much money patching old, inefficient software instead of spending just a bit more on new programs that might work better. Or they continue old internal communications practices like picking up the phone when a free or inexpensive software, such as Slack, could facilitate those internal discussions electronically while keeping phone lines free for clients to call, he says.
Moshe also indicates that hardware technologies have changed to the point where some offices are purchasing single 43-inch monitors for employees who previously had two or four screens on their desks. That frees up space to be more productively used. They’ll also purchase laptops so employees can take them home.
“You can help them work when and where they want to,” Moshe says. “Before you know it, you’re capturing productive time you otherwise wouldn’t have been able to capture.”
Businesses should use caution, he adds, when purchasing security software. It’s important, but it’s equally important to have a plan so it doesn’t “like many things in business, become a money pit, as well.”
The good news is, if you started early, created a plan and worked with the right experts, now is a great time to sell.
“The market is super-hot,” DeMuse says. “Most good businesses that are coming in are selling fairly quickly and generally with multiple offers. It’s been a sellers’ market for a while but it’s interesting how over the last quarter it has really jumped.”
“Remember to check your emotions at the door and use a process, use a plan and lean on that board of advisers or the group that you surround yourself with to help with any acquisition,” Johnston says.
Harris Partners also takes some time to work with entrepreneurs to ensure they have a plan for when the sale closes. Siders says, from personal experience, that being aimless is not good.
By Andrew Tellijohn
Photographs by Tom Dunn
Sean Boland, managing principal with DS+B | CPAs + Business Advisors: 612.630.5076; sb*****@*****pa.com; www.dsb-cpa.com.
Peggy DeMuse, business broker with Sunbelt Business Advisors: 651.288.1627; pd*****@************st.com; www.sunbeltmidwest.com.
Melissa Johnston, vice president of business banking at Highland Bank: 952.858.4798;
me**************@***********ks.com;
www.highlandbanks.com.
Dan Moshe, founder and CEO at Tech Guru: 612.235.4895; da*@********it.com; www.techguruit.com.
Tom Siders, partner with L. Harris Partners: 952.944.3303; to********@*************rs.com;
www.lharrispartners.com.
