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Sunday, 01 April 2018 22:56

Small business owners should plan ahead to maximize sale value, ease transition process

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Trivalent Group CEO Larry Andrus developed a transition plan for his Grandville-based tech firm, but he accelerated those plans when a buyer with the right culture and fit emerged. Trivalent Group CEO Larry Andrus developed a transition plan for his Grandville-based tech firm, but he accelerated those plans when a buyer with the right culture and fit emerged. Photo by Katy Batdorff

Larry Andrus began thinking about his eventual exit from Trivalent Group Inc. almost from the beginning.

Three years ago, he was ready to put his transition in motion and began implementing a plan for the next iteration of the Grandville-based tech firm, which he bought from its founders in 2002.

Trivalent Group strategically transitioned from primarily a provider of software and hardware to an information technology services company. The changes followed industry and client trends and put in place a profitable business model.

At the same time, Andrus began delegating more responsibilities to employees and identifying people who could move into leadership roles. He promoted a services manager, for instance, to chief operating officer and got him more involved in strategic planning.

All of it was in preparation for an eventual sale and Andrus’ exit from the company. His succession plan culminated last month when Troy-based accounting and consulting firm Rehmann LLC acquired Trivalent Group.

“None of us are eternal. I knew I couldn’t do this forever, so I needed to make sure we provided a long runway for the employees,” said Andrus, who advises other business owners to start planning early to sell their companies.

“All businesses need to transition. Start putting together a plan for yourself and your company to maximize it for everybody involved,” he said.

Trivalent Group’s deal with Rehmann took effect on April 1. At Rehmann’s request, Andrus agreed to stay on for another three years to lead the strategic vision and future growth for the practice.

The planning and the path he took to position Trivalent Group for the sale mirrors the advice of professionals who work with owners on business transitions or the sale of their companies.

Business owners should always have the end in mind and take a few years to prepare a business for a sale, according to transition and succession planning experts. The earlier small business owners plan out their eventual exits from their companies, the smoother that process will likely go.

“In a perfect world, it’s a continuous process,” said Matt Johnson, a partner at Warner Norcross & Judd LLP in Grand Rapids who advises business owners to plan at least two to three years ahead for a sale.

“Realistically, I see people with 10-year plans and people with 10-week plans. The 10-week plans generally don’t work out the best as the folks that have the longer-term focus,” Johnson said. “It’s not like it needs to consume you, but just to have that in the back of your mind — ‘Where are we going and how are we going to get there?’ — is helpful to a business owner.”

Small business owners who don’t plan ahead for a sale or transition run the risk of not getting maximum value for their companies, or missing out on potential transactions with buyers, Johnson said.

THE SMALL DETAILS

Among the first items for small business owners to consider when planning how to position a company for sale is what they personally want out of a transaction.

They need to consider whether they simply want to cash out and be done, or whether they care about legacy and what will happen to their employees or the company’s community involvement under new ownership. The answers to those questions will determine the kind of buyers they seek, Johnson and others say.

Experts suggest that early on, business owners should secure advice from legal and financial professionals who can help them through the planning process.

Operationally, and to maximize value, a business owner needs to make sure the company’s documents and financial records are in order, and to structure the business so a prospective buyer has a clear picture of what they may get. Owners as well should go through significant vendor and supplier relationships and contracts so they can offer a “fairly clean business that a buyer can come in and understand,” Johnson said.

Quite often small business owners, because they are busy focusing on day-to-day operations, get sloppy in their record keeping and documentation, Johnson said.

“The business owners are so focused on running the business and making sure the bottom line is positive, they don’t necessarily always focus on some of those smaller details,” Johnson said. “If you’re going to position your business for sale, you really need to take time and focus on those details to make sure the buyer doesn’t focus on those issues, because that just makes the buyer question some of the other practices in the business. It just throws a lot of dirt on the grease and cogs of the transactions.”

PROACTIVE ACTION

Likewise, business owners considering a future sale should clean up the balance sheet and make sure they don’t have personal items and expenses on it that a prospective buyer might question.

Some business owners, for example, may have a personal vehicle in the company’s name, or real estate or other assets, said Max Friar, the managing partner of Grand Rapids-based M&A firm Calder Capital LLC. They need to get their personal assets off the balance sheet before they go to market to avoid issues — for instance, the buyer thinking that a vehicle the seller drives comes with the business.

Experts say owners also need to account for their own salaries on the balance sheet at an appropriate level, even if they don’t take one regularly and rely instead on quarterly or annual earnings for their income.

“Take the time to work with a professional CPA to go over your books,” said Friar, who formed a new River City Partners division last year to focus specifically on small business transactions. “Say, ‘Hey, if you were a buyer looking over my books, what would your concerns be and what are some things we should be thinking about changing or reclassifying or cleaning up?’ 

“When you’re getting into due diligence, you want as few issues to come up. So taking the proactive action and getting it off the balance sheet, that’s going to get rid of the problem.”

Experts say business owners planning to sell should try to look at their companies from the perspective of a buyer.

Or, as Johnson put it, “do a little bit of due diligence on yourself.”

Johnson cites as an example a situation in which an owner also owns the real estate separately from the business, which leases the space at a below-market rate. That’s a scenario that a buyer may take issue with and that should get cleared up ahead of time, he said.

According to attorney Neil Kimball, a partner at Mika Meyers PLC in Grand Rapids, presenting a balance sheet that’s “as perfect as possible will get you the highest value” for the business. However, sellers should approach the process with full disclosure and acknowledge any blemishes, he added, noting that discovering issues during the due diligence phase will surely lead to problems. 

“The buyer and their professional advisers are going to go over everything. It’s better to be up front,” Kimball said. “It’s kind of a loss of trust. They’re going to wonder what else is there.”

CLEAN BOOKS MATTER

An inward look for a business includes making sure the company’s finances are going in the right direction. Put added focus for a few years on growing sales and cash flow, trim expenses and even pare away underperforming areas of the business, according to experts contacted for this report.

Eric Seifert, owner of Left Coast Capital Resources LLC in Muskegon, suggests that owners work well ahead of a sale to diversify their revenue stream and customer base. No one customer or industry should represent more than 20 percent of the business, said Seifert, who works with aging entrepreneurs who want to exit their companies.

“If the company loses that industry or the industry goes down or the customer goes down, that’s risk. It all goes back to that risk factor,” he said of buyers. “That’s why if you have time to do that stuff, it’s going to increase the value of the business. If you want to sell now, there’s not a whole lot you can do other than sprucing up the books and kind of like staging a house for sale.”

Owners who have time to plan and prepare for a sale should avoid steps that will make the balance sheet look better just for one year, according to experts. Buyers typically want to see consecutive years of sales and earnings growth, Friar said.

Some business owners intentionally may do what they can to keep earnings low to reduce their tax burden. That’s “almost shortsighted” because it does not show the true financial performance of the business and deflates the company’s valuation, Friar said. It could even hinder the ability of a buyer to secure bank financing for a transaction, he added.

“For the virtue of clean books and for the buyer to get bank financing, if you have to pay a little more in taxes for a year or two, it’s completely worth it,” said Friar, noting that buyers and banks generally care about the last few years of the company’s performance.

A one-year improvement may not make a difference in their view, he said.

“The assumption isn’t that that’s a new trend. The assumption is that’s an anomaly, and they won’t give you full credit for that, generally,” Friar said.

PRIORITIZING PEOPLE

At Trivalent Group, which has 84 employees and last year generated revenue of $21.5 million, Andrus viewed removing himself from some day-to-day operations as a way to groom new leaders. He focused on “putting the right people in the right spots” when the opportunity arose, “so you can see them grow under fire and grow up and do things that many never even thought they could do.”

That tactic is one that professionals recommend for business owners when they seek to position their companies for sale.

Having employees who assumed key duties well before a sale provides a prospective buyer some comfort that a company will continue to run smoothly post-transaction, said Dan Youngs, the president of HFG Advisors Inc. in Kalamazoo who a year ago launched successionconnection.com for financial planners seeking to transition their practices and retire.

Sometimes grooming employees for leadership roles can even lead to identifying the right buyer, Youngs said. Business owners should “keep your eyes open” for the person or group within the company who could someday take over.

“Everybody has kind of that key member or team” that’s a potential buyer, Youngs said. “They know the business and if they’ve been working for you for many years, they have a relationship with the clients.”

IDENTIFYING BUYERS

During the planning process, a business owner needs to identify potential buyers for the company, whether that’s a key employee or management team, a competitor, a strategic buyer looking to add product or service lines or a new geographic market, or a financial buyer such as a private equity firm.

Experts recommend getting a third-party valuation when setting an asking price and settling on a number that’s reasonable. 

“Your business is only worth what someone is willing to pay for it,” Johnson said.

Quite often, business owners “have no idea of a reasonable valuation and how it changes over time,” said Seifert of Left Coast Capital.

Although awareness is growing about the need to plan ahead, Seifert and others say many business owners still don’t give near enough consideration to their eventual exit until they’re forced to do so. That results in a quick sales process in which owners may not receive what they should for their businesses.

Seifert reminds business owners that “life happens” — perhaps the sudden onset of a health issue — and may force them to sell quickly. Having a plan in place and the business prepared for a transition improves the potential for getting the maximum price, he said.

“If they have all the groundwork in place and the contingency plan in place, then they can sell for full value in short order, as opposed to having to take a discount because they have to hurry the process,” Seifert said. “If you have to sell and you have a gun against your head, you’re going to get nickels and dimes on the dollar. I’ve seen it happen.”

BE FLEXIBLE

At Trivalent Group, Andrus wasn’t ready to sell when he first met with Rehmann in February 2017. He told his counterparts he would entertain a joint venture in Southeast Michigan.

As the conversation with executives at Rehmann continued, Andrus came to the conclusion that the firm was a good cultural and business match for Trivalent, which in addition to its Grandville headquarters has offices in Battle Creek, Midland, East Lansing and Traverse City.

Rehmann has 19 offices in Michigan, Ohio and Florida and 12,000 customers “that we could be introduced into and we could provide (Rehmann) additional services that they don’t have today,” he said.

“It became clear to me that maybe I should move my schedule up a little bit because this was the right ‘who,’” Andrus said. “It kind of all just evolved. ‘You know what? This is kind of the right fit now.’”

So he adjusted his thinking and moved ahead sooner than expected on his transition plan.

That ability to pivot and adjust when circumstances arise is another element that good business succession planning should take into account.

“You begin with the end in mind and where you think you want to be at that point,” Andrus said. “You start preparing and identifying the potential leaders in your organization and then put together with those leaders a structure that supports where you are today and that can scale for the future, and then be agile enough to adjust as the marketplace changes.” 

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