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CEO Advisor® Newsletter
June 2020
Getting Your Share of Private Equity's Record $1.5 Trillion Cash Pile

With the challenges created by Covid-19, the plans and thought processes of many CEOs and business owners have changed drastically. How to grow? How to effectively and profitably manage your employees? How to realize substantial money from the business from a minority investment or a majority sale? All of these questions and more have become far more critical today. 

 

Here are some facts that may help you focus on the second half of 2020 and your growth and liquidity plans:


- Private Equity investors are sitting on a record $1.5 trillion in cash. That is the highest on record, and more than double what it was five years ago.


- Analysts say investors are flooding to Private Equity thanks to low interest rates, hedge fund underperformance, and lower expected returns from the public markets.


- This excess amount of cash means more competition for the same deals; however, the excess cash is pushing up valuations and making this a unique opportunity for CEOs and business owners.


- Private Equity firms are holding on to a record pile of cash, but they must make investments in order to generate double-digit returns for their investors.


Highest and Best Use of Cash

These Private Equity firms are working with a shot clock. Private Equity investments have a lifecycle of 5 to 7 years, and they need to get that capital to work within a certain time frame. 



"There used to be the notion that in order to get growth capital for any company you had to grow to $75+ million in Revenue and go to public markets. That's simply not the case today.


CEO Advisor, Inc. works hands-on with CEOs and business owners as a trusted, experienced funding/M&A advisor to present your best options, prepare you for a Private Equity minority investment, or a majority sale of your business enabling you to realize a larger second bite at the apple upon the ultimate sale in 5 to 7 years, and works with you to secure this capital from our many Private Equity sources. 

 

Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520, by mobile phone at (714) 697-3370 or by email at MHartsell@CEOAdvisor.com to discuss your growth capital options, valuation and exit strategy in a no cost, no obligation initial consultation.




Do You Have an Exit Strategy for Your Family Owned Business
When you evaluate the management practices of hundreds of technology companies, here are the primary reasons they fail. 
Evaluate your own management decisions and practices and seek help from a business consultant or business advisor to address your
specific needs.
1. Lack of Market Focus
Emerging technology companies often do anything possible to generate revenue and in the process try to be all things to all people. Worried about losing business they avoid segmenting the market and refuse to focus on one to three key vertical markets. As a result, the company is unable to effectively serve any market segments effectively and management is suddenly swamped with support problems and competitors.
2. Undifferentiated Products
Most technology products and services that fail do so because of a lack of differentiation. Successful companies differentiate their product from all other products on the market. Differentiation is possible on the bases of five fundamental factors: function, time utility, problem solved, price and positioning. These five elements are critical to uniquely positioning your products and services to achieve success and profits.
3. Poor Market Research
Many companies routinely perform the wrong type of market research. Statistical surveys of customers alone do not provide the qualitative information that is needed. Because your target audience often relies as much on perceptions as on facts, qualitative research intended to identify existing needs has equal or greater value in assessing, planning and executing a company's marketing strategy.
4. Excessive Product Improvement
Technology products and services are generally used over an extended period of time, are integrated with complementary products and impose learning costs on customers. Customers require time to implement and recover their investment in high-tech products. The rapid introduction of new and improved versions can make a customer regret a previous purchase, delay all new purchases, and agonize over similar purchases in the future. Additionally, the time and costs related to excessive product development can delay product launches and delay sales opportunities and revenues.
5. Incomplete Products
Customers view products very differently than the technology companies that create or supply them. Technology companies tend to try to sell products on the basis of price, special features and technical specifications. These technical factors are often favored by the engineers who typically run technology companies. The problem is that most customers consider factors such as product support and company reputation to be more important. 
6. Failure to Establish the Right Competitive Barriers
Traditional barriers to competition are of little value in the technology industry. Patents can be effective but are very expensive, divulge trade secrets and take years to come to fruition. Conventional techniques are mostly designed to prevent market entry and tend not to work in technology-based businesses. The most effective competitive barriers in high-tech are the perceptions held by customers and prospects of product differentiation and first to market with a specialization in a market segment.
7. Using Price Alone to Drive Market Transformation
It is easy to misinterpret the role price plays in the market. And it is a mistake to believe that a technology product or service would be widely used and purchased if its cost was low enough. Price is a function of value and utility, and products and services should be positioned and marketed accordingly.
8. Improper Marketing
Marketing is both an art and a science. Positioning, pricing, sales strategy, target vertical markets and other factors contribute to the success or failure of your products and services and the corresponding sales. A well-crafted marketing plan is critical to success. Improper marketing or lack of marketing can be a product killer or cripple your company as a whole.
9. Sales Mismanagement
There's more to sales management than most companies realize. Specific skills are required to effectively manage each type of sales channel and those skills must be developed internally starting with an effective direct sales force. Unique management challenges exist for each primary type of sales channel: direct selling, online sales, dealers, OEMs, alliance partners and value-added resellers (VARs). Seek a business consultant or business advisor to assist you in optimizing your sales strategy as a critical factor in your success.
10. Misinterpretation of the Technology Adoption Lifecycle Model
The primary technology adoption lifecycle model describes the market acceptance of new products in terms of Innovators, Early Adopters, Early Majority, Late Majority, and Laggards. The process of adoption over time is illustrated as a classic normal distribution or "bell curve".
Because the technology adoption model is expressed in terms of a standard bell curve, it means statistically, a random sample of any given market or population must contain: 2.5% Innovators, 13.5% Early Adopters, 34% Early Majority, 34% Late Majority, and 16.0% Laggards. So no matter what industry you tend to be in, there will always be a sequence of adoption by different types of buyers.
When you evaluate the management practices of hundreds of technology companies, here are the primary reasons they fail. 
Evaluate your own management decisions and practices and seek help from a business consultant or business advisor to address your
specific needs.
1. Lack of Market Focus
Emerging technology companies often do anything possible to generate revenue and in the process try to be all things to all people. Worried about losing business they avoid segmenting the market and refuse to focus on one to three key vertical markets. As a result, the company is unable to effectively serve any market segments effectively and management is suddenly swamped with support problems and competitors.
2. Undifferentiated Products
Most technology products and services that fail do so because of a lack of differentiation. Successful companies differentiate their product from all other products on the market. Differentiation is possible on the bases of five fundamental factors: function, time utility, problem solved, price and positioning. These five elements are critical to uniquely positioning your products and services to achieve success and profits.
3. Poor Market Research
Many companies routinely perform the wrong type of market research. Statistical surveys of customers alone do not provide the qualitative information that is needed. Because your target audience often relies as much on perceptions as on facts, qualitative research intended to identify existing needs has equal or greater value in assessing, planning and executing a company's marketing strategy.
4. Excessive Product Improvement
Technology products and services are generally used over an extended period of time, are integrated with complementary products and impose learning costs on customers. Customers require time to implement and recover their investment in high-tech products. The rapid introduction of new and improved versions can make a customer regret a previous purchase, delay all new purchases, and agonize over similar purchases in the future. Additionally, the time and costs related to excessive product development can delay product launches and delay sales opportunities and revenues.
5. Incomplete Products
Customers view products very differently than the technology companies that create or supply them. Technology companies tend to try to sell products on the basis of price, special features and technical specifications. These technical factors are often favored by the engineers who typically run technology companies. The problem is that most customers consider factors such as product support and company reputation to be more important. 
6. Failure to Establish the Right Competitive Barriers
Traditional barriers to competition are of little value in the technology industry. Patents can be effective but are very expensive, divulge trade secrets and take years to come to fruition. Conventional techniques are mostly designed to prevent market entry and tend not to work in technology-based businesses. The most effective competitive barriers in high-tech are the perceptions held by customers and prospects of product differentiation and first to market with a specialization in a market segment.
7. Using Price Alone to Drive Market Transformation
It is easy to misinterpret the role price plays in the market. And it is a mistake to believe that a technology product or service would be widely used and purchased if its cost was low enough. Price is a function of value and utility, and products and services should be positioned and marketed accordingly.
8. Improper Marketing
Marketing is both an art and a science. Positioning, pricing, sales strategy, target vertical markets and other factors contribute to the success or failure of your products and services and the corresponding sales. A well-crafted marketing plan is critical to success. Improper marketing or lack of marketing can be a product killer or cripple your company as a whole.
9. Sales Mismanagement
There's more to sales management than most companies realize. Specific skills are required to effectively manage each type of sales channel and those skills must be developed internally starting with an effective direct sales force. Unique management challenges exist for each primary type of sales channel: direct selling, online sales, dealers, OEMs, alliance partners and value-added resellers (VARs). Seek a business consultant or business advisor to assist you in optimizing your sales strategy as a critical factor in your success.
10. Misinterpretation of the Technology Adoption Lifecycle Model
The primary technology adoption lifecycle model describes the market acceptance of new products in terms of Innovators, Early Adopters, Early Majority, Late Majority, and Laggards. The process of adoption over time is illustrated as a classic normal distribution or "bell curve".
Because the technology adoption model is expressed in terms of a standard bell curve, it means statistically, a random sample of any given market or population must contain: 2.5% Innovators, 13.5% Early Adopters, 34% Early Majority, 34% Late Majority, and 16.0% Laggards. So no matter what industry you tend to be in, there will always be a sequence of adoption by different types of buyers.

For most family and closely-held businesses, planning for succession and an exit strategy is the toughest and most critical challenge they face. 88% of current family business owners believe the same family or families will control their business in five years, but succession statistics undermine this belief.


According to The Family Firm Institute:

- Only 30% of family-owned businesses survive in the second generation

- 12% remain viable into the third generation

- 3% operate into the fourth generation and beyond


There is a disconnect between the optimistic belief of today's family business owners and the reality of the massive failure of family companies to survive through the generations.

Research indicates that failures can essentially be traced to one factor: a lack of family business succession or exit planning.

Family Business Statistics

The statistics regarding family businesses does not provide optimism regarding their long-term sustainability: It's estimated that 40.3% of family business owners currently expect to retire, 70% of family businesses would like to pass their business on to the next generation, of which only 30% actually will be successful and nearly 43% of business owners have no succession plan in place.

Keep in mind, selling the business might be the best option for you AND your family.
When does selling your business make more sense?

Like so many things in life, timing is critical. To get the best price, the business should be sold on an upswing, with three consecutive years of good, improving financial statements, as well as, in a strong economy. Today's turbulent times are only a temporary setback as financial markets and valuations remain strong.

The 10 Step Process to Selling a Family Business


1. Assemble the Transaction Team 

A prudent potential seller will put together a team of advisors. The team should include an M&A advisor, a corporate/transaction attorney and a CPA/tax advisor. CEO Advisor, Inc. acts as an M&A advisor to either buyers or sellers of businesses with the needed expertise to get deals done effectively.

 

2. Define What is Being Sold 

It is typically very important to sell the entire business. Buyers want to understand what they are buying and not view the business as "muddy waters." Furthermore, with family businesses, it is particularly important to determine who are the actual owners and memorialize it in a Capitalization Table.

 

3. Evaluate the Price Range and Structure of the Transaction 

While many sellers think in terms of price, that really is only the first part of the calculation. The real keys are the terms of the sale and what the seller will net after taxes. Usually the seller is better off selling corporate stock than assets, but asset purchases are more common. Also, a truly crucial issue is whether the seller is willing to take partial cash and accept payments over time through a promissory note from the buyer, vs. partial cash plus an Earn Out over two to three years.

 

4. Resolution of Any Problems Within the Business 

The seller's biggest fear is the deal falling apart. The wise seller works hard to eliminate the potential stumbling blocks to closing. By doing so, the seller makes the business more attractive to buyers, simplifies the negotiation process because there are fewer issues to resolve, and improves the odds of closing by eliminating the likelihood of deal breakers rearing their ugly heads. Some items to be resolved are: All Lawsuits Should be Resolved, Tax Records are in Order and Tax Returns Filed, Financial Statements are Up to Date and Accurate and Updated Capitalization Table.

 

5. Preparation for the Sale  
The next step is to evaluate the needed preparation prior to selling. This includes a Sales Forecast, a Business Plan or well-crafted Executive Summary, a monthly 3-year Financial Forecast, a compelling presentation, a clean Capitalization Table and a list of prospective buyers and other items. CEO Advisor, Inc., as your M&A advisor, plays a hands-on role in the A) preparation of selling your company and B) throughout the sale process.

 

6. Negotiate the Sale and Execute the Letter of Intent
The normal process is for the buyer to provide, and the buyer and seller to enter into a non-binding letter of intent (LOI). The parties use the LOI to make sure they have agreed on the price and major terms. Typically, it is a document prepared by your M&A advisor and reviewed by a lawyer. The LOI states it is binding as to some provisions and not binding as to others. Both parties are expected to follow the terms that are set out in the LOI once agreed upon and fully executed.

7. Due Diligence
The due diligence period will begin after signing the letter of intent. While the due diligence period can be difficult for any seller, for the first-time seller it is often both difficult and overwhelming. Buyers want a substantial amount of information! With the help of an M&A advisor, providing the needed information will be a manageable and orderly process.

8. Prepare and Execute the Purchase Agreement
While the experienced M&A advisor and your corporate/transaction attorney are accustomed to lengthy legal agreements with numerous schedules and exhibits, the first-time seller often is taken aback by these documents. Creating realistic expectations is critical in this aspect of the sale. Usually, the buyer's lawyer prepares the first draft. The M&A advisor and your transaction attorney work with the CEO or business owner through the entire agreement in detail, negotiating business, legal and tax related issues.

9. Closing
Depending on the personalities of the principals and the competency of all involved, closing can be a smooth and joyous occurrence or a bumpy and tense one. With prudence, diligence and some luck, all the details have been long since worked out and all the documents prepared and reviewed. The seller should be advised in advance that these documents are coming and all deal points are addressed to work towards a successful close.

10. Celebrate
No business sale can be risk free and stress free. But a strong M&A advisor, along with a seasoned transaction attorney and tax advisor, working with the CEO or business owner(s) who understand and follow the 10-step process described in this article can greatly reduce the risk and stress. In doing so, they meet the universal goal of all sellers - successfully closing the transaction at an optimal valuation and terms.

At the end of the sale process, the goal should be to devise a plan that provides the best outcome for the family in the long term. Set emotion aside and consult experts who can recommend whether a succession plan or a business exit strategy will make the most sense for you and your family.

CEO Advisor, Inc. has decades of experience and expertise in hands-on advising of small and mid-size businesses, including building value, growth capital and buying/selling companies. Contact Mark Hartsell, MBA, President, today for a no cost consultation by calling (949) 629-2520, by mobile phone at (714) 697-3370 or by emailing MHartsell@CEOAdvisor.com.


Testimonial  


"Thank you Mark! And thank you for all your help over the years. It is truly appreciated and it was a great ride of accomplishment for all of us. Stay in touch!


Echoing Craig's statement of much thanks and appreciation for the many years in the trenches together with us and helping us achieve a successful exit."

CEO and President, Digital Agency Client
(After Their Successful Sale)

CEO/President, Engineering Services/Manufacturing Company


Whether it is growing a business to the next level, turning a distressed company around or preparing a company for an exit, Mark's firm, CEO Advisor, Inc, provides a broad range of services and Mark is there for the CEO every step of the way."

 


Partner

Haynes & Boone, LLP

Words of Wisdom


"Life is a series of near misses ... What we ascribe to as luck is not luck at all. It's seizing the day and accepting responsibility for your future."

Howard Schultz
American Entrepreneur, Chairman of Starbucks