Selling Your Business - Rizolve Partners

Pivoting to Value Ahead of a Business Transition

Posted on November 20, 2024November 13, 2024 by RizAdmin

When business owners start contemplating a transition, it’s crucial to plan ahead to maximize value. Ideally, this planning should begin 3-5 years in advance, especially if no prior planning has been done. Various factors can trigger thinking about an exit plan, such as a partner’s desire for a lifestyle change, family events, health issues, or a re-evaluation of personal goals.

“Exit planning is not just a plan. It is a strategy rooted in execution that grows value while expanding options so that an owner can transition the business on their terms when they are ready. It aligns the business, personal, and financial needs of the owner.” (Exit Planning Institute)

Once this mindset shift occurs, seeking professional advice becomes essential. There are several advisors that deliver value, but to maximize value you want to find an aligned group of advisors who can cover all of the bases that will drive and deliver value to you at the end of the transition journey. The principal advisory group should include:

A BUSINESS ADVISOR: This person should have a holistic view of the transition process and act as an Exit Planner. They will help you navigate the complexities of transitioning your business, ensuring that all aspects are considered and addressed.

AN ACCOUNTANT: Specializing in business tax planning, an accountant will help you understand the financial implications of your transition. They will ensure that your business is tax-efficient and that you are aware of any potential tax liabilities.

A LAWYER: Experienced in negotiating purchase and sale agreements, a lawyer will protect your interests during the transition. They will ensure that all legal aspects are covered, from drafting contracts to handling any disputes that may arise.

A PERSONAL FINANCIAL PLANNER: With experience in working with business clients, a financial planner will help you manage your personal finances during the transition. They will ensure that your personal financial goals are aligned with your business transition plan.

These advisors should have complementary skills and ideally have worked together before. After forming this advisory group, a committee should be established to agree on an exit or transition plan, set a timeline, organize a work schedule, and allocate responsibilities for executing each element of the plan. Coordination is key, as priorities for maximizing shareholder value change with a pivot to value before the exit.

The Importance of Pivoting to Value

Pivoting to value requires a mindset change from both the business owner and the advisors. Traditionally, business owners focus on value creation driven by increasing sales and profit. While this is a valid strategy, it overlooks a third dimension of value that professional investors recognize but many business owners miss. This third dimension involves demonstrating that the engine driving profitability (people, processes, tools, and their organization and management) is well-structured and operates smoothly, ensuring it can function independently, sustainably, and predictably.

This third dimension is a major focus of due diligence by potential acquirers. The assessed quality of this engine determines the multiple an acquirer is willing to pay for future cash flows. The more assurance of repeatability of cash flows, the higher the price an acquirer is prepared to pay. If growth and scalability potential are also evident, the business becomes even more attractive.

Accelerating Business Value

Pivoting to value can significantly accelerate the value of a business in the final years of ownership. The return on investment for advice focused on value improvement can be substantial (10 times the investment or even more).

Steps to Pivoting to Value

Mindset Shift: The first step is a mindset shift from focusing solely on sales and profit to understanding and improving the underlying engine of the business. This involves recognizing the importance of people, processes, tools, and their organization and management.
Professional Advice: Seek professional advice early in the process. Assemble a group of advisors who can cover all aspects of the transition process. This group should include a business advisor, an accountant, a lawyer, and a personal financial planner.
Form a Committee: Establish a committee to oversee the transition process. This committee should include your advisory group and key members of your management team. The committee will be responsible for developing an exit or transition plan, setting a timeline, organizing a work schedule, and allocating responsibilities.
Develop a Plan: Work with your advisory group to develop a comprehensive transition plan. This plan should include strategies for improving the underlying engine of your business, as well as strategies for increasing sales and profit.
Implement the Plan: Implement the transition plan, with a focus on improving the underlying engine of your business. This may involve investing in new technology, improving processes, training staff, or restructuring the organization.
Monitor Progress: Regularly monitor progress against the transition plan. Make adjustments as necessary to ensure that the plan is on track and that the underlying engine of your business is improving.
Prepare for Due Diligence: As the transition process progresses, prepare for due diligence by potential acquirers. This involves ensuring that all aspects of your business are well-documented and that the underlying engine of your business is operating smoothly.

Benefits of Pivoting to Value Prior to a Business Transition

Pivoting to value ahead of a business transition is a strategic move that can significantly enhance the overall value of your business. Here are some key benefits:

Enhanced Visibility and Control: By focusing on value, you gain a comprehensive understanding of all aspects of your business. This visibility allows you to maintain control over the transition process, ensuring that every decision aligns with your long-term goals.

Expert Guidance: Engaging with experts who can help you articulate your business, personal, and financial goals is crucial. These professionals bring deep domain skills and experience, providing you with a trustworthy reference point on a timely basis.

Experienced Advisors: Advisors with a track record of successful execution can significantly improve the outcome of your transition. Their insights and strategies are invaluable in navigating the complexities of the process.

Coordinated Team Effort: A quarterback with aligned relationships can create a fully functional exit planning team. This coordinated effort ensures that all aspects of the pivot to value are seamlessly integrated and executed.

Increased Confidence: With a well-structured plan focused on value, you can have great confidence that you will achieve your desired outcomes. This assurance comes from knowing that every detail has been meticulously planned and accounted for.

Value for Money and ROI: Investing in a pivot to value offers significant value for money and a substantial return on investment. The benefits of a well-executed value enhancement strategy far outweigh the costs, providing financial security and peace of mind.

Attractiveness to Acquirers: Demonstrating that your business operates independently, sustainably, and predictably makes it more attractive to potential acquirers. This can lead to higher multiples and a better sale price.

Sustainable Growth: By improving the underlying engine of your business – people, processes, tools, and their organization and management – you ensure that your business can continue to grow and thrive even after the transition.

The Importance of Planning Ahead

Pivoting to value is not just about increasing sales and profit; it’s about demonstrating the robustness and sustainability of your business model. By focusing on improving the underlying engine of your business, you can ensure that it operates independently, sustainably, and predictably. This will make your business more attractive to potential acquirers and increase the multiple they are willing to pay for future cash flows.

Rizolve Partners is an exit planning advisor that plots value growth strategies with its clients and works alongside owners and management teams to facilitate value growth. If you are contemplating a transition and require a confidential assessment of your situation, reach out to us today.

The Importance of Succession Planning: Practical Steps and Strategic Benefits

Posted on October 7, 2024October 1, 2024 by RizAdmin

Succession planning is a critical yet often overlooked aspect of business management. For many business owners, the thought of stepping away from their company can be daunting. However, planning for the future ensures your business’s long-term success and continuity. Whether you’re a business owner nearing retirement or simply preparing for the unforeseen, succession planning helps safeguard your company’s future.

In this article, we’ll explore both the practical steps involved in succession planning and the strategic benefits that make it a crucial part of any business’s long-term strategy.

Why Succession Planning Matters

Succession planning isn’t just about replacing top executives or planning for the retirement of key leaders. It goes beyond that, ensuring business continuity, building leadership pipelines, and maintaining organizational stability. A strong succession plan benefits both the organization and its employees, ensuring a seamless transition of leadership while preserving the company’s legacy.

Fact: According to a study by the Harvard Business Review, nearly 60% of businesses have no formal succession plan in place.

This staggering statistic shows the importance of proactively preparing for the future. Succession planning is not just about mitigating risks; it’s about positioning your company for long-term success.

Practical Steps in Succession Planning

1. Identifying Key Roles

The first step in succession planning is identifying the critical roles within your organization. These are the positions that directly impact business operations, decision-making, and growth.

In most small and medium-sized businesses, key roles include leadership positions and specialized roles that require unique expertise. Knowing which positions are integral to your business’s success helps you plan accordingly.

2. Evaluating Potential Successors

Once you’ve pinpointed essential roles, the next step is evaluating potential successors. Internal candidates are often a good fit, as they already understand the company culture, operations, and values.

However, don’t overlook external candidates who may bring fresh perspectives and skills that align with your company’s future direction. Succession planning isn’t just about finding someone to fill a role — it’s about finding the right person with the potential for long-term success.

3. Creating a Training and Development Program

Identifying successors is only part of the equation. The next critical step is ensuring that those successors are fully prepared for their new roles.

This means implementing structured training and development programs that help successors gain the necessary skills, knowledge, and leadership experience. Whether it’s mentorship, external training courses, or job rotations, providing development opportunities helps ensure a smooth transition.

4. Documentation and Communication

Documenting your succession plan is essential. The plan should outline the process for transitioning key roles, the timeline for each transition, and the roles of current leadership in supporting successors.

Effective communication is vital. Ensure that all stakeholders — employees, partners, and key clients — are aware of the plan. This transparency fosters trust and confidence in the business’s future.

Strategic Importance of Succession Planning

1. Ensuring Business Continuity

One of the primary reasons for succession planning is to maintain business continuity. Whether it’s a planned retirement or an unexpected event, having a succession plan in place reduces the risk of disruption. The plan ensures that the business can continue to operate smoothly, even during periods of transition.

2. Retaining and Nurturing Top Talent

Succession planning is also an essential tool for retaining your top talent. Employees are more likely to stay with a company when they see clear pathways to leadership roles. By nurturing potential leaders and offering them opportunities to grow, you increase employee engagement and loyalty, which in turn reduces turnover and boosts productivity.

3. Preserving Your Company’s Legacy

For many business owners, their company is more than just a source of income — it’s their legacy. Succession planning allows you to protect and preserve that legacy. By carefully selecting and training future leaders, you can ensure that your vision and values are carried forward, even after you’ve stepped down.

4. Enhancing Business Valuation

From an investor’s or buyer’s perspective, a well-documented succession plan significantly enhances business valuation. Buyers are more likely to invest in companies that demonstrate stability, leadership continuity, and long-term planning. A strong succession plan signals that your business is not only stable but also positioned for future growth, which increases its attractiveness and market value.

Why You Should Start Planning Today

Succession planning is more than a contingency—it’s a proactive strategy that ensures the future success of your business. By identifying key roles, evaluating successors, and preparing them with training and development programs, you can safeguard your business’s legacy, retain top talent, and ensure continuity. Additionally, the strategic advantages of succession planning, such as enhancing business valuation and preserving the company’s culture, make it an essential practice for any business leader.

If you haven’t started succession planning yet, now is the time to do so. At Rizolve Partners, we specialize in helping businesses develop comprehensive, customized succession plans that align with your company’s goals and values. Contact us today to ensure your business is prepared for the future and set up for long-term success.

Exit Strategy Planning and Legal Due Diligence

Posted on June 19, 2023July 13, 2023 by RizAdmin

By Stephen Cummings and Vanessa Grant

Stephen Cummings is the CEO of Rizolve Partners, a leading Exit Planning firm.

Vanessa Grant is a leading corporate lawyer with Norton Rose Fulbright Canada who is skilled in preparing for and executing business transactions for entrepreneur-led private and public companies.

PLANNING YOUR BUSINESS EXIT

There are many areas in your Business Exit where agreements and representations are made to a third-party buyer that he/she will rely on in agreeing to the transaction. Having legal advice to ensure that reasonable bargains are made such that options for recourse are limited by reasonability is important to mitigate risk.

Seeking early strategic advice, followed up by disciplined pre-due diligence planning is key to negotiating a successful transaction and ensuring that momentum in the deal is preserved.

Finally, having a skilled M&A lawyer to negotiate your side of the bargain who understands the current market for appropriate legal terms, conveys to the bidding team that you are serious about concluding a satisfactory deal.

Legal Advice on Planning Your Business Exit

The legal advisor is one of the key advisors to a business owner in planning for and executing an exit. This advisor should be part of your core transition team. Their role has the key objective of ensuring that all of the existing company legal agreements and corporate governance structures are drafted and allow for a transaction to proceed with minimum friction from any stakeholder, including the buyer.

There are two core roles that the legal advisor fulfills in this regard:

Ensuring that a company is ready from a legal perspective to navigate the transaction process. This includes ensuring that the existing (and subsequent) legal agreements and corporate governance structures (controls, policies, and guidelines) are drafted in contemplation of a future purchase and sale agreement such that documented acceptance of a transition into third party ownership has been reached, so far as possible, well in advance of a transaction; and
The legal advisor has well developed experience in drafting and negotiating a purchase and sale agreements at current market terms. Not all advisors have equal experience and a legal representative who is active in the M&A market is important.

STRATEGICALLY PLANNING A TRANSACTION

In strategically planning a transaction, a legal advisor should be included to offer advice in the review in such matters as:

Tax efficiency of the ownership or corporate structure;
Capital structure and the approval process for a transaction;
The nature and extent of the liabilities contained in the financial instruments held;
The corporate governance in any shareholder agreements, the articles and the laws of the company that will impact the ability of the entrepreneur to affect a transaction;
Understanding the nature of the outcomes of different exit options.

After making a decision to transition the ownership of the company into different hands, the legal advisor should then be engaged to review, from a tactical perspective, all of the elements of the corporate group structure, agreements governing the rights of shareholders, equity compensation plans and other financial instruments, the articles of the company, the laws and existing legal agreements to ensure that there are no blockers or issues of significance that would cause a problem for the transaction. Examples of the legal counsel review would include the following:

Buy-Sell Agreements

Are there any?
If so, do these agreements contain documented purchase options?
If so, are there any provisions related to the departure of the entrepreneur?

Participation Agreements

Are there bonuses or distributions on exit?
Are there allocation of profits, distributions or carried interest that activate on sale?

Intellectual Property

Does the company have an inventory of its registered and unregistered intellectual property? For example:
- Patents
- Trademarks
- Trade secrets
- Copyrights
- Domain names
- Data
If the company develops or has developed its own software, is the software subject to an open-source license?
Is it clear who owns the intellectual property?
- Distinguish between employer, employee, contractor or prior employer
Are protections in place to further guard the intellectual property such as:
- Assignment of intellectual property agreements
- Confidentiality agreements
- Prior restrictions
- Internal policies and procedures
- Licenses

Financial Agreements

What are the financial covenants?
Are there personal guarantees that will need to be released on closing?
What are the change of control provisions?

Contracts

For all agreements:
- Is there a change of control provision that requires the consent of the counterparty on a change of control (sale) of the company?
- Are there limitations of liability or unlimited liability?
- Are there indemnification clauses?
- Do you have insurance to cover the indemnification provisions in the agreement?
Customer and vendor agreements
- Is it clear which form of agreement takes precedence (look for terms and conditions that are incorporated by reference into purchase orders – do they conflict with the master agreement)?
- Are the performance terms of the contract clear?
- What are the termination provisions? Is the contract a long-term contract, or a short-term contract? Is the duration of the contract consistent with industry norms?
Leases
- Leases almost always have a change of control provision – consider the relationship with the landlord and whether there will be any issues obtaining consent for a change of control.
Licenses
- Review intellectual property clauses: who owns any intellectual property?

Human Resources

If there are any written employment agreements or offers of employment, do they reflect the current state of employment law?
What are the liabilities for vacation pay, potential severance pay, and benefits? Are these clearly documented?
Non-compete, non-solicit, confidentiality, and assignment of intellectual property provisions – what are they and what do they affect?
Retention – do you intend to provide retention incentives for any employees – all or key only?

Business Litigation and Risk Management

Litigation
- Is there any litigation?
- If so, is it likely to settle or be resolved prior to any sale of the company?
- If it is not likely to be resolved prior to a sale, discuss with your legal advisor how best to manage it with a prospective buyer.
Reducing likelihood of litigation
- Do you regularly perform credit and background checks?
- Are there onerous contract terms that should be flagged for prospective buyers?
Insurance
- What insurance policies are in place?
- What is the scope of the insurance? Does it cover the operations of the business?
- Do you need directors’ and officers’ insurance?
- Does the company have CGL and named insureds?
- Are professional liabilities covered such as errors and omissions?
- Is workers’ compensation and employer liability covered, either statutorily or with policies?
- Do you have cyber security insurance?
- Do you have employee dishonesty coverage?

Corporate and Regulatory Filings

Have all the annual returns been made and are they in good standing?
Have all extra-provincial registrations been made?
Are all required regulatory and tax filings up to date in each jurisdiction in which the company does business?
Does the company have all permits in all jurisdictions to carry on its business?

Minute Books

Do you have them completed?
Are they up to date?
Is the list of shareholders up to date and accurate?

DRAFTING THE TRANSACTION AGREEMENTS

The second major area where you will need skilled legal expertise to help you mitigate transaction risk is in drafting the transaction agreements. Key documents and components of the agreement of transaction terms are:

Letter of intent (“LOI”).
An LOI is a non-binding letter of intent usually drafted by a prospective buyer as an indication in writing of a buyer’s willingness to purchase the company. While the document is of a legal nature, however, it is not intended to be fully binding. The only binding obligations tend to be with respect to confidentiality and exclusivity. The LOI sets out the terms of the acquisition process and provides insight into what the final offer and its terms might look like.
Purchase and sale agreement.
A buyer may elect to purchase the shares of a company or all or some of the assets of a company. The form of transaction (share or asset sale) depends on a number of factors, including tax and business risk. Regardless of the form of acquisition, a business purchase and sale agreement is a legally binding contract that outlines the terms and conditions of buying or selling the business. It specifies the purchase price, assets, liabilities, warranties, any purchase price adjustments, and other important details to protect the interests of both the buyer and the seller. Much of the negotiation of a purchase and sale agreement is around what is the limit to how much a seller has to pay where there is a breach of the representations, warranties, and covenants made. The limit might be an amount equal to the purchase price (not as common as it once was) or a percentage of the purchase price and any holdback or escrows of the purchase price.
Documenting and negotiating representations and warranties.
Representations and warranties in a business purchase and sale agreement are statements made by the seller about the condition and status of the business being sold. These statements cover various aspects such as financial information, legal compliance, contracts, intellectual property, and other relevant details. If any representation or warranty is found to be untrue, the buyer may have legal remedies or options for recourse.

FINAL TAKEAWAYS

In summary, having a legal advisor with the appropriate M&A skills involved in the early consideration of the transaction strategy can save a lot of time and money. As part of the aligned core transition team, this advisor creates the potential for the transaction to proceed with minimum friction from any stakeholder, including the buyer. You can see from the above analysis that there are many areas to consider and having a trusted, knowledgeable legal advisor who knows you and your goals is critical to achieving a satisfactory outcome.

For more information about Exit Planning, check out our process expertise tips sheets here.

Four Steps to Finding Your Sell-By Date

Posted on November 20, 2022December 20, 2022 by donna

Most business owners think selling their business is a sprint, but the reality is it takes a long time to sell a company.

The sound of the gun sends blood flowing as you leap forward out of the blocks. Within five seconds you’re at top speed and within a dozen your eye is searching for the next hand. Then you feel the baton become weightless in your grasp and your brain tells you the pain is over. You start an easy jog and you smile, knowing that you did your best and that now the heavy lifting is on someone else’s shoulders.

That’s probably how most people think of starting and selling a business: as something akin to a 4 x 100-meter relay race. You start from scratch, build something valuable, measuring time in months instead of years, and sprint into the waiting arms of Google (or Apple or Facebook) as they obligingly acquire your business for millions. They hand over the check and you ride off into the sunset. After all, that’s how it worked for the guys who started Nest and WhatsApp – right?

But unfortunately, the process of selling your business looks more like an exhausting 100-mile ultra-marathon than a 100-meter sprint. It takes years and a lot of planning to make a clean break from your company – which means it pays to start planning sooner rather than later.

Here’s how to backdate your exit:

Step 1: Pick your eject date

The first step is to figure out when you want to be completely out of your business. This is the day you walk out of the building and never come back. Maybe you have a dream to sail around the world with your kids while they’re young. Perhaps you want to start an orphanage in Bolivia or a vineyard in Tuscany.

Whatever your goal, the first step is writing down when you want out and jotting some notes as to why that date is important to you, what you will do after you sell, with whom, and why.

Step 2: Estimate the length of your earn-out

When you sell your business, chances are good that you will get paid in two or more stages. You’ll get the first check when the deal closes and the second at some point in the future — if you hit certain goals set by the buyer. The length of your so-called earn out will depend on the kind of business you’re in.

The average earn out these days is three years. If you’re in a professional services business, your earn-out could be as long as five years. If you’re in a manufacturing or technology business, you might get away with a one-year transition period. (Estimate: + 1-5 years)

Step 3: Calculate the length of the sale process

The next step is to figure out how long it will take you to negotiate the sale of your company. This process involves hiring an intermediary (a mergers and acquisitions professional, investment banker or business broker), putting together a marketing package for your business, shopping it to potential acquirers, hosting management meetings, negotiating letters of intent, and then going through a 60 to 90-day due diligence period. From the day you hire an intermediary to the day the wire transfer hits your account the entire process usually takes six (at best) to 12 months. To be safe, budget one year. (Estimate: + 1 year)

Step 4: Create your strategy-stable operating window

Next you need to budget some time to operate your business without making any major strategic changes. An acquirer is going to want to see how your business has been performing under its current strategy so they can accurately predict how it will perform under their ownership. Ideally, you can give them three years of operating results during which you didn’t make any major changes to your business model.
If you have been running your business over the last three years without making any strategic shifts, you won’t need to budget any time here. On the other hand, if you plan on making some major strategic changes to prepare your business for sale, add three years from the time you make the changes. (Estimate: + 3 years)

Figuring out when to sell

The final step to finding your sell-by date is to figure out when you need to start the process. Let’s say you want to be in Tuscany by age 50. You budget for a three-year earn out, which means you need to close the deal by age 47. Subtract one year from that date to account for the length of time it takes to negotiate a deal, so now you need to hire your intermediary by age 46. Then let’s say you’re still tweaking your business model – experimenting with different target markets, channels and models. In this case, you need to lock in on one strategy by age 43 so that an acquirer can look at three years of operating results. (Estimate: 4-7 years)

It certainly would be nice to make a clean, crisp break from your business after an all-out sprint, but for the vast majority of businesses, the process of selling a company is a squishy, multi-year slog. So the sooner you start, the better.

Rizolve Partners is a trusted strategic advisory firm dedicated to helping business owners achieve peak value. If you’d like to learn more, let’s have a conversation. You can reach us in any number of ways here.