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How to Take Your Business Through

a Sale, Merger, or Recapitalization

Madison Street Capital | From Rapid Growth to Smart Exits 1

s a business owner, you’re deep in the trenches of running your
company on a daily basis: satisfying customers, strategizing on
how to stay competitive, managing team members, and helping
put out fires. You know that someday you’ll need to think about taking
the next Big Step—merging, selling, restructuring, or even retiring. But
you just don’t have the time to plan for the inevitable transition that is
looming, and it all feels a bit daunting and hazy.

Not only do you lack the time to plan your next steps, but you lack the
deep expertise and experience to make the best choices for yourself,
your employees, and your family. That’s why it is so important to find
a trusted advisor to help you navigate these uncharted waters.

What do you need to know to sell your company? What do your

financials say about the worth of your business? Will your company
survive if you step down? How does your business factor into your
retirement picture?

While the responses to those questions will be as unique and personal

as your business model, the background you need to find the answers
is the same for everyone. In the next few chapters, we’ll walk you
through what you need to know to make what could be the most
important business decision of your life. Grab a cup of coffee and
buckle your seatbelt, because it’s going to be an interesting ride.

Madison Street Capital | From Rapid Growth to Smart Exits 2



What Factors Go Into Valuing Your Business?

efore you can make any major thorough market analysis on your own.
decision or transition for your “A privately held company’s financial
company, you need to understand performance is exactly that: private,”
what your business is worth. But that’s Botchway notes. “Unless the business
easier said than done. Of course, there are owner has access to an entire data set
many different methods for determining of privately held companies, it would be
the value of your business, including difficult to do a comparable analysis.”
three well-known models: DCF analysis,
comparable company analysis, and Another reason, he says, is that most
historical transaction data. But Charles business owners gauge value by the
Botchway, CEO of Madison Street Capital, balance sheet, or “book value,” which does
recommends against tackling this project not give a robust picture of entire worth.
by yourself. In fact, there are many other variables
that go into valuation beyond the balance
“We do not usually recommend that sheet, and while trying to determine the
business owners try to ‘value’ their own worth of your company on your own is not
businesses,” he says. Why? One major recommended, it’s helpful to understand
reason is that it’s very hard to do a what factors are weighed. Let’s take a look.

Assets: Tangible and Intangible

When business leaders are asked to list their assets, they tend to
think of tangibles, “like historical earnings, working capital, cash
flow, and hard assets on the balance sheet,” says Botchway. He
reminds business owners not to forget about technology—both
proprietary and nonproprietary, “especially if that tech is unique
to their business model or industry.” Botchway notes that there
are intangible assets to account for as well, including intellectual
property, specialized knowledge, and expertise in serving a
unique vertical or customer base.

Madison Street Capital | From Rapid Growth to Smart Exits 3

Human Capital

Human capital is another factor that adds value to your

company, says Anthony Marsala, COO of Madison Street
Capital, along with your ability to attract and retain the best
of the best. Leadership teams, in particular, are critical value-
adds; their business acumen helps companies make strategic
decisions that spur growth and avoid pitfalls. “High-profile
thought leaders with their own personal brand, executives with
histories of building successful companies, and individuals with a
specific or highly sought expertise all add unique value,” he says.
“And they can help raise the overall worth of the business.”

Business or Operational Model

Just how difficult is it to do what you do? If your

implementations require massive teams of specialists and
months of hard work to accomplish, buyers may be wary. If, on
the other hand, you have a simple plug-and-play operational
model, you might find would-be buyers and investors banging
down your door. This is especially true if your simple solution is
intended to disrupt a historically complex industry in which the
status quo insists on large operational lifts.

Access to Capital

The old axiom “you have to spend money to make money” isn’t
wrong; without the ability to spend, growth and transition can
be tricky. “Your revenue should cover day-to-day operating
expenses,” Marsala notes. “But if you’re looking to expand your
product line, spread your geographic footprint, or move your
business into an ideal position for acquisition, you might need
an infusion of capital.” Without robust access to funding, your
potential for growth is limited and, by extension, so is your
business’s value. We’ll explore funding sources in more detail in
Chapter 2.

Madison Street Capital | From Rapid Growth to Smart Exits 4

Location and Geographic Footprint

Location matters for a variety of reasons, depending on

your business model. You may need to have good access to
customer traffic, be near suppliers, or have a wide geographic
footprint, with proper locations set up along multiple distribution
points. “Being based in an area with access to high-quality
infrastructure and talent can also play a part in the valuation of
your business,” says Marsala.

External Factors

Your industry’s market and other external factors help

determine the value of your business as well. Consider the
recent history of your industry. Has it changed? Have disruptive
technologies emerged? What about compliance concerns or
legislative changes—the legalization of cannabis or new import
tariffs, for example? While everything from weather to fuel
prices to trade wars can have a significant impact on your
revenue, “outside economic trends won’t necessarily adversely
affect valuation,” says Marsala. “If a company stays on top of
economic trends and is nimble enough to diversify its offerings
to mitigate negative impacts of economic swings,” he notes, “its
valuation should be unaffected.”

While this is by no means an exhaustive requires time, effort, and expertise that
list of valuation factors, it’s important to extend well beyond what’s needed to
remember that anything that differentiates manage a balance sheet. For that reason,
your business, gives it a competitive “it’s important to have independent third-
advantage, or adds to its value should party validation of a company’s outlook
be given proper weight. What to weigh— and valuation,” says Marsala. “And it
and how much weight to attribute to should be done by companies with staff
each—is complicated. And gaining a full who have the proper credentials and
understanding of your business’s value experience.”

Madison Street Capital | From Rapid Growth to Smart Exits 5



What Kind of Transition Do You Need?

ou want to plan for a major transition business owner and the investment bank
for your business, but you’re not sure with a deeper understanding of current
where to start. Maybe you have a and future capital needs. “Regardless of
new idea and you need capital to dive into the business owner’s timeline for an exit,”
another venture. Maybe you’re thinking Petersen notes, “having validation that all
about retirement. Or maybe you want to your ducks are in a row will increase the
merge your offering with a complementary odds of a successful sale or transition of
set of products or services and become the business.” Your investment banker will
a bigger fish in a bigger pond. “This is then help assess the benefits and costs of
the discovery phase of the process,” each alternative. Based on that process, an
says Barry Petersen, senior managing entrepreneur might choose to sell, merge,
director of Madison Street Capital. “During or seek external funding.
discovery, we work with the business
owner to identify what they want, why they To help you understand the best option
want it, and when they want it.” for you and your business, let’s do a quick
tutorial on acquisitions, mergers, and
To get started, an initial transaction external funding sources—and how they
review is necessary to provide both the relate to the valuation of your business.

“Regardless of the business owner’s timeline for an exit, having

validation that all your ducks are in a row will increase the odds of a
successful sale or transition of the business.”
—Barry Petersen, Senior Managing Director, Madison Street Capital

Madison Street Capital | From Rapid Growth to Smart Exits 6

There are two types of acquisitions: stock and asset. Stock
acquisitions occur when a purchaser buys an interest in a
company’s stock. An asset acquisition is the purchase of any or all
of the assets of a business. Consider a manufacturer who makes
a very specific item. A buyer might be interested in purchasing
the manufacturer’s assets to expand its own product offerings or
to create its own internal infrastructure. This allows the buyer to
avoid the expenditures of time and money that it would take to
build an operation from scratch.

Of course, manufacturing is just one example. “Asset acquisitions

can occur with any type of business,” says Petersen, “where
something of value is purchased by another company in order
to expand the purchasing company’s offerings or, sometimes, to
eliminate the competition.”

A merger occurs when multiple businesses join to become a single
entity. Upon completion of a merger, there is a single set of assets
and the new business has a new value based on the combination
of strengths, liabilities, and the market position of the new entity.

The value your business brings to a merger will be based on

factors described in Chapter 1, as well as the potential needs or
shortcomings of the businesses that are joining forces. If one
company brings access to capital or a distribution infrastructure
that the other wouldn’t otherwise have, and the other brings
product expertise missing from the first business, together they
can provide the missing pieces to each other and emerge stronger
and more valuable. Hiring an investment banker to help during
the merger process is critical, says Petersen, “ensuring that your
business is not being undervalued, and helping to change the
perception of risk in the eyes of the other party or their investor.”

Madison Street Capital | From Rapid Growth to Smart Exits 7

External Funding Options
If you’ve gone through the discovery process and determined that
an exit strategy is not in your best interests, you might consider
external funding from an equity investor or debt provider to help
your company get through the transition. There are different
types of equity investors and they cater to companies based on
where they are in their life cycle. For example, “angels typically
provide seed funding, in small amounts, to startups,” Petersen
explains, “while venture capital firms (VCs) tend to invest in early-
stage firms that are typically past the seed rounds.” While these
options are not exit strategies, they can provide the necessary
funding to take your company to the next level, and they also
bring advantages such as mentoring, strategic expertise, and
ongoing access to capital.

Private equity groups (PEGs) are another source of capital to

consider. PEGs are funds that invest in more mature companies;
they get their funding from groups of high net worth individuals,
or from institutions such as hedge funds, pension funds, and
endowments. “The main advantage of a PEG recapitalization is
that the business owner has an opportunity to take some of their
chips off the table,” says Petersen, “while still maintaining some
interest in the business.” In other words, PEGs provide instant
liquidity, allowing business owners to reduce their own risk.
Injecting capital into the business primes it for future acquisition,
leading to the business owners being able to exit in a five-to-
seven-year time frame.

Whether selling or merging your company “The right investment banker will help you
outright or doing a recapitalization, any create a competitive environment—an
significant business transition is a major auction environment—for your transition,”
milestone that requires careful deliberation, says Petersen, “with the distinct purpose
strategizing, and assembling the right of optimizing the terms and value, and
team. To optimize success, finding the obtaining all of the business owner’s
right investment banking firm is critical. objectives.”

Madison Street Capital | From Rapid Growth to Smart Exits 8



The Front Door to Your Future

yths get built around the origins the door to new business ventures, a well-
of businesses: a good idea born in earned retirement, or other life-changing
someone’s basement, a long-unmet scenarios. A lot is riding on getting your
need filled by a visionary. We think of exit right—so, like the rest of your business,
businesses as engines of innovation, as the it must be planned. In this chapter, we’ll
beginnings of bold new endeavors. Exits, walk you through some often-overlooked
on the other hand, tend to get overlooked. steps.
But a business exit is a big deal; it opens

Prepare for Lifestyle Changes

One mistake business owners make is to plan for the big financial transaction
itself—the sale or merger—but neglect the lifestyle and mental adjustments
that go along with it. Ideally, this self-reflection will happen first, before any big
financial decisions are made.

“Many business owners spend a lifetime working 60 or more hours per

week with few or no vacations,” says Katrin Owen, managing director of
Madison Street Capital. “The business has become ‘a warm blanket.’ It can be
overwhelming to suddenly have nothing to do.” Not having a post-retirement
plan can create anxiety or lead to depression—especially if the sale of the
business is sudden or relatively unplanned. To avoid these kinds of negative
outcomes, it’s important to start planning early and have realistic expectations
about what comes next—and what doesn’t.

“Make sure that the entire business-exit process is thought through,” Owen
says. “Set expectations around what you really want—in terms of time,
lifestyle, money, etc.—and make sure a team of professionals is selected to
ensure a smooth transition. In other words, your team should help you create
a strategic path to the exit and the after-exit transition.”

Madison Street Capital | From Rapid Growth to Smart Exits 9

Consider All Business Options

Once you’ve reflected on which lifestyle changes you’re looking for or are
willing to accept, the next step is to consider which business transition will
allow for those goals. “Some business owners are serial entrepreneurs and
want to start or acquire another company,” says Owen. “Some want to
continue working, just without carrying the risk or responsibility of ownership.
Others want to fully retire, relocate, or even travel the world for a few years
after the sale of the business.”

Many business owners do not grasp the full range of options available to
them—many of which we touched on in Chapter 2. Restricting yourself to a
business sale, for instance, without fully exploring the other options can lead
to a post-exit life that is unexpected or unfulfilling—and then it’s too late to go

For instance, after exploring options, an exiting owner may actually decide to
stay on with the new owner—in either a full-time or a part-time capacity. If this
is the case, says Owen, “it must be negotiated and reflected in a letter of intent
and in the documents signed at closing.” This provides clarity for everyone
involved and helps smooth the transition, post-exit.

Prepare Your Post-exit Finances

It’s also extremely important to work with an experienced wealth manager

or financial advisor to plan out investments and next steps after the sale
or transition. “Selling a company is usually a once-in-a-lifetime event, and it
usually involves the largest asset the business owner has,” says Owen. “The
entrepreneur typically does not have an M&A attorney, financial planner, tax
attorney, or wealth manager on staff—but an investment banker can provide
guidance and advice in selecting the professional services needed during and
after the transaction.”

When it comes to retirement and selling as a lottery jackpot or inheritance windfall,”

your business, the stakes are high. Business warns Owen. “Instead, each dollar from
owners who fail to work with investment the sale of the business should be properly
bankers—or who ignore their advice—may allocated to meet a stated objective that
meet with catastrophe following the sale of ensures the seller’s financial security down
their businesses. “The payment the owner the road.”
receives at closing should not be treated

Madison Street Capital | From Rapid Growth to Smart Exits 10



Taking on a New Business Partner

aving adequate capital is a big than capital to the table, and that equity,
part of how your business’s value once surrendered, isn’t easy to get back.
is determined—but it’s not the only Here’s how to make sure you’re aligned
part. If you’re considering taking on a in a way that adds value to your business
funding partner to deepen your pockets, while protecting the interests of everyone
remember that a partner brings a lot more involved.

Choose a Complementary Skill Set

“Raising debt is like dating,” says Jim Cohen, managing director of

Madison Street Capital. “And equity is marriage.” As in a marriage,
it’s crucial that your equity partner is a good, and permanent, fit.
“Besides money, what else can the funding source bring to the table?”
Cohen asks. “Will the business owner be able to tap into the funding
source’s network or ecosystem? What skill set can the funder bring?
Technology? Sales?”

There’s strength in diversity. If you’re an accounting genius, don’t bring

another numbers person on board. Look for holes in your expertise
or business needs and fill them. Bring in a creative guru or brilliant
developer—whatever suits your need—but stay away from someone
who has exactly the same skill sets and personality traits as you. And
before you commit, ask yourself: Will the partner be able to help take
the business to new heights and further the company’s mission?

Define Roles

If you’re a people person and your new partner is more analytical,

build your roles accordingly. You provide the vision and direction, while
he or she fills out an operations role. Build an org chart and make it

Madison Street Capital | From Rapid Growth to Smart Exits 11

clear which departments and teams report to which partner. You’ll save
yourselves a lot of disagreement—and focusing on your individual
strengths will add value to your business as well. Your new partner
may even be a silent partner, contributing capital but happy to stay
out of the day-to-day workings of the business. Just make sure you’re
both on the same page—and write up an agreement that spells out
your roles clearly. “It will be important to establish expectations before
signing on the dotted line,” says Cohen.

Be Open About Valuation

As we noted in Chapter 1, knowing your business’s worth is the baseline

for all other decisions, so it’s crucial to do a proper valuation and get
everything out in the open before taking on a partner. “A business
owner saying, ‘My company is great’ is not as impactful as a third
party saying, ‘This business is great, and here is all of the supporting
data to prove it,’” says Cohen.

Make sure your books are in order and there are no surprises that may
come up at the closing table and kill the deal. “These could include
a prior bankruptcy, pending litigation, or back taxes,” Cohen says.
“We call it ‘the good, the bad, the ugly’ of a business’s history.” It is
important that anything “bad” or “ugly” is shared privately with your
investment banker before going to market so that it can be addressed
early and not discovered during due diligence.

According to Cohen, “Most investment banks will be able to help with

this, and the added benefit of working with an investment banker is
that they already know what investors are going to ask and what they
want to see.”

In the best-case scenario, a business chemistry between you and a prospective

owner will have several equity partners equity partner is not important. It is—you
to choose from, each a good potential have to work with this person on a daily
fit. “This can make the decision more basis, so a personal connection is key. But
difficult,” says Cohen. “But, again, one of hiring an investment banker to help you
the roles of the investment banker is to evaluate partners, financial terms, and skill
help the business owner navigate what’s sets, rather than relying on your gut, is the
best for them.” That’s not to say that the smartest way forward.

Madison Street Capital | From Rapid Growth to Smart Exits 12



5 Signs It’s Time to Speak With a Corporate Financial Advisor

he reality is that most business times its earnings before interest, taxes,
owners really don’t know the true depreciation, and amortization (EBITDA).
value of their company—and this While this formula is not necessarily a
applies to companies of all kinds and bad starting place, it ignores factors
sizes. “It’s not easy to objectively value like industry variables, market, growth
something when you’re close to it and projections, risk, and access to capital, to
have poured vast amounts of your energy name just a few.
and time into it,” says Jay Rodgers, senior
managing director of Madison Street While knowing the true value of your
Capital, “After all, the company is your business may not be an emergency during
baby.” normal business operations, there are a
number of circumstances and triggering
Then, there are also some fairly common events that suggest it’s time to get a better
misperceptions about business valuation understanding of your value. You might be
floating around—that, for example, a in need of some expert business valuation
business could be worth four, five, six help if one of these five thoughts surface:

You’re considering selling your business.

Determining the accurate value of your own business can be

challenging—partially because you’re biased, and partially because
you’re really busy with the day-to-day operations of running your
business. Additionally, any value you assign your own company
is likely to raise some skeptical eyebrows on the part of potential
buyers. An unbiased third party’s appraisal, however, is not only
likely to be more accurate, but is also more likely to be acceptable
to your buyer—enabling you to achieve the most from the sale.

“A do-it-yourself approach usually results in not gaining sufficient

choices or investment parties to ensure that the match is optimal,”
says Rodgers. “A business owner negotiating on their own behalf is
a recipe for disaster. From unfavorable terms, tax considerations,

Madison Street Capital | From Rapid Growth to Smart Exits 13

and the fundability of the deal as well as tire kickers and
competitors looking to poach information—these all come to mind
as potential dangers in a self-selling scenario.”

2 You’re thinking about merging.

Unless you know your company’s real value—including intangible

assets and growth potential—it’s difficult to know what you’re
bringing to the table. The same goes for the other business
involved. To understand the value and strengths of the newly
forming post-acquisition entity, you have to measure what’s
going into the agreement. An investment banker can look at both
entities without bias to determine the value of the businesses being
merged, as well as help them come together in a way that’s most
beneficial to the resulting business.

3 Retirement is on the horizon.

An inflated estimate of your business’s value can derail your
retirement. To retire safely, you’ll need to know what your company
is worth now and what it will likely be worth in the near future—and
you’ll need someone to handle the considerable work involved in
the valuation.

“The time commitment required to sell a company pulls a business

owner away from running their business,” says Rodgers. “Taking
your eye off the business while trying to sell it could result in poor
financial performance, a lowered valuation, or a buyer backing
out when performance requirements are not met.” An investment
banker can not only help you determine current value and likely
growth, but can also help you understand your position in the
market so that you can maximize the growth and value of your
business in the years between now and retirement.

Madison Street Capital | From Rapid Growth to Smart Exits 14

4 You want to grow.

It’s difficult to know how much you’re growing—and to take the

necessary steps to break into the next level—if you don’t have
an accurate business valuation as a baseline. A valuation by a
professional can also reveal areas of improvement, help you
understand the scalability of your business model, and make
decisions about needed funding sources.

You need funding.

Finding investors or obtaining a loan requires that attention be

given to your business model, proposal, and valuation—expertise
and time that most business owners simply don’t have. That said,
“the optimal time to plan for funding and to lay out strategies is
before you need funding,” says Rodgers. “These strategies can
always be addressed, but you want to do so from a position of
strength, not weakness.”

The reality is that anyone who owns a strategies the moment they first put the
business should be thinking about when key in the door,” says Rodgers, “and if that
to obtain expert advice around funding has already passed, then they should have
and exit strategies. If he had his way, all done it yesterday.”
business owners would “consider exit

“Taking your eye off the business while trying to sell it could result in poor
financial performance, a lowered valuation, or a buyer backing out when
performance requirements are not met.”
—Jay Rodgers, Senior Managing Director, Madison Street Capital

Madison Street Capital | From Rapid Growth to Smart Exits 15

ou know how to run your business: it’s your passion, your
expertise. But selling, merging, or recapitalizing your business
is a journey unlike the one you’ve been on, and it’s typical for
that journey to have a few unexpected detours along the way. “At
the end of the day, working with an investment bank to manage the
complexities of your business beyond the balance sheet and profit and
loss statement gives you the advantage of their expertise, while letting
you stay focused on yours,” says CEO Charles Botchway, “helping you
minimize stress, avoid common pitfalls, and maximize the odds of a
successful transaction.”

Madison Street Capital | From Rapid Growth to Smart Exits 16