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Chips off the table

As entrepreneurs, our largest asset is usually our business. Most owners dedicate years of blood, sweat and tears to build their company, often at the exclusion of diversification. We sometimes wrongly believe that our best chance of controlling our destiny is through managing our own business and reinvesting its earnings. In the process, we often take risks (for example personally guaranteeing business debt) with most of our personal net worth being at risk or “in the game”.

Prudence dictates that we will eventually want to protect our assets which requires we take “Chips Off the Table”. This can be accomplished in a number of ways:

• Sell the business to an outsider for cash. The preferred exit for many owners. Requires a buyer with deep pockets and synergies with the seller. Sellers seeking this option need to plan years in advance and understand the importance of timing.

• Sell the business to an outsider for a combination of cash and seller financing. An installment sale can be risky but can be attractive to a seller who remains with the Company after the sale. This can result in a higher selling price, lower taxes and a superior interest rate compared with alternative investments. Some sellers use a guaranteed structured installment sale, which guarantees that the seller gets their money but is not taxed until received.

• Sell the business to family/employees/management. Many firms are led by professional managers, including family members, who are attractive partners for private or strategic buyers/investors. Also, where appropriate, ESOPs (Employee Stock Option Plans) offer very attractive tax benefits for owners and employees.

• Merge with a public Company substituting shares in a private company for public securities. This alternative offers tax deferrals and is attractive where the public entity is well managed, has a long track record of growing value, and has a robust market for its shares.

• Recapitalizations make sense when values are high and where there are plenty of buyers (current conditions). Owners can sell a controlling or non-controlling interest for cash and keep ownership and management control. This presents the opportunity to withdraw value from the business and yet stay engaged and active without risk.

Additional Factors to consider:

• Income Tax Rates – Federal Capital Gain rates recently were increased to 20% from 15%, Ordinary rates on the taxable earnings from a business (reinvested or not) can be as

high as 40%. These differences can be significant over time and with Capital Gains rates expected to increase further, sellers may elect to move sooner rather than later.

• Interest Rates – There is a direct relationship between the cost of debt and capital and the price that can be paid for a business. When rates are higher, cash flow is lower; thus depressing value. Interest rates today remain at historically low levels. Most economists believe they will rise in the future.

• Market Conditions –As we learned in Basic Economics, supply and demand ultimately determine the value of any business. Today, the market is robust with a huge amount of money chasing fewer quality deals. The result is a sellers’ market and an opportunity for business owners to get top dollar.

• Business Life Cycle – Businesses, like individuals have a life expectancy with growth, maturity and decline phases. Change can come quickly when we are least prepared. Very few family businesses survive longer than two generations. The time to sell is ALWAYS when the business is at its peak or close thereto and the owner is healthy and still active. Many great private companies have failed by holding on too long.

The decision of when to take “Chips Off the Table” is the ultimate decision we all make as business owners. It is a decision that can impact the seller and his/her heirs for generations. It needs to be made only after careful consideration, planning, and without emotion or bias.

Choose wisely.

Creating Shareholder Value through a Roll-Up


In years past, there have been a number of consolidations or “Roll-ups” in which participating companies have created significant shareholder value through a combination of multiple companies in the same industry. Recently, these consolidations have been driven by the recession, outside factors over which business owners have little control and “baby boomers” desiring to retire. Participation in a Roll-up provides an attractive exit alternative for many business owners.

Examples of industries that have been particularly active in consolidation are financial services, food and beverage distribution/manufacturing, logistics companies, auto retailing, commercial banking, and waste hauling. Recent changes and declining margins in the U.S. health care industry are also driving consolidation in that industry.

Introduction to Roll-ups

In simple terms, a Roll-up involves the merger and integration of a number of businesses in the same industry to create one larger company. They are generally best suited for highly fragmented, mature industries with predictable, sustainable cash flows but without a dominant player(s).

Usually a “Sponsor” (an established or new larger company backed by funding from a lender or by a private equity fund) acquires the assets of other companies for cash and/or equity (“bolt-ons”) with the objective of generating economies of scale and reducing costs through elimination of duplicative expenses, etc. The non-Sponsor participants (“Founders”) often become owners and remain active as managers in the surviving entity.

Benefits of Roll-ups

The primary benefit of consolidation is the opportunity to arbitrage the difference in valuation (based on earnings multiples) between smaller vs larger private companies. Small private companies normally can be acquired for a lower earnings multiple than a larger company. A Sponsor can generally acquire a number of small companies for 2 or 3 times EBITDA and then sell for a higher multiple of 5 or 6 times.
If the Sponsor ultimately becomes a public entity, the valuation multiple may be 9 or 10 times EBITDA or more.

As a result of the valuation arbitrage, many owners of smaller companies have created substantial value for themselves by electing to take equity in the consolidated entity as opposed to selling for cash.

Consolidation may generate other benefits as well:

• Cost synergies – examples are cheaper insurance, merchant fees and buying power;

• Revenue Growth – cross-selling of products / services and access to larger customers and new markets;

• Brand Building – Allows for faster brand recognition across multiple market locations or sales channels;

• Capital – Capital is more accessible to larger, strong entities;

• Leveraging fixed costs – spreading fixed costs (such as HQ or sales /marketing and occupancy costs) over a larger revenue base;

• Centralized administration – access to more sophisticated IT and accounting systems.

Is my industry suitable for a Roll-up?

• If customer interface represents a high percentage of the costs of doing business, the opportunity for economies of scale is limited. Also, businesses in some industries benefit from being small, innovative, and local – values which are not always enhanced by size (and hence less suitable for consolidation). Trying to bring together a large number of equally small and unsophisticated companies is not likely to succeed.

It is easier to integrate a large number of relatively smaller distribution or service businesses than larger, more complex businesses (such as IT and manufacturing).

• Does the Sponsor have the right stuff?

• An experienced and committed management team with the ability to take the business to the next level
• A long term perspective and the patience required to create value
• Sound proven business model with a history of earnings
• Well developed and scalable systems and infrastructure

• How difficult is integration? Do the Founders have as a common goal the creation of value? Do they have reasonable valuation expectations? Are the cultures of the businesses similar? Will key managers sign on? Do the participants have good information including financials?

• Is the size of the industry large enough to generate economies of scale? For example, can enhanced earnings be generated through centralized bulk purchasing of products and services?

• Are there third party suppliers, manufacturers, customers, etc. that are encouraging consolidation? Will customers see the consolidation as beneficial? How will competitors react to the aggregation? Will the consolidation open new opportunities in new markets or territories with larger customers?

• Can the addition of new technology to the combined companies create standardization of operating and pricing policies?

• How many bolt-ons should be acquired?

Too much, too soon may exceed the ability of management to integrate the add-ons (both operationally and culturally). Too few participants may not provide the scale needed to fully utilize synergies/buying power.

• Are some Founders willing to “roll” a portion of their equity in their current business into ownership in the Sponsor? A significant percentage of the equity in the Sponsor Company should come from Founders.

• What are the costs associated with a Roll-up?

A successful Roll-up requires extensive research, preparation and cooperation. The cost of retaining professionals experienced in these matters, including investment bankers, legal, accounting, and tax experts can be significant. Businesses with a high risk of contingent liabilities, complex financial histories, uncertain/unstable forecasts can make the cost of due diligence prohibitively expensive.

What are the risks of Roll-ups?

• Consolidation can present integration challenges, clashes of culture/ego, and execution risk;

• Geographical differences can be hard to overcome;

• It can be difficult to integrate smaller businesses with varying information and accounting systems, management styles and business philosophies;

• Sometimes the cost savings don’t exceed the expense of a head office (executive salaries, etc.);

• If Founders receive a large cash payout as part of the Roll-up they sometimes lose focus rather than driving the business forward. It is important that most participants (including management) have “skin in the game”, particularly if there is the risk a key member will leave the group to start a new competing business;

• Under new ownership, Founders will inevitably be forced to deal with a more formalized culture with far stricter reporting requirements and governance with all strategic decisions being dictated at the Board level.

• The greater the number of parties means the greater the risk that one stakeholder seeks to hold up the consolidation or the eventual exit by being greedy or relying on some technical right (in other words refusing to sign the relevant acquisition or sale documents) in order to get a special deal.

Mitigation strategies

The risks of a Roll-up can be mitigated through the careful implementation of several strategies:

• A governance model that is Sponsor/Founder centric (e.g. the Sponsor/Founders retain a majority of the equity, the CEO is appointed and the majority of the Board is appointed by the Founders). This governance model is an important driver of success.

• Use a “push” rather than “pull” strategy for some policies and procedures. In other words, it is up to each Founder whether they accept changes rather than it being forced upon them.

• Consider whether a decentralized model is appropriate rather than a centralized
structure. While it makes sense to integrate/centralize certain aspects of the business (such as corporate governance, financial controls/reporting and management of future acquisitions) full integration is not always necessary.

• Offer incentives for Founders to stay involved with the business into the future. These can include options for additional equity or cash bonuses based on the performance of their original business (not just the group).

Strategic Alliances

As companies grow, they often fail to consider strategic alliances as a source for intellectual and financial capital. By definition, a strategic alliance is a formal agreement between two businesses as an alternative to forming a legal partnership, agency, or corporate affiliate relationship (merger or acquisition).

Strategic alliances gained increased popularity in the 1990s. From 1987 to 1992 more than 20,000 new alliances were formed in the U.S, up from 5100 between 1980 and 1987. By 1999, U.S. corporations were involved in over 2,000 alliances with companies in Europe alone.

The primary benefits of a strategic alliance is the opportunity it creates to combine resources or share expertise in order to quickly build or expand market opportunities or gain some other competitive advantage. Some of these include:

• Shared manufacturing and marketing expenses and R&D costs to gain economies of scale
• Expanding a customer base through a partner’s relationships or geographical footprint
• Gaining access to intellectual talent and/or protected technology
• Co-branding or capitalizing on another company’s brand or market position
• Access to capital

Strategic alliances force companies to share revenues and profits, but they also share the risk of loss and failure. As a result, their popularity increases as projected risk increases, thus companies enter into alliances when other options are too risky or too costly.

One common misconception is that large companies only partner with large companies. This has never been the case and is less so these days when change can come quickly, business needs to respond, and where new niches are created every day.

Some recent examples of successful alliances:

Starbucks – Starbucks partnered with Barnes and Nobles bookstores in 1993 to provide in-house coffee shops, benefiting both retailers. In 1996, Starbucks partnered with Pepsico to bottle, distribute and sell the popular coffee-based drink, Frappacino. A Starbucks-United Airlines alliance has resulted in their coffee being offered on flights with the Starbucks logo on the cups and a partnership with Kraft foods has resulted in Starbucks coffee being marketed in grocery stores.

Apple- Apple has a long history of strategic alliances having partnered in the past with Sony, Motorola, Phillips, and AT&T. Recently it partnered with Clearwell in order to jointly develop Clearwell’s E-Discovery platform for the Apple iPad. E-Discovery is used by enterprises and legal entities to obtain documents and information in a “legally defensible” manner.

Hewlett Packard/Disney – HP and Disney have a long-standing alliance dating to 1938, when Disney purchased eight oscillators to use in the sound design of Fantasia. When Disney wanted to develop a virtual attraction called Mission: SPACE, Disney Imagineers and HP engineers relied on HP’s IT architecture, servers and workstations to create Disney’s most technologically advanced attraction.

Eli Lilly – This pharmaceutical giant has been forming alliances for nearly a century, and was the first in big pharma to establish an office devoted entirely to alliance management. It currently has over one hundred partnerships around the world devoted to discovery, development, and marketing.

Some alliances are geography centric. Others focus on specific customers, products, or technology. Vendors, suppliers and even potential competitors can be potential partners. Often the strategic partner eventually becomes a buyer or a seller.

Keep in mind that there must always be “consideration”— value gained by both parties. Often the alliance fails due to one party or the other gaining too much from the relationship. The best alliances are often completely voluntary, where either party can walk on short notice.

The Inman Company and its consultants have years of experience in designing, managing, and monitoring strategic alliances

How to Select an Advisor in the Sale of a Private Business

Electing to sell a private business is one, if not the most important, decision an owner(s) will make during their lifetime. It usually presents a once-in-a-lifetime opportunity, that, if timed correctly and managed professionally, can be a financially rewarding and painless experience.

In recent years, the economy has rebounded from the “Great Recession” and generally, businesses in most industries have prospered. During this recovery, values of lower middle market companies (revenues of $5M-$100M) have also reached record highs.

Some factors driving recent record M&A levels:

• An abundance of lenders and financing options for buyers

• Continued low interest rates relative to historic norms

• Limited organic growth opportunities for buyers

• The need for buyers to gain access to new markets, intellectual property, or business models

Due to renewed confidence by buyers and an increase in their numbers (particularly private equity firms), sellers have never had more options to consider. These can include a sale of 100% of their business, a sale of a majority interest, or even a sale of a minority interest. There are advantages and disadvantages to each.

As a result of the U.S. enjoying an unprecedented ten-year period of favorable conditions, most economists believe the economy will soon cool, as the FED raises interest rates, and external factors (geopolitical instability, regulatory, trade tariffs, etc.) impact deal value. As a result, many owners today are developing an “exit strategy”.


Few business owners are experienced in the selling process. Most are ill suited to negotiate on their own behalf and they often do not give serious thought to a transaction until they are approached by a suitor. Many are intimidated and threatened by the complexities of making a deal or talk too much without regarding the importance of confidentiality. Some elect to take the first deal that comes along, which in just about every case, can be a mistake. They underestimate the time and resources required to close a successful transaction and fail to appreciate the complexities of making a deal.

The best Buyers today are experienced, highly focused, and served by advisors. A Fortune 500 or public company would never consider a sale transaction without the assistance and participation of experienced advisors. They’ve seen studies that confirm that an experienced, professional intermediary can add as much as 40-50% to the selling price of a business and more importantly, greatly increase the odds of the deal closing.

An experienced M&A Advisor should provide the following:

• An opinion of fair Market Value based upon current MARKET conditions and not just financial history and other theoretical considerations used in most “valuations” 

• Financial Benchmarks that compare the Company with its peers and competitors

• An independent business assessment that includes a close look at the Company’s management and employees, market, customers, assets, etc. and identifies its intrinsic value, strengths, weaknesses, threats, and opportunities


Many firms and individuals represent themselves to be qualified at selling a business. Lawyer and accountants play a role in M&A but seldom possess the relationships with buyers or the knowledge and experience of all aspects of a successful transaction. 

Large Wall St, Investment and Commercial Banks have highly educated and credentialed bankers with industry expertise that work mostly in teams, for public companies, Due to high overhead they don’t normally represent companies with values less than $100Million. Their minimum fee is usually $1 Million which they expect to collect within 6 months.
“Business brokers” who sell small businesses do not normally have the academic/professional credentials or expertise to handle larger or complex transactions. Many “brokers” have acquired a “franchise” where little, if any, experience is required to open an office. Their closing percentage can be low with fees, if successful, of 8-10%.

National, regional, and local “Boutique” M&A firms often serve companies in the lower “middle market” (revenues of $5M-$100M). Many of these have seasoned partners who serve as “rainmakers”, while less experienced “associates” handle the details and “heavy lifting”. Fees at these firms can vary but in a $20M transaction are typically in the 3-5% range.


Some M&A advisors specialize in specific industries. This can be beneficial in some instances but it can also be problematic if the advisor brings preconceived biases and/or conflicts of interest to the engagement. Industry agnostic advisors, with broad experience, can offer an unbiased and wider perspective and relationships, and a more creative approach to maximize value.


In selecting a M&A advisor(s) it is important that the individuals involved in the deal have the proper licenses and credentials. Recent regulatory changes have eliminated the need for securities broker-dealer for most middle market transactions, however many states still require intermediaries be licensed real estate brokers (Fl and GA included)

The advisor(s) should be experienced professionals with expertise in all aspects of a transaction, financial, legal, tax and operational. The best advisors are former business owners or C-level executives.

Other important qualities:

• A knowledge of and experience with the corporate governance of private companies/family businesses and the unique issues they present

• Advice that is independent, without emotion or bias, based upon good business practices, and without conflicts of interest

• The ability to provide consulting services as well as M&A advice and make suggestions that will enhance value

• Guidance and suggestions as to various deal alternatives and structure to minimize taxes

• Access to the detailed research (much of which is expensive, and subscription based) required to be informed about the Seller’s industry

• The relationships and resources required to patiently identify the best buyers (strategic and financials)

• The ability and commitment to professionally package the business and present it in its best light

• Demonstrated negotiation skills

• The ability to assist the buyer in arranging financing for the acquisition, if necessary

• A long track record of managing the lawyers and the due diligence process, reviewing the sale documents, and getting deals closed

• Solid advice that is independent and fact based, without conflicts of interest, and in the client’s best interest

• A process that is highly disciplined with timelines and deliverables, under no pressure to close quickly above all else, preserves confidentiality


When selecting an advisor, it’s important that the seller not focus exclusively on the M&A firm, but also the individual(s) who will personally handle the work. Being comfortable with the advisor on a personal basis is very important. Look for these qualities:

• An experienced, mature individual with the wisdom and appreciation of and an understanding of the non-financial issues of a sale, including a sale’s impact on customers, family and employees

• Personal financial stability and a long track record of managing multiple M&A transactions over many years

• A personal commitment of time and energy to the project, the patience to take the time required to make the best deal, and 24/7 availability

• A professional appearance and the confidence that reflects positively on the seller and the business with the communication skills, intelligence and maturity required to handle stressful, complex and difficult situations


Time management is critical in a sale process. Without deadlines, buyers (and sellers) take their time in due diligence and find reasons to re-negotiate. Taking too long to close also increases the risk that key managers, employees, customers, suppliers, and competitors learn of the sale.

A professional advisor should have a proven sale process that includes the following:

• The ability to run an efficient and timely process and maintain confidentiality at all cost

• Preparation of a Confidential Information Memorandum or Executive Summary which includes most of the information buyers require without having to visit the business or interview the owner and employees. Almost all interested buyers will want to know (i) revenue and gross profit by customer and product, and (ii) details of the Company’s market and related market share.

• Prior to going to market, conduct a business assessment thereby reducing the likelihood that interested parties discover aspects of the business late in the process that can kill a deal or when the seller’s leverage is reduced.

• Prepare industry benchmarks comparing the Company’s financial performance with its peer group and others of similar size in the same industry

• Present various transaction alternatives

• A time-proven process to identify and pre-qualify potential buyers

• Personally, contact potential buyers, build relationships with each, and establish the seller as credible and serious and not simply interested in testing the market

• Negotiate the terms of the transaction

• Participate in and supervise the due diligence process

• Review the legal documentation, assist and manage the lawyers, and close the transaction.

In some cases, the advisor is asked to perform additional services:

• Restructuring and/or renegotiating the seller’s debt

• Arranging financing for the buyer

• Provide strategic consulting well in advance of a transaction to prepare the Company for sale

• Assist in resolving shareholder/family issues that can destroy value

• Develop incentive compensation (golden handcuffs) plans for key employees


For many reasons, most proposed M&A transactions fail to close. In the process, sellers become frustrated and the business can be damaged.

Above all else, the owner must remain focused on managing the business, not handling the sale. Visits by buyers should be restricted to after-hours, and guarantee the protection of the Company’s confidential information.


There are many alternatives in a sale of a business. A sale to employees or management is an option in some cases. A sale to an Employee Stock Ownership Plan (ESOP) can offer substantial tax advantages to the seller. Strategic partnerships and joint ventures are not uncommon, are relatively simple to negotiate and structure, and can be attractive alternatives to a sale transaction. A good advisor has experience in developing these agreements.

To maximize value, it is often important that the sale process includes strategic and financial buyers. These buyers have fundamentally different objectives, which usually affect the deal terms as well as the post-transaction integration.


The engagement of a M&A firm should always include a written agreement. Fees in the deal business are standard based upon industry norms, but can vary in important components and certain provisions can be negotiable. Unlike CPAs and lawyers who charge on an hourly basis regardless of the closing of a transaction, a M&A advisor’s fees should ALWAYS be PRIMARILY incentive-based and paid upon the closing of a transaction. This insures that the advisor’s financial interests are in total alignment with the seller’s.

Upon the closing, the advisor receives a “success” fee which can be an agreed upon flat fee or a percentage of the transaction value. The percentage is larger in smaller deals (8-10%) and decline to less than 1% in $100M transactions. Fees for consulting services are based upon time devoted and are in addition to normal transaction fees.


To close a sale of a business requires a great deal of information. The preparation of the “pitchbook” is designed to answer most buyer’s questions and to present the business in a professional, positive light. Professional advisors should prepare the book and charge a fee to cover their costs. Depending upon the size and complexity of the Company, the cost can range from $15-$50k or more. This fee also serves to demonstrate a commitment that the seller is serious about making a deal, and the advisor is not spending time and money working on a project where the seller is simply seeking free information.

Normally, advisors also charge for travel expenses. In all cases, the seller is responsible for income taxes and other professional fees including, accounting, legal, tax, and environmental.


The sale of a business can be a very time-consuming process. Owners attempting to manage a sale themselves report that it can require 70-80% of their time for many months or years. This is time away from the business. Although deals can have been closed in as little as 90 days, a professionally managed sale process can take 12 months or longer.


70% of all proposed M&A deals never close. Buyer and/or sellers often don’t appreciate the complex issues involved in a transaction until late in the process. Negotiations can be intense and difficult. Due diligence can be extensive, time consuming and expensive. Emotional or personal factors sometimes interfere with good business judgement.
An experienced and knowledgeable M&A advisor should have a unique combination of deal experience, knowledge, communication and transaction skills, and integrity. They can shift the experience factor in favor of the seller. Most importantly, they should have the commitment required to make every transaction a win-win for everyone.