With mergers-and-acquisitions activity on the upswing and Baby Boomers retiring in large numbers, many owners are now looking to exit their businesses. In this podcast, Fentress Seagroves, deals partner for the U.S. with PwC, and one of the authors of the PwC report Exit Strategies for Owners of a Private Company, outlines the steps business owners can take to ensure a successful transition and discusses the many ways CPAs can support them during this process.
In this episode, you’ll learn:
- The five stages of the exit process.
- The biggest challenges owners face during each stage.
- The vital role CPAs can play during the exit process.
- When owners should start thinking about exiting.
- Areas of exit planning owners tend to overlook.
- Top tips for owners during the exit process.
Play the episode below:
To comment on this podcast or to suggest an idea for another podcast, contact Courtney Vien, a JofA senior editor, at Courtney.Vien@aicpa-cima.com.
Courtney Vien: Hello and welcome to the Journal of Accountancy podcast. I’m Courtney Vien, a senior editor with the Journal of Accountancy. I’m speaking with Fentress Seagroves, deals partner with PwC for the U.S., and one of the authors of a recent PwC report called Exit Strategies for Owners of a Private Company.
So we are in the middle of a long-running streak of high mergers and acquisitions activity, and we’ve certainly seen this in the accounting space. You’ve likely experienced it if you’ve worked with business owners. PwC put together this report to give advice to the owners of private companies who are looking to sell or otherwise leave their businesses, and Fentress is going to give us some of the highlights. But first, please listen to this message from our sponsor.
Fentress Seagroves: Hi.
Vien: How are you today?
Seagroves: I’m happy to be here. Thanks a lot.
Vien: So tell me more about the report and how it came to be.
Seagroves: Well, the report is aimed at family- and entrepreneur-owned businesses, owners looking to sell, or bring in private equity, or growth capital. This is a really robust M&A market right now. There’s a lot of capital in the market looking for good businesses, and we’ve thought about trying to provide some general guidelines and insights based on our experience of helping companies in these types of situations respond to every stage, from the planning through the closing of a transaction, to life after.
This report’s based on many years of experience on divestiture transactions, for me both as an investment banker and a due diligence partner, but also from the collective experience of the colleagues I included in this process. It includes a lot of research on tax laws by our tax team, which of course, as you guys know, require a regular review and consideration. But I think the most important thing is reflecting on transactions that we've seen the past, situations with business owners that have gone well, and others that haven't gone so well. What were the lessons learned?
Vien: You mentioned that you've been seeing a lot of M&A activity lately. Can you tell us a little bit about what the market’s looking like lately?
Seagroves: Sure. There's a record amount of “dry powder” out in the marketplace: private equity money that's looking for an investment option. We estimate about over a trillion dollars out there which is unparalleled in past history.
And this creates a lot of demand in the marketplace, a lot of demand for good businesses. At the same time, strategic buyers are looking for ways to grow. And they realize that organic growth may not be fast enough for their shareholders. So strategic buyers are looking as well for acquisition opportunities. Both the significant amount of dry capital available with private equity and a hunger of strategic buyers looking for inorganic growth options create a really robust marketplace for an owner to think about when they're selling their business.
Vien: Your report breaks down the exit process into five stages. Can you briefly walk us through those stages?
Seagroves: Let's start with the beginning, the making of the decision. This is all about identifying your goals and objectives as an owner, and then determining the strategy and timing that's appropriate. The theme is really that proactive planning is better than reaction.
Understanding the buyer universe is next. Here the focus is more on understanding which buyer, whether that be private equity or strategic buyers, would likely be interested in the business, and how they line up in terms of monetary or nonmonetary factors. This also helps to shape the understanding of buyers’ expectations during the process.
The next part is preparing the business. This is really the heavy lifting of getting the business ready, from building and organizing the data, to preparing the management team for interviews and presentations, to the process of buyer review and diligence, and then moving through to preparing the information to close. The real theme here is early and comprehensive preparation is key.
The fourth part is the deal process. If you're prepared thoroughly, and you've properly anticipated the challenges and express the strength in the business and its story, then the deal process should go smoothly. So we walk through what happens during the deal process from the initiation of the discussions to the negotiations in the close. And I think the key here is, is we encourage owners to really stay disciplined throughout this process.
And finally, the last section talks about preparing for life after the deal. The section delves into tax and estate planning for post-deal life, thinking about wealth preservation designed to really help optimize an owner's financial legacy for future generations, your future activities.
The end of the day, good planning is going to give you the most options post-deal.
Vien: What role could a CPA play during this process?
Seagroves: There's really a role at each stage of the process because CPAs have a specific set of skills that are very valuable and directly applicable here. CPAs are obviously critical in estate planning and helping business owners understand optimal planning options. So that means they can be involved all the way back to the beginning of the business, throughout the lifecycle of the business.
And as we think about moving into a potential transaction, then CPAs become especially valuable during the preparation stage. Quality of earnings and sell-side due diligence, these are really commonplace things these days. And these analysis areas are really areas of specific strength for CPAs, and where they can really leverage their expertise to help support and explain the reported financials and bridge to the deals financials. This is really a baseline requirement in today's market, and CPAs can really shine here. Accounting and tax expertise is the cornerstone expertise in this process.
CPAs understand the due diligence process. They can help owners and anticipate, plan for questions that will come from the buyers and need to be addressed. They can be a coach to management and help them through the data process and the story so that the buyer can get the clarity and the process can proceed efficiently. They're really — and they really actionize this process and help bring clarity to what needs to be said and how the responses need to be crafted.
I think CPAs can help with the underlying business story, of course, starting with their involvement with reporting and analyzing the financial history and past performance. The fundamental underpinning of a buyer’s confidence in the future is going to be the past and the CPAs can help capture that, present that, and help the owner put their best foot forward.
Given their training and familiarity as trusted business advisers, they can help the seller prepare to articulate the critical capabilities of the company, and how that company is going to achieve its growth plan beyond the near term. In today's marketplace, a good business with a good story sells at a premium, and CPAs speak the language of business. They're perfect advisers to be involved with an owner during this capstone event, from the planning to close.
Vien: You break the exit process up into five steps, from the decision, to understanding the buyers, to preparing the business, to the deal process itself, and ending with life after the deal. Is there one of these stages that causes more problems for business owners than the others? Have you seen that?
Seagroves: Well, that's a great question. I'd say each stage creates challenges for owners. The first, just making the decision. I mean, it's sometimes hard for owners to separate from a business. Most entrepreneurs have dedicated a significant portion of their lives to these companies. It's hard for them to recognize the optimal time to leave, to exit, to sell. What we encourage is the owner should be proactive to start thinking, and assessing, and planning early, because it is going to be hard to make that decision to sell the business. And it's going to be tough to figure out when is a good time to do it. But if you've planned ahead, it's going to provide flexibility when they do want to move forward.
When considering buyers, this can be also challenging for some owners. We encourage them to consider the options. Don't be committed to the first buyer that you talk to, the first private equity group that shows interest. We encourage them to cast a broad net, at least early on, in thinking about potential buyers, whether they be private equity or strategic, domestic or international. You never know who could be the right match without some significant consideration. We want to help them match the buyer with their objectives.
That's really the key challenge for the owner. I'd say when they're choosing a buyer, one challenge they have is making sure they don't forget about important factors like certainty to close. The highest bid doesn't mean it's the best bid.
In the area of preparing the business I'd say the biggest challenge is that sellers most often underestimate just how much time this takes. And it's not just their time, but time from key managers. That's time away from the business. And if you don't plan accordingly, this can really create unnecessary business disruption.
During the deal process, one of the biggest challenges is for the seller not to get too emotional during the process. There's a lot of pressure. This is a capstone event, so much riding on the outcome and a lot going on. And owners can get off track if they don't stay objective and disciplined until the close.
Another key challenge is making sure the owner doesn't take their eye off the ball. That reminder that they need to run the business successfully throughout the process. We see too often where a business fails to hit its projections, or deliver on a promised action or events. And this raises scrutiny for the buyer, can impair valuation, impede the process, and create more pressure on the seller.
And if the seller runs the business successfully, like they're not going to sell it, it also gives them optionality. It takes a little bit of the pressure off, that they have an option if the deal doesn't go through or if they want to change their mind. But staying disciplined, staying to and true to the preparation, the coaching of your advisers, allows the owner to stay in control during the process.
And that's really important, because as the process moves forward, as you come closer and closer to being wedded to a buyer, the natural leverage in the process shifts to the buyer.
Vien: How early should business owners start thinking about their exit strategies?
Seagroves: I think planning for an exit strategy should be something an owner thinks about on a regular basis in the ordinary course of running their business. Even if a transaction or the need to begin a process is not imminent, it's good for the owner to be thinking about these things, so they can be ready to recognize the signal that they should exit, or the opportunity when it arises to exit, and be ready to move forward with the process.
You want to be able to be proactive. Same thing with estate planning and tax planning. All of these things are better when you start them early. So, in some cases, the owner is able to come to the market on their own terms, when they want to, with the right buyer with their timing.
But in some cases, something happens. An owner may become ill. There may be a shift in the markets where a business needs to respond and an owner wants to find a partner. There may be a partner who comes to the table with a can't-refuse offer to do a transaction. It's better if you've thought about the process of exiting, of selling, of bringing on capital before that happens, so that you understand: Where is the business strong? Where do I need resources to help me think about this? And how quickly can I respond? The more you've thought about it, the more you prepared, the better you can react and move forward when you need to.
Vien: You mentioned tax strategies fairly often in your report. Is this an area of exit planning that owners tend to overlook?
Seagroves: Well, if they've got a good CPA I would expect they're very well prepared from a tax perspective. But selling your business creates tax complexities that most owners haven't normally had to deal with. Unfortunately we see situations where owners want to structure a certain type of wealth planning/estate planning structure, but they didn't start early enough for them to take advantage of it at the time of their transaction. So making decisions around asset sales, stock sales — those are transactional tax structure discussions that need to happen prior to the transaction.
When you sell your business it's a capstone event, oftentimes creating significant wealth. That requires thoughtful and detailed planning to optimize the value of that estate going forward, for the legacy of the owner, and the generations thereafter, or to create the most flexibility for them post-deal.
Tax planning is something that's available to do now, so an owner doesn't have to wait. And we really encourage that.
Vien: What are the three most important pieces of advice that you would give to a business owner thinking of selling or exiting?
Seagroves: Well, I’d say that the three most important points I'd make were, number one, preparation and discipline are absolutely critical to ensuring success and optimal outcome. Owners can keep more control of the process by anticipating what buyers are going to be focused on, and being prepared to address those items and details.
Second thing I'd say is keep focused on the business. Owners have to minimize the disruption through planning, like we've said, but we want to make sure that the management team’s running the business as if they weren't going to sell.
Hit your projections. Hit your benchmarks. Achieve what you've said you're going to achieve during the near term, during the process, to build the confidence in the buyer. This creates credibility. It also keeps owners — this creates — this reinforces credibility. But this also keeps an owner’s optionality during the process, and presents an alternative in the end should they walk away.
The third thing I'd say is don't wait. Be proactive with your planning, at least assessing options, timeline, considerations around your future, what's important, and then what it's going to take to get you and your business ready, so that when you do decide it's time for a transaction, and you need to move forward, you are ready to proceed efficiently and effectively.
Vien: So you've made several references to the story of a business. Can you tell us a little more about what you mean by that term and how having a story can help owners to sell?
Seagroves: That's a great question about story. Most business owners have lived the story of their business. They've grown the business. They've had the ups, the downs. They've made decisions around products, and people, and investment and costs, and during a process, the story is the thing that's going to be presented to the buyers to build confidence in them investing or buying the business. Now, this story is not just financial history and past performance. That is really important, because that's going to give you confidence in the future. If you've done it in the past, and the owner can demonstrate that, and defend it, it's going to give the buyer confidence that it can happen again. But the buyer is going to want to understand more than that.
They're going to want to understand: How strong is the management team? Where is the business strategically positioned in the marketplace? How are the relationships with customers and suppliers? How will it grow? How does it produce cash? And ultimately, these are the things that the buyer is going to be paying for.
So the story is not just the past. The story is not just what's going on right now. The story is not just what's going to happen in the intermediate term, but what's going to happen longer term, and that comes from the vision, and the strategy, and the plan that the owner has, and how they can articulate it not just from a stand-alone perspective of an owner, but how that creates value in a buyer’s hands, whether that be private equity or strategic buyers, because businesses with a good story, that's defensible, sell at a premium in today's marketplace.
Vien: That was Fentress Seagroves, deals partner with PwC for the US, and his report is called Exit Strategies for Owners of a Private Company. You can find it at www.PWC.com/pcs/exitstrategies.
This has been the Journal of Accountancy podcast. Thank you for listening.