Business Owner Received an Offer with No Exit Plan in Place
THE SITUATION: $10MM revenue, 30-year well-established building automation company unexpectedly received an offer from a competitor.
Without an advisor, the owner tried to negotiate a deal on his own. The negotiations dragged on while the owner provided confidential information about his company without a proper NDA to protect his proprietary information. He did not know the value of the business so he could not assess if the offer received was at market. He also did not understand the terms, how to mitigate taxes, or the potential impact of a liquidity event on his wealth.
His wealth manager recognized that he desperately needed guidance in preparing and executing the sale of his business and referred him to Legacy Partners.
Key Owner Questions
- With just one buyer, how do I know if this is a good offer or if the buyer is trying to steal my business?
- Can I afford to sell and live the life I enjoy currently as a business owner?
- How can I minimize taxes?
- I have groomed two employees to take over the business. Is an internal transfer the right option or should I sell it to an external buyer?
OUR APPROACH
Create an actionable and comprehensive Master Exit Plan® that answers all of the above questions and execute the exit strategy to sell the business to a third-party, meeting the owner’s business, financial, and personal concerns:
- Valuation: We performed an in-depth quantitative and qualitative analyses to calculate the Enterprise Value of the business. This valuation served as a benchmark as the owner evaluated the current offer received and future offers, assessed exiting via an internal transaction versus a sale to an external buyer, and gained clarity on the potential impact of a liquidity event on his personal wealth.
- Optimization Plan: The valuation identified opportunities for improvement and a strategy to optimize the business to increase value and marketability of the entity was developed and executed prior to going to market.
- Post-Ownership Plan: The post-ownership plan established his personal goals for the next chapter in his life, which included buying a second home while maintaining residency in his current tax-free state. This plan ensured that the owner would transition smoothly from business ownership into the next chapter in his life.
- Personal Financial Plan: A financial plan, which accounted for the owner’s available assets to be used to fund his retirement, including the net investable proceeds from the sale of the business, and the projected associated cost of retirement based on his post-ownership plan was created. The financial plan gave the owner the necessary clarity to assess whether a sale to an outside buyer would better meet his goals as opposed to an internal transfer to his key employees. The plan also served as a guide as he considered an equity roll in the deal structure and made critical tax mitigation, wealth management, and estate planning decisions.
- Exit Strategy: Based on the valuation and his personal financial plan, the owner opted to exit via a sale to a third-party which would result in a higher transaction value than an internal transaction to his key employees. He engaged Legacy Partners to run a professional M&A process which attracted multiple buyers to his business.
- Tax Mitigation and Estate Plan Review: A strategy to minimize taxes on the sale of the business was developed and included negotiating the removal of a 338(h)(10) election in the sale structure from the deal which would have treated the transaction as an asset sale for tax purposes resulting in over a $1MM additional tax burden to the seller. His estate plan was also updated to include the proper distribution of assets according to his and his wife’s wishes.
Result
The M&A Process:
39 Buyers were included in the limited auction
10 NDAs were signed
3 Indication of Interests
1 Letter of Intent
Final Deal:
- Structure: Cash-free, debt-free stock sale.
- Price: 47% Increase over the original offer received and over $1MM in tax savings.
- Terms: All cash with a 10% equity roll. Two-year employment agreement for the owner. Employment agreements for key employees.
- Wealth Management: Proceeds were immediately invested per the identified investment strategy which was aligned with the owner’s estate plan.
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