Why an Exit Plan is Critical When the Time Comes to Sell
By JoAnn Lombardi, PresidentVR Business Brokers/Mergers & Acquisitions
Every business owner should have an exit plan in place. If you currently own a business, you know as every other successful entrepreneur knows that you will not be doing this forever. You want the value of the business to stay high so you can attract qualified buyers to take over ownership and expand whenever you decide it is time to sell. To ensure this happens, have an exit plan in place so you will be able to sell your business for the maximum value.
Understanding an Exit Plan
An exit plan is a series of continually evolving and interrelated plans to help ensure your business will continue to sustain and grow. When you are first putting together your exit plan, you must answer at least the following questions:
- What are your preferred options and timing for exiting the business? For example, sale to outsider, sale or gift to family or employees, merger with a competitor, buyout by a partner, etc.
- What family members are involved in the business and what are their objectives?
- What are your financial objectives and retirement plans?
- What is the value of your business now?
- What key actions are necessary to increase business value and position it for sale?
- What actions are necessary to manage the estate, trust, and tax issues you will face through retirement and beyond?
- What changes in the business and what is your role needed now to preserve your quality of life and your passion for the business?
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Considering Earn-Out Provision
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An earn-out provision is language in a purchase and sale agreement that commits the buyer to make payments to the seller if the business achieves agreed-upon financial targets following the sale. Earnouts also may be referred to as payouts or contingent payments.
Earn-outs are often useful when buyers and sellers can’t agree on a price or when the transaction is only possible if the seller finances a portion of the purchase price. The seller may believe the business has good financial prospects and merits a higher sale price, but the buyer is unwilling, or unable, to pay it.
To break the deadlock, the seller agrees to accept a lower payment at closing with a held interest and the promise of additional remuneration if the business meets certain financial milestones. The seller releases held interests as these remunerations are paid and may maintain rights to assets of the company if the buyer fails to meet a specified schedule.
Earn-out provisions have several components. A quantitative formula typically determines how much is to be paid as a financial target is reached. For example, a buyer might agree to pay the seller 20% of annual earnings that exceed the prior year’s earnings by a certain amount. A target also might be based on annual cash flow, sales, or other metrics. A payout provision also specifics when and how many payments are to be made.
The term covered by the earn-out provision generally runs no longer than three years. Longer periods can subject the seller to additional risk because they increase the possibility of adverse business events beyond the seller’s control. So if a longer period is envisaged, sellers should consider financing in the form of a loan or preferred stock in the company both of which offer remedies in the event the business is mismanaged and the buyer can’t meet the financial obligations.
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Profit & Cash Flow Optimization (P+CFO)
by Brian Mayville, MBA, DRDA CPAs & Business Consultants
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What is Profit & Cash Flow Optimization (P+CFO)?
P+CFO is a proactive approach into the understanding of current profit and cash flow levels and optimizing them to achieve peak business performance. Our approach includes a detailed analysis of historical profits and cash flow and the identification of strategies on how to optimize them.
P+CFO can be broken down into two phases. I like to think of the first phase as viewing a business through a wide lens in its entirety. By starting with a broad approach, it helps to identify any problem areas affecting profits and cash flow. When problem areas are identified, we can move onto the second phase where the wide lens can become narrower in order to focus on the root cause of each problem. As the root cause for each issue is addressed, profits and cash flow will begin to increase toward their optimal level.
How Does P+CFO Work?
It cannot be overstated enough the importance of maintaining good up-to-date books for your business. For P+CFO, it is extremely important because inaccurate books would lead to inaccurate results.
We use the business's most recent three years’ balance sheet and income statement and re-cast them to show the true economic value stemming from business operations. To do this, we need to remove certain items that do not affect the key business operations, such as executive compensation, deferred compensation or life insurance for the executives.
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When Deciding Whether to Sell the Business is a Family Affair
By Caitie Burkes - Insider
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As many baby boomer business owners make plans to retire in the near future, their mostly millennial children—who would be second-, third- and, in some cases, fourth-generation owners of the family business—are weighing their options.
Maybe a company’s heirs-to-be don’t want to have to pack up and return to their hometowns in order to run the business. Or perhaps they’ve already tested the waters and determined that they simply aren’t passionate about their family’s line of business. What’s more, the potential successor could resent their parents for seemingly forcing them to follow in their footsteps, instead of forging their own career path.
Whatever the reason, Camm Morton, a certified exit planning adviser based in Baton Rouge, has heard them all and more.
“It’s staggering how few businesses survive the third generation,” says Morton, owner, and principal of VR Business Sales | Mergers and Acquisitions.
To be specific, some 30% of family businesses survive into the second generation, while 12% make it to the third generation and only about 3% of all family businesses operate into the fourth generation and beyond, according to The Family Business Institute.
Yet despite these statistics, Morton says less than 10% of business owners have a written exit plan. That’s a scary thought, he says, with roughly 80% of U.S. businesses owned by baby boomers who could retire within the next few years,
Further complicating matters are the family dynamics that can come into play during the sale of an heirloom business. And when a business does go to market, only 20% to 30% actually sell, according to the Exit Planning Institute.
All of which goes to show that, for many local business owners, adequately preparing for the sale of a family business is no longer a recommended option, but a necessity.
“It’s never too early to plan your exit,” Morton says.
Why now?
Some Baton Rouge business owners looking to sell their companies are accelerating deal timelines in order to avoid a potentially bigger tax bite under the new presidential administration.
President Joe Biden wants to raise the current 20% tax rate on long-term capital gains to the rate applied to ordinary income for those making more than $1 million. His proposal would also raise the top rate on ordinary income to 39.6%, up from 37%. After a sale, higher-income business owners would face nearly double the taxes.
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Behavioral Health M&A Report: Q1 2021
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Significant tailwinds across the behavioral health sector propelled an active first quarter of 2021 with regards to merger and acquisition activity, keeping up momentum observed in the latter stages of 2020.
A total of 29 behavioral health industry transactions were announced in Q1. Outside of a dip in the second quarter of 2020 during which only 19 transactions were announced—a slowdown fueled by the onset of the COVID-19 pandemic—the sector has settled into a pattern of roughly 30 deals per quarter dating back to the beginning of 2020. The volume of deals for Q1 2021 is telling, but not unexpected.
And it’s pretty evenly split between addiction treatment, autism treatment, and mental health. Mental health transaction volume has picked up significantly over the past two quarters, buoyed by the pandemic.
Private equity continues to play a large role in the space, accounting for 22 of the 29 deals announced in Q1, including three platform transactions and 19 add-on transactions. With many private equity-backed strategic companies operating in the space continuing to grow, there is a possibility that one could announce a public offering, either traditionally or through a special purpose acquisition company (SPAC) in the coming months.
Many treatment center owners, worn out by the pandemic could be ready to exit the space and sell, but the number of deals across behavioral healthcare to be announced over the rest of 2021 could hinge on the Biden-Harris administration’s stated intention to raise the capital gains tax. The administration’s recently announced infrastructure plan, however, does not directly address capital gains, instead of focusing on corporate tax reform.
In the meantime, private equity has the mandate to invest and grow. Firms will be watching closely as industries get back on their feet in a post-pandemic world. A key factor to watch will be which structural changes enacted to keep businesses afloat in 2020—both in the behavioral healthcare space and other industries—will stick permanently.
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Custom Software Company for Sale in Chicago Area, Relocatable
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VR Located in San Antonio, TX Sold an Established Concrete Company for $2,450,000.
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Profitable and well-established precast concrete manufacturing facility located in Oklahoma. This successful precast concrete company specializes in manufacturing large precast items for retail, wholesale and commercial applications. Their facilities were located on 3.5 acres and included a spacious industrial yard for storage which consists of office space, a warehouse, and a production area.
This was a turnkey opportunity with long-term employees and well-known products that had proven to outlast the competition. The new owner can take advantage of the many repeat customers and leverage the past owner's efforts to continue the current company growth.
Congratulations toJohn Smallfor your successful closing.
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Thinking of selling your business or looking for an established
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