Month: February 2019

Due Diligence

Legal matters, business strategy, and life perspectives from the mind of a non-attorney.

 

So you want to sell your business, eh?

Obviously, the reality is somewhere in the middle. Which end of the spectrum does it fall on? Hard data indicates that reality is much closer to the latter.

70% of businesses placed on the market NEVER sell.

That’s 7 out of 10.

If you’re a small business owner, I want you to think about your top 2 competitors. If you all went on the market today, statistically speaking, only one of you is going to sell. The other two would be liquidated. Yikes.

 

Even if you are fortunate enough to receive an initial Letter of Intent, you are not “home-free”.

According to Forbes, nearly 50% of all deals fall apart in the formal due diligence process!

That means, in a TON of cases, the money and mutual interest is there, but it doesn’t get to the finish line because of something that happens in Due Diligence!

 

What is Due Diligence?

Merriam-Webster says, “Research and analysis of a company or organization done in preparation for a business transaction.”

I really like that definition. It’s simple and straightforward. Unfortunately, Due Diligence is anything but simple and straightforward.

 

It’s a HIGHLY complex process that requires a TON of time, for both the buyer and the seller.

 

The process of formal Due Diligence begins when a Letter of Intent is executed. This letter is generally non-binding, and usually discloses a range of possible purchase prices.

Next, the buyer will likely sign a non-compete and non-disclosure agreement in exchange for the ability to review the seller’s sensitive documents.

Then, all H*** breaks loose.

A well-educated and experienced buyer will look for every conceivable way to “re-negotiate” terms of the original offer. They analyze and scrutinize until they are satisfied that every stone has been overturned. This includes:

  1. Financial Documents
  2. Organizational Documents
  3. Physical Assets
  4. Technology
  5. Intellectual Property
  6. Customers
  7. Strategic Direction
  8. Contracts
  9. Employee Benefits
  10. General Employee Issues
  11. Key Personnel
  12. Litigation
  13. Environmental Issues
  14. Tax Matters
  15. Insurance Matters
  16. Professional Affiliations
  17. Press Releases

These are just a handful of the topic areas typically covered. Have you ever seen an actual Due-Diligence Checklist? A short checklist is 10 pages long. An extensive checklist can push 25 pages without blinking an eye.

What if you can’t find some of the information requested?

…Or it takes you a few weeks to deliver the information because you’re ‘busy’?

…Or you feel uncomfortable disclosing the information?

As the selling party, that’s all your prerogative. I can promise you, though, it doesn’t paint you in a good light.

 

Buyers generally are given 30 to 60 days, just to review the material once it has been received. At that point, all parties may come back to the negotiation table to try and close the deal.

Start to finish, most deals take at least 6 months to close. Many can take significantly longer. Can you imagine the pain of having a deal fall apart in the final stages?!

If the Due-Diligence process equates to actual wartime preparation (in terms of the planning and strategy required to do it well), most business owners act like they are preparing for a casual water gun fight in their backyard. Woefully unprepared.

 

Practice Makes Perfect

Wouldn’t it be nice if you could get a practice run at Due Diligence? You know, get bruised up a little bit – maybe a few years in advance of your exit. That way, you could figure out the things that you need to correct while you still have time on your side. Plus, you wouldn’t be blindsided by anything when Due Diligence happens for real, because you’ve got experience on your side. No surprises.

Man… That would be perfect…

 

By Exit Planning with Epiphany Law, you can do just that.

Your first step is completing a State of Readiness assessment, which offers an unbiased opinion on the preparedness of YOUR COMPANY for a transition / sale. If you’re ready, great! Keep up the good work until it’s time to hit the ‘eject’ button. If you aren’t, we will recommend ‘next steps’ to get you where you need to be.

 

Give us a call or shoot me an email if you have more specific questions!

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Exit Planning: When to start?

Legal matters, business strategy, and life perspectives from the mind of a non-attorney.

A few weeks ago, we sent out emails to several business owners, inviting them to attend a presentation on Exit Planning. We met our desired room capacity pretty quickly, but we did get a few responses like this:

  • “I’m not exiting my business for 3 or 4 years, I’ll attend the presentation then.”
  • “We aren’t exiting until next year. Will you be doing this again in 6 months?”

Two separate business owners made a conscious decision to delay attending this kind of presentation until their exit is at arm’s length.

As a person who is very educated on what Exit Planning is and how much work it takes, let’s just say those decisions scare the s*** out of me.

Yes, I know, there is a certain contingent of business owners who simply cannot – and will not – mentally or emotionally handle the task of planning for their exit. In fact, we even wrote a blog about it: Exit Planning: Why Do Business Owners Avoid It? Bottom line: It’s just too much for them, so they stick their heads in the sand.

Those responses we got – you know, a few weeks ago after the presentation – those felt different. To my mind, it feels like those business owners actually think it is OK to wait longer than they already have. Like, with the rational part of their brain.

They weren’t being emotional, afraid, or willfully negligent.

It seems like they were just living their reality.

If that is the case, I have failed you all miserably.

Why?

The truth is, executing an Exit Plan takes a hell of a lot longer than 6-12 months. If you wait until then to even start LEARNING about Exit Planning, you are way behind the 8 ball. You are asking for disaster. I’m not saying you are S.O.L, but I AM SAYING that you have effectively put the ball in someone else’s court and left value – i.e. MONEY – on the table.

Really?

Yep.

Okay… So how long DOES it take?

Internal Transition

First of all, did you know there are really only four (4) practical ways that you can transition a business internally?

  1. Intergenerational Transfer: The transfer of a business to direct heirs, usually children. About 50% of business owners want to exercise this option; only 30% do it successfully.
  2. Management Buyout: Owner sells all or part of the business to the company’s management team. Management uses the assets of the business to finance a significant portion of the purchase price.
  3. ESOP: Company uses borrowed funds to acquire shares from the owner and contributes the shares to a trust on behalf of the employees.
  4. Sale to Existing Partners.

Here’s the deal: If I’m going to be your Exit Planner, and you are considering an Internal Transition of any kind, I want our initial meeting to be at least 10 years prior to your exit.

You heard me. 10 years.

Why? 2 Reasons.

  1. In all likelihood, you are not just GIVING this thing away. And you want cash at closing, not a promise to pay.
  2. In all likelihood, the person(s) you are selling it to can’t afford to buy it, and wouldn’t be able to secure financing.

If you come meet with me 10 years in advance, we can create a pot of money for your successor(s). The concept is simple: Money gets bonus-ed into the pot if – and only if – they achieve predetermined objectives that help you grow the value of the business. Pick your scenario:

  • Give successor(s) $0.00, have a company worth $2,000,000. In 10 years, receive a 20 year note and a $150,000 first year payment.
  • Give successor(s) $1,000,000.00, have a company worth $3,000,000. In 10 years, receive $2,000,000 and a 10 year note for the balance.

I know which one I’d pick.

If you come meet with me 5 years in advance, we cannot do that.

If you come meet with me somewhere in between, the numbers might work. They might not. It’s anybody’s guess.

External Sale

If you’re planning to pursue a sale to a third party, I will be thrilled if you give me a 5 year runway to work with.

You see, Exit Planning is a lot like flipping a house:

If you give me 5 years, we can update everything: new hardwoods, appliances, siding, and roofing. We can check the plumbing and electrical. We can remodel the kitchen and master bedroom. Hell, we can even toss on an addition. And the best news: All of that will be done in 2-3 years, giving us the opportunity to truly pick our spot and capitalize on favorable market conditions when they are present.

If you give me 3 years, we can still make a ton of updates. The house will truly be in great shape for buyers. Only problem: you aren’t giving yourself any time to play the market. Once the house is ready, you’re going up for sale, whether it’s a buyer’s market or a seller’s market.

If you give me 1 year, we can update a handful of things and slap on a fresh coat of paint. That’s it. Smart buyers – yes most of them are smart – are going to try and poke holes to drive the price down.

I know what you’re thinking: “Yeah, remodeling makes everything look great, but it ain’t free either. Is it really worth the investment?”

  • For most of you it’s going to mean the difference between a business that sells and one that sits on the market for 2 years before getting liquidated because nobody wants it.
  • We track ROI for our clients. We’ve never had someone come out in the negative. We generally EXPECT our clients to earn at least 30% on their investments in Exit Planning by the time it’s all said and done.

Getting Started

We generally kick off the process with a complimentary “exploratory” meeting. You’ll have the opportunity to ask questions and help us understand your true desires.

Assuming all parties agree to move forward, we jump into “Benchmarking” your business.

To stick with the remodeling analogy, it’s the basic equivalent of obtaining a real estate appraisal – on steroids. Yes, we deliver you with an estimate of value based on your financials. We also take it 5 steps further. We give you insight that says, “Hey, someone is going to fall in love with this house and pay 20% more if you gut the basement clean, paint the stairwell olive green and put a giant picture of Aaron Rodgers in the family room.”

At that point, whether you hire us to gut the basement and paint the stairwell, contract it out to someone else, or ignore our advice is entirely your prerogative.

 

Thanks for reading! To subscribe to our weekly content, you can enter your email on our homepage. You can also follow Epiphany Law on Facebook and LinkedIn for regular updates from the Firm. Finally, you can follow me on Instagram (@kelton.official), where I regularly post links to new blogs, as well as random pictures of my life.