Uncertainty and 2024 - How prepared are you.....?

Uncertainty and 2024 - How prepared are you.....? Editor's Note: Many articles have surfaced in recent months about strategic planning. Acronyms abound - RED (rapid), FAST, EASY. Some others stress the creation of assumptions, or financial-based models. While acronyms and simple approaches may sell books or make for interesting speaking engagements, the truth is there is no magic button, no easy way to predict the future. Uncertainty and pace of change have accelerated, resulting in the need for a more flexible approach to planning.  The Mead Consulting Group has been utilizing scenario planning to help clients build flexibility into planning and execution for almost 25 years. While scenario planning was once conducted primarily with our larger clients, today, over half of our clients (owner-operated, strategic, and private-equity- backed) have discovered the benefits of scenario planning. - dpm] How well are you prepared for what you think will happen in the future?   How well are you prepared for what you don't think will happen? Imagine yourself inside your business in September 2007 or September 2019. Life is pretty good. Your business has been consistently growing with the market. The Dow Jones is at record levels, unemployment is low. You are in the middle of developing your company's plans and budgets for 2007 or 2020. How likely is it that the assumptions in your plan accurately forecast that one year later in September. (Think the Great Recession and Covid-19). The Dow was way down and unemployment had skyrocketed. Uncertainty, volatility and risk are here to stay. Were these one-time, isolated events? Life and planning in businesses have changed. Uncertainty, volatility and risk are here to stay. The world has been transformed from a series of loosely connected, reasonably predictable economies to a complex web of relationships where the global impact of local events is felt almost instantaneously. The past is no longer a good predictor of the future. In response to such uncertainty, traditional strategic planning and budgeting simply no longer works. Scenario planning, which was pioneered by Royal Dutch Shell in the 1970's, was traditionally used only by large organizations such as AutoNation, British Airways, Corning, Disney, General Electric, KinderCare, Mercedes, UPS, etc. Today, scenario planning is being widely used by many small and mid-size organizations. In the past 15 years , Mead Consulting has seen the number of middle-market and lower middle-market companies embracing scenario planning grow by more than 4X. These companies cross a broad array of industries from technology, software, education, and consumer, to manufacturing, distribution, health care, and business services. These companies are seeing a dramatic improvement in their management team's ability to adapt to changes in the environment, and to move more quickly to gain competitive advantage. In addition, business owners, boards, and investors are beginning to ask questions that can only be answered by scenario planning. Scenario Planning is NOT the same as contingency planning. All organizations should include contingencies in its planning - a good example is disaster recovery from power failures, natural disasters, etc. However, scenario planning looks at the dynamics of potential changes in competitive landscape, disruptive innovation, changes to buying patterns, etc.   Traditional strategic planning alone can be based on a foundation of shifting sand. Traditional strategic planning causes us to make calculated "guesses" about the future. We make a series of assumptions about our industry and competition, as well as social, economic, political, and technological factors. Then we develop strategies based on those assumptions. Many times, it is the most senior, most dynamic, or most powerful person in the room that forces decisions about these assumptions. Black swans never seem to make it into the discussion and are seen as unlikely and their consideration is regarded as a diversion, or waste of precious management time. Really? Since we now know how uncertain the future is, why would we ever base our future on such a faulty foundation? Scenario planning is largely focused on answering three questions: (1) What could happen? (2) What impact would a given scenario have on our strategies, plans and budgets? (3) How should we respond to maximize our competitive position?        Differences between traditional strategic planning and scenario planning       Differences between traditional strategic planning and scenario planning Traditional Strategic Planning Scenario Planning Static Plan Dynamic possibilities Strives to Maximize return Strives to pursue possible opportunities Fear of Uncertainty (Assumes away uncertainty) Seeks gains from uncertainty Focus is on "working the plan" and minimizing risk Maximizes learning and flexibility; Builds adaptability in management and culture Typically blind to competitive threats from non-traditional sources Anticipates sources of disruptive innovation and competition from non-traditional sources

"I can't change the direction of the wind, but I can adjust my sails to always reach my destination."   _________ It's Planning Season Time for your team to chart the course for 2024 and beyond. ________ The future has never been more uncertain, but your business can always be prepared with flexible approaches to planning and execution ________

Scenario Planning does not replace strategic planning - it adds an important context.  Scenario Planning should be the first action your senior management takes before embarking  on a planning process. Best practices for companies on a calendar fiscal year show that scenario  planning occurs between the months of April to July and strategic planning between the June  to September period. However, companies that have not conducted scenario planning in recent years - or never- can benefit by doing it any time of year. Contact us  with any questions or to  discuss how to get started.

 

Keys to Maximizing Value at Exit

[Editor's Note: Many business owners fail to prepare their businesses for a sale either because they believe that a potential sale is far off in the future or because they are focused on current issues and do not consider preparation to be a priority. We would submit that companies need to be "prepared to be bought." Sometimes lucrative offers come unexpectedly for companies that are well-positioned. We typically recommend that a company engage an experienced investment banker to assist them in a sale - often even if they have received an offer - in order to generate a competitive environment. Some business owners who have tried to "time the market" at some point off in the future have found that unpredictable events such as the Covid-19 pandemic, the 2007-2012 recession, credit and stock market crunches, tech bust(s), 9/11, industry issues, etc. can derail their ability to sell at maximum value. We recommend to our clients to work each year to make certain that their companies are currently desirable to buyers. - DPM]   How best to position your company to be attractive to buyers: 1.   Demonstrate Strong Financial Performance a. Historical Financials *   Consistent revenue growth (at least upward trend) *   Recurring revenue is a plus *   Strong operating margins *   Increasing profitability *   Importance of last twelve months b. Operating Cash Flow *   Focus on hitting projected revenue and earnings numbers *   Review net profitability of customers and products 2.   Maintain "clean" financials a. Audited or "auditable" Financial Statements *   Have your financial statements audited with a reputable firm to add    credibility *   Use GAAP accounting. If not, identify how practices differ from GAAP *   Understand cash vs. accrual accounting - timing differences can be material b. Income Statement Adjustments and "Add-backs" *   Buyers are skeptical of earnings that rely on substantial add-backs (one-time, non-recurring charges, private company expenses, etc.) 3.   Diversify your customer & supplier base *   Diversification signifies a healthy business and reduces risk *   Buyers will pay less for companies dominated by one or two customers *   Examine what % of sales your top 10 customers represent? *   How stable are your top suppliers? How stable are their terms? *   Do you have multiple suppliers for critical components/services? *   What % of total purchases does your top supplier represent? Top-5 combined? *   What % of the company's sales are related to a few key employees? 4.   Develop a Strategic Growth Plan *   Maintain a clear strategy and be able to demonstrate your history of execution *   Be able to articulate specific future growth opportunities *   Position your company to take advantage of them * Remember: A buyer needs to see a potential Return on Investment 5.   Build a capable Management Team * Invest in training and key strategic hires, if needed *  Motivate management to add value to the company through a potential sale * Focus on building a deep management team that can thrive without your continued leadership 6.   Eliminate potential "Gotchas"(these are items that could result in significant discounts to value) *   Maintain legal documentation (licenses, regulatory filings, contracts, intellectual property, incorporation, etc.) *   Clear title to all assets *   Document processes and procedures *   Resolve legal disputes, environmental issues, etc. 7.   Build a team of Qualified Advisors *   Minimize distractions from running your business effectively *  Get advice from professionals who have "done it before" and  who have expertise in areas you do not  *   Beware of advisors that outstep their areas of expertise Are you and your company ready if a buyer appeared on the radar? Most business owners who have executed a successful sale of their business will tell you the most important thing is: BE PREPARED.   We can help. Selling a business is very different than operating a business. As a business owner you know your industry, your product or service, your customers and your markets. Most business owners will only sell a business once in their lifetimes - and it can be by far the most important financial transaction of their lifetime.                            The Mead Consulting Group has helped over 60 clients prepare for successful sales transactions ranging from $15M to $350M in transaction value. We help companies increase the value of their businesses leading up to a transaction, minimize the things that cause potential buyers to discount the price, prepare to best position the company, and assist the owners in building a transaction team. ____________________________________  What successful business owners say about us:  ....We could not have completed the sale of our business without the advice and guidance of The Mead Consulting Group. Their experience was critical in helping us prepare, and endure, the transaction process to a successful outcome. ...Charles M, President, Healthcare IT Company   ...A successful process is draining and stressful. The Mead Consulting Group brought the experience and expertise necessary to help our team focus on the critical issues and not get caught up in the multitude of items that can derail a transaction. Why reinvent the wheel? We chose to take advantage of individuals who could help us understand the nuances, negotiate effectively, and close the deal. ... Ken W, CEO, Behavioral Healthcare ...We missed the opportunity to sell our family business during the last upcycle. Mead Consulting helped us grow revenue and EBITDA to record levels and guided us through the selection of a transaction team. Dave Mead and his group provided great counsel throughout the sales process, removing obstacles and firmly encouraging us to a great deal with a strategic buyer that mirrored our family business values. ...Dan M, President, Building Products Company ...I do not know why anyone would attempt to sell their business without Mead Consulting. Since they have owned and sold their own businesses, they understand the challenges of continuing to run the business while trying to sell it. Their experience kept us focused on the right things and they helped keep our transaction team well-aligned during the process. They truly act as the advocate for the CEO and owner, helping to make sure that it was the best deal for the owner. ...Ron T, CEO, Software Business      Let us your your thoughts. Call me on (303)660-8135 or Email me to discuss how we can help you prepare your business Best regards, Dave Mead

"I can't change the direction of the wind, but I can adjust my sails to always reach my destination."   _________ It's Planning Season Time for your team to chart the course for 2024 and beyond. ________ The future has never been more uncertain, but your business can always be prepared with flexible approaches to planning and execution ________



Abundance vs. Scarcity Mindset. Which do you have?

Editor's Note: It's Planning Season - time to plan for 2024 and beyond. What kind of Organization do you have? What kind of Leader or Team Member are you? In many cases it comes down to whether you have an "abundance" or "scarcity" mindset.  I thought these two graphics might be good to ponder. -dpm]

Collaborator or "Smartest person in the room"; Embrace Change or Fear Change; Seek the credit or Share the credit; Horde information or Share information. Are you willing to invest to achieve a greater outcome? Whether you are building a team or a company, which traits/attributes do you want in yourself and others? The best organizations do not tolerate "scarcity mindsets" - they sap the energy and vitality out of an organization.

Individuals and Team Members Leaders

Scarcity breeds employee flight. In today's environment, employees do not want to work in an environment with a scarcity mindset - certainly not with leaders with that mindset. We can help. Mead Consulting Group has worked with many companies to help them transition to a more positive environment that sees the potential and collaboratively works to achieve possibilities. Contact me at (303) 660-8135 or meaddp@meadconsultinggroup.com to explore how to begin to transition your organization to one more focused on executing the strategic future. Best regards, Dave Mead

Minority Recaps - A great option for some business owners

     

[Editor's Note: With higher interest rates, a lower stock market, and banks more reluctant to lend, valuations for companies looking to exit have taken a hit. I thought this would be a good time to talk about minority recaps. -dpm] Many company CEOs and CFOs today are spending a good deal of time “working” the banking environment. Many of our client companies are performing at very good levels. Some are interested in taking advantage of acquisition opportunities, others in growth plans with new products and new markets. Some are looking for the opportunity to hedge the risk and perhaps take a few chips off the table. Others are good performing companies but have issues with their balance sheet. I have been surprised at how few business owners, CEOs and CFOs are aware of MINORITY RECAPS as a potential means for growth capital, taking a few chips off the table, and possibly providing for balance sheet stabilization. We recommend consideration of minority recaps.  What are Minority recapitalizations (Minority Recaps) - Owners of mid-market and family-owned companies can sell less than 50 percent of their shares at minimal, or no, minority discount and still retain control. Owners of mid-market and family-owned companies can sell less than 50 percent of their shares at minimal, or no, minority discount and still retain control; they can receive cash for their shares; they can use debt, as well as equity, to enhance returns; they can keep a significant equity tranche for a second exit when market conditions might again be peaking; and they can pursue an aggressive and ongoing business plan designed to stimulate organic growth and finance acquisitions. This allows private company owners to lower risk by lowering the personal financial concentration they have in their business through diversification.  A common myth is that all private equity firms want control. While that may have been true ten years ago, in today's environment, some PE firms are enthusiastic about teaming up with management to grow good companies with less than a controlling interest.  Minority recaps are not an appropriate for every business owner The company needs to have the following characteristics: •   Good operating performance (cash flow and revenue growth) •   Good management team •   Strategic Growth Plan (tangible opportunities for growth) For those companies that meet these parameters, it might be just the ticket. Beware – Not all minority recaps are favorable. Some PE firms will add terms that make a minority recap very onerous and function more like a control investment. It is important to have professionals on your team that understand these transactions and who know which PE firms are comfortable with minority positions.  Second bite of the apple can be better and sweeter than the first.  For those companies that sell a minority stake with opportunities to grow, the results can be compelling. In many cases, partnering with the right private equity firm can provide growth that is many times higher than the company could have achieved without outside capital. When the company is ready to sell in an additional five years, perhaps, the owner can reap significantly higher returns.  Example: A few years ago a client of ours was doing $26 M in revenue with good margins and cash flow. The owner wanted to expand beyond the region into other markets with new products but lacked the capital and financial expertise. We helped the company develop a strategic growth and execution plan and shored up some weaknesses to present the company in its best light. We assisted the company in finding experienced, knowledgeable resources to help. The company sold 35% interest to a private equity firm. The owner was able to take a few million of his chips off the table (his family was very happy that his exposure was lowered) and still had significant capital to expand. The private equity firm assisted with introductions and recommended the addition of a terrific CFO and a strong VP of Operations. After five years, the company recorded over $130M in revenue. That second bite 65% share was worth a lot more than it had been five years earlier. The owner had this to say: "I had heard terrible things about private equity. But these guys really became our partners and helped us become a better company. Thanks to Mead Consulting for helping us get it done with the right team."  Market Challenges The current market offers interesting challenges. But some companies will be able to navigate these waters and put themselves in a lasting competitive position. Think about how your company could gain with capital to acquire and grow during a period when everyone else is in the bunker with their heads down. One caution - before embarking on this path, seek help from those professionals with experience working with mid-size companies in your position. If you would like more information on minority recaps please contact me at (303) 660-8135 or meaddp@meadconsultinggroup.com Note SBA Update: For small transactions, As of August 1, 2023 there are numerous changes to the SBA Loan programs.  Among them: The SBA now permits "partial change of ownership" which provides greater flexibility for small businesses.

Plain Talk about Exiting Your Business: The Needs Gap and the Value Gap

[Editor's Note: There is a lot of misinformation about the state of the market for lower middle market ($10M to $200M in revenue) companies looking to sell - either now or sometime in the next few years. I asked some of our clients to provide questions that are on their minds. Answers have been provided by private equity firms, intermediaries/investment bankers, business owners, and commercial bankers.

 

While fast-growing, well-managed companies are being sold at record prices, this article addresses a problem for many companies looking to sell - How to address a "value gap" or "needs gap" that has developed between the current market value of their business and the amount they need or expect to get from a sale. If you have any questions about this information or a question that we did not answer in the following, please do not hesitate to contact us.        -dpm]

 

Question: How do I determine if my company has a value gap or needs gap?

Answer:

What many companies looking to sell are experiencing is called a "value gap" or "needs gap." This means that the company as it is performing or configured today will not achieve the sales price in the current market that it would have earlier. This gap is the difference in value between then and now.

 

Question: How do I know the current value of my company?

Answer:

We suggest to our clients that they contact a reputable investment bank or M&A intermediary who can estimate a market valuation range for your business. This market valuation is very different than a valuation that an organization might do for estate planning or tax purposes. An M&A intermediary will value your company based on the current market for companies of similar size, industry, performance, and growth. A common mistake that owners make is comparing their company to the valuations of large publicly-traded companies in their industry. The truth is that large companies trade at higher valuation multiples - sometimes much larger multiples - because risk is generally perceived as significantly lower than with smaller companies. An M&A intermediary or investment banker can determine the appropriate market valuation range for your business.

 

Question: OK, so now I know the estimated value range for the business. Now what?

Answer:

Once a business owner knows the estimated value of the company, it's time to figure out how much the owner gets to keep and to determine if that's enough. Consulting with a competent tax accountant, you can calculate the net proceeds which is the estimated gross value of the business less the legal, accounting, and intermediary costs to sell the business, less the tax bite that Uncle Sam may take. [Many times, there are built-in gains in the business that may make that tax bite significant - and your accountant and wealth management professional may be able to suggest ways to mitigate this BEFORE you sell.] Once you've determined the net proceeds, it's time to review this with your wealth management professional to determine how you might invest the proceeds to see if you will be able to support the lifestyle you expect.

 

Question: What if it's not enough?

Answer:

Then you and your wealth management professional must determine how much you do need. The Mead Consulting Group then helps clients develop a strategic growth and execution plan for the business, with specific steps necessary to achieve an increase in valuation in order to meet the owner's needs.

 

Question: Is that the needs gap?

Answer:

Yes. It is the difference between what an owner may need from the net proceeds of the company and what it's currently worth.

 

Question: Then what is the value gap?

Answer:

The value gap typically occurs when a company's performance slips. A company may have had a valuation of $1,000 in early 2022, based on certain performance projections for growth of revenue and cash flow. If the company has failed to meet those projections for 2023, it may now only have a valuation of $700. The difference between the previously "expected" value and the current market value is the value gap. The gap may actually widen if buyers begin to suspect that the business may have additional unknown risk. It is an uncomfortable place for all parties and typically the company is taken off the market.

 

Question: So, what happens with a needs or value gap? Am I stuck staying with the business?

Answer:

Please note that in some cases, it may not be possible for a business to grow sufficiently to add enough value to meet an owner's needs, due to an aging industry, product obsolescence, etc. If that's the case, however, business owners tell us they would rather know that as soon as possible so they can possibly take other steps.

However, we have been pleasantly surprised over the years at how many businesses can achieve their needs with a good plan and great execution. Many businesses become a "lifestyle" business over the years, supporting the income needs of the owner. As a lifestyle business, many companies are worth more to the owner than to a prospective buyer looking for a return on investment. By focusing on the primary drivers of value for the buyer, a business can be transformed into a much more valuable entity.

 

Question: What are the drivers of value for the buyer?

Answer:

What are buyers looking for? It comes down to four things:

1. History of revenue and profit growth

2. Strong cash flow or EBITDA

3. Strong management

4. Opportunities for growth

In order to get the best price, you must be able to present a company that the buyer can see will bring them a reasonable return on their investment. That means the business must have the potential to grow and have management that is knowledgeable in the industry that will help them grow the business. For more detail see "Prepare your company to be bought."

 

Question: Does that mean that businesses that don't have the four value drivers won't sell?

Answer:

No, but what is true is that flat businesses, or those with an inconsistent history, are less desirable and therefore are typically "discounted" by buyers. Businesses without the four drivers have a higher risk of not meeting the desired investment return. Simply stated - higher risk means a lower price.

What is happening in today's market is that buyers are being more selective, and those companies perceived as "less desirable" are either not sold because banks will not provide debt financing, or they are being deeply discounted.

 

Question: How long does it take a company to transform from a lifestyle business to a value business?

Answer: That depends on a number of factors. Based on the dozens and dozens of companies Mead Consulting has worked with, we would say it comes down to 12/24/36. That's 12 months, 24 months, or 36 months. We have found that by focusing company management on the key drivers, an organization can be ready to go to the market in as little as 12 months, but more typically it's 24 or 36 months. See "Maximizing Company Value at Exit."

We assist a company with direction and resources, but a lot depends on the commitment and discipline of the owner and management team. We tell business owners that there is no magic button to push - it's hard work. But, most successful owners agree that it's worth it. Many times, we can accelerate the process by helping the owner stay focused and hold himself/herself and the management team accountable for progress.

 

Question: How much progress can a company make (over 12/24/36)?

Answer:

We've seen companies with needs gaps improve valuation by as much as 500% over 36 months. An example is a $50M revenue client company that had a 16X IMPROVEMENT IN EBITDA over a 36-month period. Another more recent client valued at $16M sold for $80M three years later. While these situations are possible, it is more typical to see improvements in value of 30% - 50%.

 

Question: As a business owner, what should I be doing?

Answer: Act Now! While this is currently not a Sellers' Market, start today to work on preparing your business to meet the four value drivers so that as the market changes in 2024, you can be well-prepared to maximize value.

 

For more information, also see "Common misconceptions about selling a business" 

________________________________________________

We can help.  The Mead Consulting Group has helped dozens of clients prepare for successful sales transactions ranging from $15M to $350M in transaction value. We help companies increase the value of their businesses leading up to a transaction, minimize the things that cause potential buyers to discount the price, prepare to best position the company, and assist the owners in building a transaction team. Check out our website for descriptions of some client success stories.

If you would like to discuss how we might help your company begin the process of adding value, please contact us for a free consultation.

Best regards,

Dave Mead