5 Keys to Finish Your Year with a BANG and not a Whimper….

December 19, 2024 by Jay McDowell

This time of year, your kids are back in school, you still have hot weather, the holidays are ahead, several family holidays to celebrate. All these interruptions seem to break the concentration of your Team and seem to break their rhythm for the fourth quarter. Don’t fall into that fourth quarter trap of coasting to the finish line. Step up, review your business, get your team together and get them all energized and motivated to finish the year strong.

Five Ways to Drive Your Business to the Finish Line!!

1. Stay the Course.

Stay focused on the fourth quarter; don’t let your Team slide to the end of the year.

If you have the year “in the bag”, set “stretch” goals and find a tasty reward for exceeding the full year goal. Something around the holidays. A bonus or extra time off for everyone. Maybe a Super Holiday Celebration.

If you appear to be coming up short, refocus your team, adjust the targets a bit, make it tough but achievable and make it something they can achieve and feel great about. Celebrate, just not as big. No one likes to end the year with a “glad that year is behind us” feeling.

2. Put a Bow On It!!

The fourth Quarter that is.

Look over all your projects and make sure you drive them home and don’t let them “rollover” to next year. Whether these are capital projects, database cleanups, for accounts receivable assign accountability for a year end push and meet regularly to review progress. Celebrate the successes with your Team. Don’t forget the human resource files, performance reviews, employee annual trainings and succession planning. Get all your lose ends taken care of and come time for the holidays the only thing you will be putting a bow on will be presents under the tree.

3. Let the Big Dog Eat!

Is your sales team driving your bus, or just along for the ride?

What are your KPI’s (Key Productivity Indicators) for your sales year-to-date? Are you tracking and holding your sales function accountable for Revenue, Margin, and New Business? Do they know where they stand on a weekly, monthly, quarterly and YTD basis?

Where do you stand on any new business proposals that are out and yet to confirm the awarding of the business? Is someone following up? Are your Marketing efforts tied to your Sales Team? Are all leads/referrals fed directly to sales and verified that they are followed up on? Leads are expensive and in the small business world, 73% of all leads are never followed up on. Where do you fall? Do you know for sure, or just “believe” you know?

4. Where do you stand with Marketing?

Do a year-to-date review on the effectiveness and status of the Marketing budget?

Every dollar you spend is VERY valuable and is an investment, not an expense. You should know the result of your marketing budget before you spend it … not spend it and see what sticks. “Trial and Error” is not how Marketing is supposed to be executed. If you don’t know the result, don’t spend the dollars. Test and Measure each strategy prior to giving the green light for the full expenditure.

List all the ways you are spending your valuable marketing dollars. Business cards, newsletters, flyers, yellow pages, website, social media, networking, conferences, trash and trinkets, etc. Then determine the number of leads, appointments, and Clients each of your strategies garnered over the year. What is the cost per lead, cost per appointment and cost per Client for each marketing strategy? Your Marketing Return on Investment. (I have an Excel spreadsheet for this. Let me
know if you would like a free copy)

5. Finish Strong and Run Through the Tape.

There are 12 months and 52 weeks in the year … don’t let your Team, or you as their Leader, languish over the finish. Finishing strong is a trait every organization should strive for. It puts the stamp of a strong work ethic and that every employee needs to “earn their keep” every week. No
free lunch.

Let your competition be the ones that work half days and call casual days as the year “winds down”. A lackadaisical attitude with your expectations will result in a “soft” fourth quarter. A slow finish is invariably followed by an equally slow start to the New Year. Drive to the finish and break the tape on 2024 with a burst of energy and a lean to the line and into 2025!

Jay McDowell started his Coaching business nearly 18 years ago, after a highly successful career as an EVP of Logistics and Supply Chain for the nation’s leading home healthcare provider. He is passionate about coaching business Owners and business Leaders. He is one of the top coaches in Southern California and delivers proven results.

Private Equity Reputation

December 2, 2024 by John F. Dini

We began this series by saying that Private Equity reputation is as the Great Satan to some, and a savior to others, depending on the personal experience of the speakers. In fact, both reputations are well deserved, but neither can be universally applied.

The “Great Satan” Private Equity Reputation

PEGs buy companies for the express purpose of improving their performance. That often comes with considerable pain for employees. A Searchfunder I know said recently “I’m looking at this acquisition because the owner thinks he is running an efficient company, where I see at least ten points that could be dropping to the bottom line.”

Efficiency is good, but too often it flies in the face of what made a company successful. In one example I recall, the PEG principals spoke to the assembled employees the day after closing on the business. They said “We bought this company for its culture and its people. Those are the most important assets to us.”

The cuts started coming the following Monday. Thanksgiving turkeys were “outdated.” Gone. All bonuses would be performance-based, so extra bonuses at Christmas would be discontinued. Season seats for the local sports franchise – gone. (Most of those went to customers.) Weekend overtime – gone. Schedules would be rearranged so that weekend workers were now scheduled for Saturdays and Sundays and got fewer hours during the week to make up for it.

Employee discounts on the company’s products – gone. Partial subsidies for family health insurance, well by now you are getting the gist. The flood of cuts was shocking and seemed unending. The flood of resignations started soon after.

By the way, the PEG missed its planned flip date (when they were supposed to sell to a bigger PEG) because of poor results and eventually took the company into Chapter 11.
I wish I could say that this type of result was unique, but it happens in far too many cases.

The “Savior” Private Equity Reputation

There is another reality. About 50% of all the privately held employers in the United States are Baby Boomers. The youngest of these are now turning 60. Many have built substantial enterprises whose value is far beyond what a younger entrepreneur can afford.

Private Equity has morphed into a many-headed creature, capable of acquiring almost any size business with value. It will never be for the mom-and-pop businesses that merely earn a living for the owner. As Doug Tatum says in No Man’s Land, they have grown to a level where they provide “wealth” to the owner equivalent to three salaries. Unfortunately, the owner must hold down three jobs for it to work.

But businesses with real cash flow, from a few hundred thousand dollars to a few hundred million, can find a tranche of PEGs who will consider their acquisition. Some specialize in minority ownership, or in funding the transition to a new generation of owners. Like it or not, these will be the saving of an entire generation who became successful by building a illiquid asset.

The latest estimate (from the Exit Planning Institute) is that these owners have $14 trillion dollars locked up in these illiquid assets – their companies. It that was an economy, it would be third in the world behind only the USA and China.

Reputation Counts

Many business owners are dazzled by the money a PEG has. With 17,000 of them out there, “We have money” is no longer as impressive as it once was. If a PEG comes calling, sellers (and their advisors) should carefully research their track record. If they lead with a guy “just like you” who owned a previous acquisition, be cautious. In most cases, he or she is compensated for adding to their portfolio.

Instead, talk to other owners who were acquired previously and are no longer active in the business. Look carefully into the acquirer’s experience in your industry. Unfortunately, “We have money” sometimes dazzles the PEG too. They begin to think financial manipulation is the only thing needed to make any business more successful.

Private Equity reputation is important. It will help you decide whether you should be discussing “show me the money” or “show me the future.”

John F. Dini develops transition and succession strategies that allow business owners to exit their companies on their own schedule, with the proceeds they seek and complete control over the process. He takes a coaching approach to client engagements, focusing on helping owners of companies with $1M to $250M in revenue achieve both their desired lifestyles and legacies.

Private Equity Leverage

November 11, 2024 by John F. Dini

Private equity leverage can dramatically increase ROI, but it can also be a trap. In our previous article, we discussed the general structure of Private Equity, how it works, and the types of Private Equity Groups (PEGs). They have grown rapidly as an alternative investment that produces far better returns than Treasury Bills or publicly traded equities.

The Power of OPM (Other People’s Money)

How do they provide these enviable 18% to 25% returns on an investment? The simple answer is leverage. An example most business owners can easily comprehend is a real estate mortgage. You put down $100,000 on a $500,000 building. The mortgage, especially in the first few years, is largely interest expense. You lease the building for a rental rate that covers your mortgage payment and expenses. Two years later you sell the building for $700,000. How much did you make?

The obvious answer is $200,000, but what is your Return on Investment (ROI)? If you said 40% you’d technically be correct. You made a $200,000 profit on a $500,000 investment. But what was your cash-on-cash return?

That is 200%. You actually invested $100,000 of your own money and used the building to secure a loan for the rest. Your profit was $200,000 on a $100,000 investment.

Private Equity Leverage(Other People’s Money)

Extend this example to buying a business. The business makes about $2,000,000 a year. (For the sake of simplicity, we won’t discuss here the differences between cash flow and profit.) The agreed-upon acquisition price is $10,000,000, or five times the profits. The PEG contributes $2,000,000 as a downpayment and finances the remaining $8,000,000. The cash flow of the business must cover the loan payments and leave enough working capital for operations.

A 5% loan amortized over 20 years requires a payment of about $53,000 a month or $636,000 a year. The remaining cash flow ($1,364,000) produces a return of 68% annually on the purchase.

Of course, the Limited Partner investors don’t get all 68%. Some must be kept as working capital for expanding operations. The PEG receives substantial fees for creating the deal and overseeing the investment.

In fact, the 25% return to the investors is only part of the story. If the PEG can double the company to a $4,000,000 profit level, even the exact same 5x multiple on exit could produce a $20,000,000 sale, or an $18,000,000 return on the original $2,000,000 cash outlay. That’s a 900% ROI.

Leveraging the Leverage

Buying a middle-market business with the structure outlined above would be lucrative enough, but of course, as professionals, the PEG would like to maximize their return. They frequently cut expenses dramatically upon acquisition (more on this in the next article.)

Often, they will line up a secondary loan, using the company’s cash flow to reduce or eliminate their downpayment exposure.

Private equity leverageDuring the low-interest environment of the last decade, PEGs could negotiate even more favorable terms. If you replace the 5% loan with a 2.5% loan, the annual cost is reduced to $509,000 annually, leaving a 75% return to work with.

Traditionally, most of the loan terms in private equity purchases reset after a few years. Refinancing at 9% raises the loan cost to about $865,000. Still, a 57% ROI is acceptable, if the business is thriving and the other expenses are kept under control. If the cash flow is covering a secondary loan at an even higher rate to replace the downpayment, or it’s been pledged to cover other debt outside the business, the picture might not be as rosy.

Private Equity and Privately Held Businesses

October 28, 2024 by John F. Dini

Depending on who you are talking to, Private Equity is either the Great Satan or the savior of small and mid-market companies in the United States. The stories depend a lot on the personal experience of the speakers.

Once a vehicle for high-risk investment plays in corporate takeovers (see Bryan Burrough’s Barbarians at the Gate,) Private Equity has morphed into tranches where specialists seek opportunities in everything from a Main Street entrepreneurship to multi-billion-dollar entities.

What is Private Equity?

The term itself is relatively generic. According to Pitchbook, there are currently 17,000 Private Equity Groups (or PEGs) operating in the US. The accepted business model for our purposes is a limited partnership that raises money to invest in closely held companies. The purpose is plain. Well-run private businesses typically produce a better return on investment than publicly traded entities.

The current Price to Earnings (or PE – just to be a little more confusing) ratio of the S&P 500 is about 27.5. This is after a long bull market has raised stock prices considerably. The ratio is up 11.5% in the last year. That means the average stock currently returns 3.6% profit on its price. Of course, the profits are not usually distributed to the shareholders in their entirety.

Compare that to the 18% to 25% return many PEGs promise their investors. It’s easy to see why they are a favorite of high net worth individuals, hedge funds and family offices. As the Private Equity industry has matured and diversified, they have even drawn investment from the usually more conservative government and union pension funds.

Private Equity Types

Among those 17,000 PEGs the types range from those who have billions in “dry powder” (investable capital,) to some who claim to know of investors who would probably put money into a good deal if asked. Of course, which type of PEG you are dealing with is important information for an owner considering an offer.

The “typical” PEG as most people know it has a fund for acquisitions. It may be their first, or it may be the latest of many funds they’ve raised. This fund invests in privately held businesses. Traditionally PEGs in the middle market space would only consider companies with a free cash flow of $1,000,000 or greater. That left a plethora of smaller businesses out of the game.

For a dozen years I’ve been writing about the pending flood of exiting Boomers faced with a lack of willing and able buyers. I should have known better. Business abhors a vacuum.

Searchfunders

Faced with an overabundance of sellers and a dearth of capable buyers, Private Equity spawned a new model to take advantage of the market, the Searchfunders. These are typically younger individuals, many of whom graduated from one of the “EBA” (Entrepreneurship By Acquisition) programs now offered by almost two dozen business schools.

These programs teach would-be entrepreneurs how to seek out capital, structure deals, and conduct due diligence. Some Searchfunders are “funded”, meaning they have investors putting up a stipend for their expenses. Others are “self-funded.” They find a deal, and then negotiate with investment funds to back them financially.

Both PEGs and Searchfunders seek “platform” companies, those that have experienced management or sufficiently strong operational systems to absorb “add-on” or “tuck-in” acquisitions. The costs of a transaction have bumped many seasoned PEGs into $2,000,000 and up as a cash flow requirement. Searchfunders have happily moved into the $500,000 to $2,000,000 market.

In the next article we’ll discuss how PEGs can promise returns that are far beyond the profitability of the businesses they buy.

It’s Fall, or as Some Say, “Football Season” – How Succession and Exit Planning Mirror Winning the Big Game

October 11, 2024 by Chris Cimaglio

Fall brings crisp air, colorful leaves, and the undeniable excitement of football season. And much like football, where great individual players exist, the game’s heart and soul lie in teamwork. No matter how talented a quarterback or running back is, they can’t win the game alone. Victory requires everyone—linemen, defense, special teams, and coaches—working together toward a shared goal.

Succession and exit planning for business owners are strikingly similar. Just as a quarterback can’t win without a strong team, an owner can’t craft a successful exit strategy solo. Many owners are so wrapped up in running their day-to-day operations that they never stop to think about their “end game.” And like a team without a playbook, they often delay these crucial conversations until it’s too late.

According to the first-ever “2024 State of Succession and Exit Planning in the Horticulture Industry” survey by PivotPoint Business Solutions, we’re seeing too many businesses fumble the ball. The data shows an alarming trend of closures and liquidations—avoidable with proper planning. Succession planning, like football, is a team sport, and many businesses are unprepared for the big win.

Ideally, business owners start with the end in mind. But the survey reveals that our readiness score as an industry is a mere 3 out of 10. Even worse, 32% of respondents don’t have an exit plan at all, and of those wanting to exit within two years, 55% haven’t started preparing. The message is clear: You can’t do it alone.

Building Your Winning Team

In football, every successful team needs coaches and players making the right moves to cross the goal line. For a business owner, your trusted advisors are your coaching staff, and they play an equally pivotal role in guiding you to a successful exit. Creating a well-structured exit plan that maximizes your business’s value can take 3-5 years, but with the right team, you’ll be prepared for anything—from an unexpected third-party offer to a forced exit due to unforeseen events like death, disability, divorce, business disagreements between owners, or business distress.

So, who are the key players on your exit planning team, and how do they help you score the winning touchdown?

Your Trusted Advisors: The Coaching Staff

Just like in football, you need a variety of coaches or experts working in harmony to achieve success. Here’s a breakdown of the key advisors every owner should have:

The Accountant (CPA):

Often the most trusted advisor, your accountant knows your financial history inside out. They ensure clean financials, which are crucial for any exit plan. Survey results show that 25% of respondents rely on their accountant the most.

The Attorney:

Your legal coach is critical in drafting key agreements like Shareholder and Buy-Sell for example, and reviewing any Letters of Intent or offers. With 17% of respondents citing their attorney as a top advisor, their role in securing the “game-winning” contracts and estate planning is indispensable.

The Financial Planner:

Only 12% of business owners look to their financial planner for guidance, but they should. Financial readiness is a key factor in your transition. In fact, 70% of owners are unsure of their after-tax income needs post-transition. Many owners face financial uncertainty, rating their financial readiness 58 out of 100, well below our target of 80. A financial planner helps you plan for retirement, ensuring you have enough resources to live comfortably once you exit.

Certified Exit Plan Advisor (CEPA):

Your CEPA is your quarterback who calls the plays in your business transition. This advisor coordinates all the moving parts, bringing together your personal, business, and financial goals to ensure a smooth exit. Shockingly, only 7% of survey respondents have a CEPA, but they are key to keeping your exit strategy on track.

Your CEPA leads the team through three critical phases:

Discovery-Understanding your personal goals, business goals, and financial situation, including a business valuation.
Preparation-Building value, mitigating risks, and setting up your financial future.
Decision-Guiding you to confidently choose between growing or selling, with everything in place for a smooth transition.

Your Spouse is Not Your Trusted Exit Advisor

The survey found that many owners consider their spouse their most trusted advisor. While it’s wonderful to have that partnership in life, exit planning requires external, specialized guidance. Just as in football, where you likely wouldn’t ask a family member to coach the Super Bowl, you need objective advisors to give you the best shot at success. They will help manage the complex legal, financial, and operational components of your exit.

Your Internal Team: The Key Players

In football, even the best coaches need skilled players to execute the game plan. The same goes for your business. Your internal management team plays a critical role in driving the business forward. Luckily, 80% of survey respondents have already shared their plans with key team members. Regular communication with your team—whether family, employees, or potential successors—is essential to prevent misunderstandings and to align everyone on business goals and timelines.

Just as football teams develop a strategy for each play, you need a plan to retain these key players and keep your business running smoothly as you move toward your transition. Next month we’ll talk more about how to ensure you have the right people on your team and what it takes to retain these key players as you move down your path to victory.

Teamwork Makes the Dream Work

Only 33% of business owners are currently working with advisors to prepare for their exit. But just as no football team can win the Super Bowl with only one star player, you can’t craft an effective exit strategy alone. Exit planning is a team effort that requires insights from multiple stakeholders—advisors, management, and family members. Each brings expertise in a specific area, helping you navigate the transition successfully.

Ultimately, winning in business transition is like winning the big game—it takes teamwork, strategy, and preparation. With the right trusted advisors and players by your side, you’ll be well on your way to securing your business’s legacy and crossing that finish line victoriously.

Chris Cimaglio, CEPA®, Certified Value Builder™, Accredited Value Guide, PEMA® is the Managing Director at PivotPoint Business Solutions. Contact Chris at chris@pivotpointbizsolutions.com.