Exit Planning in the 2012 Deal Market: Value Added Commitment

   “It’s not whether you get knocked down … it’s whether you get up”

  Vince Lombardi on Commitment

We know it’s been a rough and tough market to get deals done:  

• Values are down
• Buyers are interested, but worried
• Deal terms and conditions are different in today’s “new normal”
•  Financing remains uncertain, though improving

Yet, deals are getting done.  In the past 12-months, we’ve successfully settled 3 transactions (not bragging, just letting you know we’re persistent and active!). 

A recent survey (*) of the middle market “deal makers (i.e., buyers)” regarding their 2012 plans had some interesting findings:  

• 86% planned to complete 0-3 deals
• 79% planned to complete the same or more deals compared to 2011
• 51% reported that bank lending remains “tight’; 49% felt opportunities were improving
• 76% felt that the biggest challenge of getting a deal done was the purchase price (i.e., too pricey) and economic uncertainty
• The “hot markets” are technology, financial services and healthcare that combined represent 55% of the buyers interest
• 51% expect to finance their deals with a combination of cash, equity (stock of the buyer) and debt (bank, seller)

In our experience: the deal market is improving -- call it bubbling, but not yet boiling.  

So in a tough market, what’s the plan?  What are you going to do to add value to your company?  We’re all adjusting to the “new normal” as it is now called. To be honest, in our role as exit planning advisors, there is no magic plan; there are no new tricks.  It’s about remembering and emphasizing the good habits you had in the beginning that, over time, might be forgotten or overlooked.  Here is your opportunity to restart your business with a goal to increase the business value and prepare for your “exit”.  It’s basic business 101:

• Define your “brand”: narrow the market if needed, expand if there is an opportunity.  Revisit, reset, repeat as needed
• Diversify your customer base: right or wrong, buyers are “squeamish” when a handful of customers represent a large part of the business,
•  Customer contracts – are they “assignable”? Is that in writing?
•  Profit margins – “run your business” to improve (not minimize) profit margins.  The “profit is good enough” attitude needs to go away.  Even if you’re in a commoditized industry, you don’t have to be the cheapest in town (note:  revisit #1 above -- brand does matter)
• Recurring revenue/cash flow – if you have an opportunity to convert from single billing to repetitive monthly cash flow, consider making the change (e.g., HVAC contractors who have both preventive maintenance contracts vs. time and material). Buyers like balanced, recurring revenue streams even when it’s the same dollars
• Refresh, recharge the marketing look.  You’ve heard the expression you only get one time to make your first impression … website, tweets, social media advertising.  It’s predicted that by the end of 2012, 60% of the Fortune 500 companies will actively engage customers via Facebook marketing efforts.  Where are you?  What’s it look like?
• Management team – we get it. You’re the decision maker about everything.  Loosen the reins a little.  Your key people are most likely staying with the new owner.  Give them the flexibility and authority to make decisions you‘ve been making.  Remember, you’re creating value for your company and key people are just that … valuable!
• Management compensation plans, incentive plan:  Critical to buyers, and to your successful exit, is the ability to retain key management.  Take a fresh look at various incentive plans you could use now to retain the key staff in the event of a change in ownership.
• Debt – credit lines and other forms of debt.  Do you use them just because they are convenient?  Or is the debt really needed to provide working capital? If not needed, make it go away. 

There you go. We hope we triggered some “Aha” moments for some.  We spend a lot of time with owners and their advisors helping them plan for a successful exit. As always, if we can help you, just give a call.     

           

 by Ed Davis, Partner

 

* The Deal magazine and Merrill DataSite

New Estate Tax Laws, Time to Plan

“One difference between death and taxes is that death doesn't get worse every time Congress meets”.


Will Rogers

Confused about the federal estate rules and regulations? Wonder what the tax rules are? Did George Steinbrenner (owner of the New York Yankees) get it right when he died in 2010…should he have waited? We thought we would recap the current estate and gift tax rules. Note, they only apply for 2011 and 2012 and will change again, maybe. Here you go:



1. The minimum federal estate and gift tax rate is 35%,

2. The “unified tax credit exemption equivalent” is $5m … a fancy way to say that up to $5m in assets can be passed on to heirs either during your lifetime and at death (hence the term unified) without federal taxation,

3. The generation-skipping transfer tax rate is 35% with a $5m generation skipping transfer tax exemption. Many individuals (grantors) who might otherwise leave their entire estates outright to their children will instead allocate their generation-skipping exemptions to “generation-skipping transfer tax exempt trusts” for their children and grandchildren. Potential benefits include:

a. the trust will escape all transfer taxes when the children die and will pass tax-free to the grandchildren,

b. the trust may be protected from the claims of creditors and, to some degree, from claims of ex-spouses. Had the trust property been left to the children outright, the property would be subject to such claims. In some states, property acquired by gift or inheritance from a third party is not subject to division in divorce proceedings and therefore, would not be subject to claims by an ex-spouse,

4. The maximum estate tax unified credit between spouses is now “portable” meaning that a surviving spouse can elect to use any unused portion of the estate tax credit of the predeceased spouse (currently $5m). so, with the right planning, married couples can effectively shield up to $10m in assets from federal estate and gift tax,

5. Estate tax deferral – payments of estate tax attributable to the value of a closely-held business can be deferred for up to 5-years.



Remember, these rules only apply for planning during 2011 and 2012. After that, the rules “sunset” (we think that’s a cute phrase) and revert to the 2001 rules.

Article Authored by Ed Davis.  edavis@ciharvest.com
U.S Treasury Circular 230: Any tax advice included in this written or electronic communication was not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency, nor can this be used for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed herein.

Lending Update in 2011

By John Gibson, Partner

We are hearing that banks say they have money and want to lend it but they can't find enough qualified borrowers. At the same time, borrowers who are looking for loans say their banks are just paying lip service, looking for a way to turn them down.

Who is right? In a way, both are.

Uncertainty and fear have produced cautious bankers. 2011 is a little better than 2010 and much better than 2009. Banks are tip-towing back in, but they are fearful. They are afraid for many reasons. Fear of the unknown. Fear of loss. Fear of federal and state regulators glaring over their shoulders and writing down loans. Even Fear of losing their jobs.

What can you do to improve your chances in this environment?

It's back to basics. Start with the 3 C's; Character, Credit, and Collateral. It takes all three legs for the stool to stand. You have one first impression to win over the banker. Don't give them an excuse to turn you down. You must have a complete loan package. If you don't it will be set aside and you lose critical momentum. Point out the positives and explain the negatives. Answer before asked. All loan proposals have negatives. Letting them know that you aware of yours, not trying to hide them and what you are doing to correct them scores big character points with the lender.

In short, be prepared, stay positive but realistic and don't forget the three C's.

Risks of a Rapid Revenue Growth Strategy

I attended a fabulous presentation recently by Manny Skevofilax of Portal Finance http://www.portalfinancegroup.com/ titled, “Navigating the Risks of a Rapid Revenue Growth Strategy”.

His takeaways were:

Review your strategic plan on a monthly basis to ensure that you are achieving your goals. All goals must have a timeline and responsible party.

Be willing to make changes to your business model and plan. Track results. It is riskier to stay the same than to implement intelligent change. Continuously and forever improve.

Whenever possible use variable costs instead of fixed costs. This will allow your costs to drop rapidly if your revenues unexpectedly drop.

Make sure you have a rear view mirror, a dash board, and a windshield. The rear view mirror is your bookkeeper telling you the past. Your dashboard is your Controller telling you what is happening today. Your windshield is a CFO helping you look into the future.

Another great thought…

A company growing at 5-10% is like driving down a city road at 15 mile per hour. You have time to look around and adjust.

A company growing at 25-100% per year is like driving down that same city road at 100 miles per hour. You don’t have any time to look at anything. Make sure you have the right team and the right plan to go 100 miles per hour.