Many owners wonder if selling their company to their senior managers might be possible as a way to reward employees and build a succession path for themselves. Before you start planning your exit day, you need to understand what might be involved. This information is useful to you whether you are the manager thinking of buying out the owner or an owner wondering if your employees could be your key to extracting your retirement wealth.

Typically, your business needs to be generating enough cash flow to pay your employee(s) a dividend in return for their performance in growing the company. The employee then uses that dividend to pay you for a percentage of your shares. Depending on the value agreed to, the growth of the company, its own need for capital, your payout might take anywhere from 3-10 years to complete. In the meantime, you have to hope you have picked the right employees and supported them enough that they are able to continue to grow the business.

The FACTS

1. Management buy outs are complicated to set up. Get help to structure them and each party should have their own legal and tax advice.
2. The valuation is based on cash flow.
3. Growth is hard for the company when cash is bled off to pay you out instead of investing in resources needed for growth. Know your growth options. Build Plan A, B, and C. Read here about what happens when you don’t have contingency plans and uncontrollable events rock your best laid plans
4. Sometimes part of the payout can be funded with debt. But be careful, if you don’t make your numbers each quarter, your banker becomes your boss pretty quickly.
5. Employees have to make a long term commitment. You have to learn to think like an investor. You love the company but what future prospects will make it loved by customers?
6. High gross margin businesses are better able to structure an MBO.
7. Risk is shared by both parties so communication amongst all players has to be transparent with a lot of mutual respect and support. No one needs a lawsuit because you haven’t built a relationship where you have learned how to speak freely with each other.

MBOs need all the right ingredients to bare the hoped for fruit. Don’t become attached to expectations and outcomes: try several plans out before committing on the bottom line.

So if you have been cutting costs and waiting in your comfort zone until buying cycles pick up, in hopes that you can survive till then, you have been playing the wrong game. Waiting is the least powerful thing you could do right now. If you really want to be in saleable condition, you need to get up out of that chair and learn how to add more tools to your bag of tricks beyond cutting expenses and paring back staff. Here are the three most powerful things you can do to improve your return on investment that will also help you start down the path of being a company and investor would actually want to buy:

1. Get Back to Basics: GIVE VALUE. Focus on standing in the shoes of your customer. What do they need that would improve the value they receive from your company and what would remove the hassles of doing business with you. Now is the time to innovate your product by building better service around it, helping solve the right problem for your customer. Get out in the field and start learning what frustrates them and then find a way to relieve that frustration. Give back. Be generous. Your efforts will be rewarded.

2. Think Bigger: NOT SMALLER. Build up your gross margin. Think of rounding up prices and mark ups. Do not give volume discounts, solve problems for customers instead. You will never make back a price discount with volume.

3. Forge Partnerships: JOINT VENTURE. You need to get to a broader market. Where can you add value to another company’s product or service? Team up.  Bundle up. You sell their product to your channel, they sell yours to their channel. Now you both have a broader distribution channel. Keep each other warm this winter and it will pay off in spades come spring.

And while you are doing all that, start learning a lot more about what it takes to become saleable. It’s a lot more work than you think. Start by taking this quick quiz from the Globe & Mail It’s your time to get ahead of all the other business owners who prefer their comfort zone over the fast lane.

2. Know what type of Investor or Buyer is Best Suited for Your Company – Want to sell to your employees? Sell to another company in your industry or part of your supply chain? Want the company to continue as a viable going concern after you leave ? All these options require a different game plan to achieve the desired goal. Understand which type of buyer/investor is right for your circumstances and how to best position the company so that this exit event occurs.

3. Put a Growth Strategy in Place Now – Despite our tough economic times, a growth strategy is imperative to being able to realize a future liquidiation event, no matter what type of buyer/investor you are targeting.

4. Recognize the Buyer/Investor is Acquiring the Future – More than ever now, they are not buying past performance, they are buying the future performance of the management team’s ability to deliver on the promise of the growth strategy. So the growth strategy has to be be well under way and producing results by the time you are ready to sell. The management team that implements this strategy are the people that will be staying with the firm after the primary shareholders leave.

5. Recognize Your Role as Owner Has Changed – If you are planning to sell, you need think of yourself now as an investor, not an owner and certainly not a manager. Your knowledge, key relationships and abilities have to be transferred to and found in your management team now, not the day after you leave.  You are not your company.

6. Deliver What You Promise – The number of companies on the market looking for exit strategies will double as boomers retire over the next ten years. Your company will have to stand out from the pack. Your company should have an outstanding solution or product offering and the financial performance in the balance sheet and income statement to prove it out. Your internal systems deliver exactly what is promised to customers in a way that makes it hassle free, unique, of high value and delivers recurring revenue. Check in with your target market. What do they think about your offering? Set up key performance indicators to manage toward the future, rather than viewing only through the rearview mirror.

7. Difficult People? Conflicted Workplace Culture? Growth and Change Will Be Almost Impossible. If you’ve got some rub points that make delivering customer value or financial performance unreliable, now is the time to deal with them , not later. If you’re struggling to change entrenched ways of working, poor performance, lack of alignment between strategy and action, then get help sorting it out. Learn how to take a different approach and get to the heart of the issues that block change, growth and ultimately profitability. There is a much better way which is far less painful.

8. Get the Right Advisors on Board – You will need an accounting group familiar with exit transactions and tax issues, a legal firm able to prepare the foundation for an acquisition so the deal goes through smoothly without skeletons jumping out at inopportune times and investment advisors to help package the company. Know who to get on board, how to find them and strategize when you bring them in.

You may need help with some of these Valuation Planning Steps. Get it sooner rather than later. For a private seminar on any or all of these topics, please contact us.

Think of the situation before Hurricaine Katrina: some people believed it was important to leave the New Orleans area, and some did not. Those that did not suffered and the rest of us were left wondering what it was that didn’t compel them leave New Orleans when they had the chance. Today, three years after Katrina, when the forecasters yell Hurricaine, the residents along the Gulf Coast don’t think twice, they go.

What’s going to galvanize business owners into getting ready to avoid the perfect storm?

The boomer bulge, born 1946 through 1962 will spend the next ten to fifteen years extracting their wealth out of the economy to put to other uses. Or I should say, attempting to extract their share of their company’s value. The only problem is, owners have not prepared their businesses so that they are attractive for investors to acquire them.

A perfect storm of influences will increase the supply of companies for sale right when the need is greatest for investors to buy them. The storm is manageable, but only if owners take preventive action now to be ready. It can take 2-3 years to put the company on a growth plan. It’s more than just slapping a coat of paint on and installing granite counters.

Here are the big clouds on the horizon for this perfect storm:

1. The economy is in a decline;

2. There are more than 1.7 million businesses in Canada. 50% are owned by boomers. 500,000 will want to sell. In any given year in Canada, roughly 25,000 businesses change hands.

3. Owners don’t like thinking about the day they won’t own the business

4. Owners don’t know who to talk to. It’s understandable that they don’t talk about it. They don’t want competitors or employees to find out they’re thinking of transitioning their ownership.

Business owners need to take heed and learn how to see their organizations through the eyes of an investor: get to know the key indicators they look for and make sure they are instilled throughout the company. Remember, an investor buys the future certainty of profitability, rather than the past. For every foggy indicator, the risk increases and so the price they are willing to pay decreases.

Ready to start acquiring companies? Already acquired a few and are wondering how to fit all the pieces together? Acquisitions are a great growth strategy. They also require a level of management and leadership as well as strategic thought that is much more complicated than running the original company.

What’s difficult? Making the right choices for your investments is only half the equation. Many companies erode the value they bought in the first three months by making decisions about how to integrate the company without first assessing impacts, checking assumptions and making a clear plan in consultation with the leaders of the acquired company. Just because your company is the buyer does not mean your methods are the best. Assimilation is not necessarily a smart business strategy.

Read on about how we’ve helped other companies learn to acquire and integrate companies successfully. Want to know your Acquisition IQ? Call 604-306-7707

Acquisition Case Studies

• How Do You Combine All the Products?
• Maximizing the Value Post Acquisition
• Cross Border Integration Irritants: You Change First

• There is a clear reason for the acquisition strategically, financially, geographically and operationally. You have a purpose and a plan to expand your market, gain distribution, achieve competitive advantage and offer a more complete solution for your target market.
• You have an acquisition integration plan.
• Your people understand how to manage change, and people really well.
• Your focus will be to take the best of your company’s processes and the acquired company’s processes and build a better larger company all around.
• You know where the hot points are for losing value in the first six months post-acquisition and have a plan to manage through or avoid these pot holes.

Not sure you’ve got the foundation for an acquisition in place? Spirit West has the experience to work with your team… but you have to be willing to make some significant changes. We have tools to guide you through how to manage acquisitions and more importantly, select the right acquisition in the due diligence phase.

Call 604-306-7707 to discuss your acquisition ambitions so your deals get done well and for the right reasons.