Posted In: Business Transactions & Corporate Counseling
By Elizabeth Schultz-Horbus on October 20, 2021
In this Business Blog mini-series, we will be featuring guests from Cascade Partners to answer important questions related to transactions, with topics ranging from M&A due diligence to contract negotiation.
Cascade Partners is an investment banking and private investment firm serving entrepreneurs, businesses, and investors active in the middle market. Drawing on the deep management, investment and transaction experience of its principals, Cascade Partners provides the guidance and resources necessary to navigate the complexities of managing growth as well as acquisitions, divestitures, financing and other strategic initiatives.
I am excited to introduce you to Jon Doehr, Managing Director at Cascade Partners. Jon brings more than 25 years of corporate finance experience as an investment banker and corporate development advisor. His experience includes providing sell-side and buy-side advisory services (including management buyouts), strategic alternatives analysis, and fairness opinion and valuation engagements for publicly and privately held entities. Jon holds an MBA from the Kellogg Graduate School of Management at Northwestern University and a BA from Colby College.
Libby: We have many business-owner clients entering the phase in their life in which they are ready to become less actively involved in the management of their company and eventually desire to transition their business to successor ownership.
What are some of the key issues for a business owner to consider when starting the process of considering whether to sell his/her business?
Jon: Business owners today have many more options at their disposal when evaluating potential exit alternatives. In order to be able to properly analyze these options, they must develop their near-term and long-term personal objectives. Are they concerned about their legacy in relation to who owns the business going forward? How much longer do they want to work? If they are ready to retire soon, then they must be comfortable that a sale of the company will generate enough value to meet their financial requirements.
Owners may want to consider options to take some liquidity now but maintain either a minority or majority share of the business through a recapitalization. This option is well-suited for a company with attractive growth options (organic/acquisitions) that can generate increased value, but also has significant equity today that can provide near-term financial security. In the case of a recapitalization, owners must consider whether or not they can effectively work with a partner.
After determining personal objectives, an owner should consider key fundamental drivers of value that can influence a sale process. These factors include taxes, capital availability for buyers, M&A markets and the state of the economy. While nobody has a crystal ball, near-term macro-economic fundamentals can generally be relied upon to not change overnight barring a cataclysmic global event. Owners need to weigh how these issues may impact the value of their business in a sale process and should consult with financial and legal advisors to obtain current information on these issues.
Libby: What are some specific steps that a business owner can take to prepare the company for a potential transaction and improve value by reducing risk for a buyer?
Jon: Financial and legal advisors have long checklists that guide owners as they prepare for a sale process, but I want to address some of the key items here.
- Does the company have management depth, or is it entirely dependent on one person? Owners must have a succession plan that includes leadership development at multiple levels. This will impact value and an owner’s ability to exit the business in the near-term. Also, the business needs to be free of any roadblocks to a deal including financial, legal and/or operational hurdles. Outstanding liens, contingent liabilities, bad contracts and back taxes are a few examples that can impact value and stall or terminate a potential deal if discovered during diligence.
- Customer diversification is another key value driver. Buyers will be weary of paying top dollar for a business whose success hinges on a few key customers, even if they have been customers for a long time. Owners should diversify by customer and end market to reduce revenue risk.
- Cybersecurity has moved to the forefront of selling processes and needs to be addressed prior to going to market. A key topic that has become top of mind with the increase in cyber attacks involves technology investment. Has the business invested in technology to develop a secure operating system and business continuity plan? The expertise may be in-house or outsourced but must be credible and proven.
- Finally, a company should have a strategic plan and forecast that shows how the business can generate double-digit revenue and EBITDA growth in the next three to five years consistently. Buyers will pay more for a business with a defendable growth plan than one that has just been harvesting profits in recent years. Evidence that the company can drive organic growth and also pursue strategic acquisitions is a key element of driving value.
This blog is intended to provide information generally and to identify general legal requirements. It is not intended as a form of, or as a substitute for legal advice. Such advice should always come from in-house or retained counsel. Moreover, if this Blog in any way seems to contradict advice of counsel, counsel's opinion should control over anything written herein. No attorney client relationship is created or implied by this Blog. © 2021 Brouse McDowell. All rights reserved.